RIL's post-tax ROCE could rise by 11% in two years: Morgan Stanley

Topics Reliance Jio | RIL | Morgan Stanley

Reliance Industries' after-tax return on capital employed is likely to rise to 11 per cent in two years from the current 7-8 per cent as margins rise on the back of an increase in telecom tariffs, Morgan Stanley said on Tuesday.

"RIL strong stock outperformance has once again led investors to ask about what is next," it said in a research report.

Over the past decade, RIL's post-tax ROCE (return on capital employed) has been range-bound around 7-8 per cent. "We think this trend is set to be reversed as the telecom tariff increase should raise returns on USD 50 billion of investments (50 per cent of the last capital expenditure cycle)."

Last week, top-three mobile operators Bharti Airtel, Jio and Vodafone Idea increased prepaid tariffs by 14-33 per cent.

"We see ROCE rising to 11 per cent in two years as consumer portfolio returns inch closer to energy ROCE of around 14 per cent," it said adding although overall returns are still below levels since 2004, an uplift in the chemical cycle from current troughs should boost ROCE higher.

Reliance Jio, the telecom arm of RIL, last week raised tariff by up to 39 per cent following hikes effected by other service providers. The hike will boost revenue over the next four quarters as the revamped plans will restrict down-trading-led revenue leakage.

Edelweiss in a separate report said while the industry's average revenue per user (ARPU) has plunged 33 per cent over the past four years, voice usage per customer has jumped 84 per cent and data usage by 47-times providing enough value to customers to justify the tariff hike.

"We expect industry ARPUs to improve over Q4FY20-Q3FY21 led by users optimising spends by advancing recharges as well as consolidating SIMs," it said. "Moreover, users are likely to delay recharges as well as down-trades, especially in the voice segment."

However, the new tariff plans are still affordable and the hikes are expected to drive 35 per cent ARPU improvement in four quarters for Jio, it said. "With Reliance Jio plans being 20 per cent cheaper than rivals, we expect the company's robust subscriber addition pace to sustain. Hence, we revise up Jio's FY21 subscriber estimate 17 per cent to 471 million."

Centrum said Jio has seen the highest increase in tariffs in the 56-84 days' validity plans which have risen by 33-35 per cent, while the lowest increase was seen in the 2GB/day plans for 28 days (12.2 per cent).

"Given that there is some portion of subscribers who may down trade to lower priced plans and some subscribers may have taken longer prepaid plans in advance, we estimate an 8 per cent increment in ARPU for FY21 and a further 19 per cent in FY22E for Jio," it said. "Resultant, EBITDA (earnings before interest, tax, depreciation and amortisation) for Jio sees an upgrade of 16/20 per cent from previous estimates."

Jio plans, it said, remain the most attractive on the street. "Despite the material uptick in the tariff plans, Jio's plans across price points remain the cheapest on the street, with discount of 8-20 per cent vs Airtel/ Voda-Idea plans."

"With the superior data speeds and network coverage for Jio, we believe its dominant position in terms of market share growth and data usage will sustain comfortably over the next 18-24 months post this change," it said.

Morgan Stanley said RIL's chemical Ebitda will decline a 20 per cent quarter-on-quarter in October-December, leading to overall earnings to remain muted despite better refining margin.

However, the trough is unlikely to be sustained as supply rationalisation and normalisation in inventory should help margins, it said.



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