Clsa-A big boost for Jio
Jio’s tariffs remain at a discount despite a big hike; Ebitda up >US$1bn
Jio announced an up-to-35% hike in its tariff which will boost its Ebitda by US$1.1bn-US$1.3bn. Despite this hike, Jio is at a 7%-20% discount to its competition, maintaining its strong relative positioning. We see a good chance of further upside to Jio’s profit as the tariff hike on the JioPhone is still awaited, interconnect costs may fall below our forecast and Arpu may be higher as customers may prefer 28-day over 84-day plans. We raise our EPS by 1%-8% and target price from Rs1,710 to Rs2,010. Strong near-term quarterly profit due to IMO and tariff hikes and the closure of the fiber and Aramco deals are triggers. BUY.
Jio’s new tariffs at 7-20% discount to incumbents; Ebitda rises by US$1.1-1.3bn
Jio’s new tariffs for smartphone users will be applicable from 6 Dec 2019. These tariffs are at a 7%-20% discount to comparable incumbent plans of which means Jio’s relative competitive advantage remains quite high. The difference in allowance of off-net minutes and the introduction of some new plan categories makes a neat comparison difficult for Jio’s existing versus new plans. However, a comparison of the cheapest all-in one plans for various durations reveals a tariff hike of 15%-25% by Jio. Notably, Jio is yet to reveal new tariffs for JioPhone users. The new tariffs drive a c.25% increase, ie US$1.1bn/US$1.3bn rise in Jio’s FY21/22 Ebitda. Modelling for higher depreciation and interest expense limits the rise in the consolidated FY21/22 EPS of Reliance to 6%/8%. We continue to assume another 10% tariff hike in April 2021.
Further upside possible to Jio’s earnings forecast
We see clear drivers for further upgrades to Jio’s forecast. First, we still do not bake-in any near-term hike in JioPhone tariffs, which may be revealed soon. Second, we model a burden of Rs44bn-Rs48bn in the form of interconnect costs. With recent action to charge for off-net calls, there is a chance this impact may be notably reduced. This could raise Jio’s Ebitda by 10%-12%. Finally, like before, we build our smartphone tariff forecast using the cheapest 84-day plan. However, we see that our per day premium for the 28-day versus 84-day plan has fallen from 17.5% to 7.5%. This may make customers move to 28-day plans which could potentially raise Jio’s FY21 revenue and Arpu by 6% and Ebitda by 11%.
Raise target to Rs2,010 & Reliance Industries’ EV may inch up c.US$200bn
Our higher Ebitda, and as we roll forward our forecast period, drives an increase in our target price from Rs1,710 to Rs2,010. We forecast Reliance’s EV to inch near US$200bn by Mar 2021. Strong earnings momentum due to a refining margin boost from IMO along with the benefit of tariff hikes will be a near-term positive. The closure of the fibre and Aramco deal, the start of the petcoke gasification project, launch of its ‘New Commerce’ business in retail and any progress on stake sales in the digital business are other triggers. We reiterate our BUY rating (+29%).