Published on 20/04/2017 3:11:24 PM | Source: Emkay Global Financial Services Ltd
Buy Reliance Industries Ltd For Target Rs.1,517.00 - Emkay
Performance reliant on JIO
* Petchem EBIDTA is expected to grow by a CAGR of 13% to Rs220bn during FY17-19 driven by capacity addition and margin expansion. Also, GRM should remain robust at $10.9/12.8bbl in FY18/19. With the phase of mega capex drawing to an end in FY17, FCF generation is expected to be positive from FY18 onwards.
* The company is targeting 50% revenue market share with an estimate of industry revenue doubling in 4 years to Rs3tn, backed by multi-fold increase in data consumption. However, continued free offerings to attract subscribers is keeping both industry and Jio’s revenue target under pressure.
* Launch of much talked VoLTE feature phone by Jio would create another round of wave with non-data users looking to churn out from existing operators to buy low priced phones. Traction on growth in subscriber base with monthly subscriptions is the key trackable.
* Considering the various tailwinds discussed above, we are revising our FY17/18 EPS estimates by 5.7/3.7% respectively and rolled-over our SOTP valuation to FY19E to arrive at a revised TP of Rs1,517/share (Rs1,160 earlier on FY18E) after factoring in full benefits of core business expansion and value accretion from telecom business. Maintain BUY.
The key cornerstones behind our constructive thesis on RIL are laid out below:
1. Since the last two years, refining cycle has changed courses to move on the upward trajectory unlike pre-2015. Going forward, capacity addition is expected to be limited while demand growth should be higher. Hence, we expect the refining cycle to remain fairly stable at least in the next couple of years. The startup of the petcoke gasification project should add incremental delta to RIL’s GRMs. Though the current economics of petcoke gasification are not very favorable given lower spot LNG prices, we expect crude oil prices to rise which will lead to increased demand for spot LNG, thereby, narrowing the price differential between petcoke and LNG. Thus, we expect better GRMs from FY19 onwards on a yoy basis. Moreover, the combination of downstream integration and improving feedstock supply will act as a potent force in augmenting petchem margins.
2. JIO: Management betting big on industry revenue growth while continued aggression with free offerings could delay the target timeline
The company has stated its vision of 50% revenue market share with an estimate of industry revenue doubling in 4 years to Rs3tn, backed by multi-fold increase in data consumption. Robust industry growth is good sign while we believe it would be difficult to achieve, given the hyper competitive scenario that has evolved post its commercial launch in Sept’16. Jio is targeting to get maximum number of high paying subscribers. In our view, Jio’s target to get decent paying subscriber base would keep hyper competitive scenario alive for the industry in medium term. Focus on robust content offerings across the segments would be one of the key factor for consumer stickiness and ARPU expansion over the long term.
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