RIL has more legs to run even after hitting Rs 10 trn in market cap

Even though the Reliance Industries stock has gained over 30 per cent since September this year, the rally according to brokerages is not over yet. The latest trigger is the announcement of a price hike by its telecom subsidiary, Reliance Jio. The telecom arm raised tariffs by up to 35 per cent, which is expected to boost its revenues and average revenue per user (ARPU) by 22 per cent in FY21.

Despite the price hikes, analysts say Jio's tariffs are at a discount of up to 20 per cent to incumbents, which should help the company to maintain its competitive position in the market and gain market share. What could offer further upside to ARPUs is the pricing action on JioPhone users which the company has not touched so far.

Given the price hikes, higher ARPUs and increase in subscribers from 307 million in FY19 to an estimated 463 million in FY21, analysts at CLSA expect Reliance Jio’s operating profit to more than double to Rs 37,920 crore in FY21. Reliance Jio ended the last financial year with an operating profit of Rs 15,096 crore and margins of 38.9 per cent. Higher revenues on a steady cost base is also expected to rub off on margins which is expected to jump to over 48 per cent by FY21. Interconnect costs, too, are expected to trend down as the company's all-in-one mobile plans absorb the same while rising subscriber base will neutralise the current imbalance. The impact of the higher revenues and profits is expected to boost cash flows by an incremental Rs 11,700 crore, according to analysts at Motilal Oswal Financial Services. If this is used to bring down debt, then the net debt to operating profit metric, which is currently at 3 times, is also expected to improve.

Analysts are positive on the refining business as well. Goldman Sachs believes that complex refiners will be the biggest beneficiaries of IMO 2020 regulations and RIL with the highest refining capacity is well-positioned to benefit from it. They expect the company’s gross refining margins to move up by $5 per barrel by FY21 as compared to $9.4 per barrel in the September quarter.

Given the triggers, most brokerages have increased the target price for RIL to Rs 1,800-Rs 2,000 levels, which from the current price of Rs 1,550, offers an upside of 16-29 per cent.



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