Reliance Jio's 2 per cent QoQ rise in ARPUs despite steep tariff hikes was lackluster; however, the increase in data and voice usage implies limited down-trading. Healthy subscriber additions despite tariff hikes is an early indication of consumers' acceptance of higher tariffs. Strong subscriber additions should also allay concerns over the sustainability of the tariff discipline. Reiterate Bharti Airtel as our top pick.
RIL reported Q4FY20 results that were slightly underwhelming. While refining and retail business did better than expected, the Petrochem business disappointed majorly. Even the Telecom business fared slightly below expectations with ARPU of Rs 130.6 coming in below expected levels of Rs 135-138 that had its impact on topline growth, though lower than expected interest and tax expenses helped bottomline of that business.
The announcement of the pay cut ahead of results signifies some tough times for the company at least for the next few months. The rights issue size was higher than expected, though staggered payment would provide some time to shareholders to subscribe. The debt reduction plan now seems achievable though with some possible delays.
With over Rs 1 trillion worth of capital-raising (rights issue, Facebook stake, etc) expected in Q1FY21, net debt can fall by one-third, implying net debt/EBITDA would slide to just 2.2x. With a potential fibre InvIT divestment and Aramco deal in the second half of 2020 (H2), RIL can potentially achieve zero net debt.
The company generated positive free cash flow (FCF) of Rs 200 billion in FY20E, although largely via working capital management and lower cash taxes. However, capex is plunging, and we expect positive FCF in FY21 despite sharply lower operating cash flow (OCF).
The Facebook-Jio Platforms alliance is aimed at turbocharging Jio’s reach through WhatsApp’s 400mn strong user base across rival service providers. The concept value of the new e-commerce channel is a known unknown and could morph into a Wechat-like platform in India. Maintain ‘BUY/Sector Outperformer’ with SoTP-based target price of Rs 1,645/share.
We tweak our estimates for FY21/22E as we believe RIL is well placed to capitalise on growth opportunities in the digital and retail space. Fund raising plans of Rs 1 trillion by way of right issue, stake sale to Facebook, and recent BP transactions will help RIL to tide over the tough post Covid pandemic situation, especially in the hydrocarbons business. We will incorporate the fundraising plans post completion of the deals. Rating: BUY; target price: Rs 1,601.
Reliance Industries' Q4FY20 adjusted result was largely in-line with consensus estimates, led by consumer businesses and positive surprise from refinery profit. Though, a higher gross refining margin (GRM) of $8.9/bbl vs consensus estimate of $7.5/bbl and robust 49% YoY growth in Digital Services EBITDA was a positive surprise.
We cut our EPS estimates by 13% and 5% respectively for FY21E/FY22E owing to lower tariff hike and lower Retail profits impacted bY Covid-19 pandemic; as lockdown will not be in FY22. We cut our target price to Rs 1,528 (Rs 1,586 earlier) and downgrade the stock to HOLD from BUY due to limited upside potential from the current level.