Buy Reliance Industries Ltd For Target Rs.3,275 By Motilal Oswal Financial Services
RJio initiates ~20% tariff hike; Boost to the telecom sector
RJio first among its peers to initiate a price hike of ~20%; expect 11%/17% increase in revenue/EBITDA
* The much-awaited tariff hike among telecom companies came in from market leader RJio. The tariff increase of ~20% was in line with our expectation.
* The company increased tariffs for prepaid and postpaid plans, but not for Jio phone users. The hike should increase ARPU by 15% to INR206 (exit ARPU of INR223 in FY25). This should drive a 17% increase in our EBITDA estimates, assuming no major subscriber loss for RJio as its plans would be the cheapest and best network among all telcos. Thus, we build in a 23% EBITDA CAGR over FY24-26E.
* We expect a similar tariff hike (~15-20%) by VIL and Bharti in the near term. Accordingly, we expect the pricing gap between RJio and peers to remain at the similar level.
* Overall, a tariff hike after two years is a positive step for the telecom industry, as this will provide a breather for VIL and improve return ratios for Bharti/RJio.
* RJio is valued at an EV/EBITDA multiple of 12x on FY26E EBITDA, thereby arriving at a valuation of INR840/share, adjusted for its 66% stake (vs. INR810/share previously). Consequently, we arrive at RIL TP of INR3,275 (vs. INR3,245 previously).
Deep-dive into the tariff hike
* Among prepaid plans, the price increase is more aggressive at the lower-price plans compared to higher-price plans, i.e., 22% hike in the monthly plan of INR155 vs. 13% hike in the INR399 plan. This will add value from the low-price recharges and arrest downtrading by users to lower-price plans (as new plans have shrunk the gap between lower end vs. higher-end plans).
* Among postpaid plans, RJio has increased prices in two plans INR299/INR 399 by 13%/17%. The move is justifiable as its existing prices are lower (20% discount to Bharti). Even after the price hike, the upgraded plan (INR449) is 10% cheaper than Bharti’s current plan (INR499).
* RJio did not increase prices for JioPhone/JioBharat users (~100-120m JioPhone subscribers, as per our estimates).
* The new plans will be effective from 3rd Jul’24.
* To deliver value to users by leveraging its technology, RJio will be introducing:
* JioSafe - Quantum-secure communication app for calling, messaging, file transfer and more (priced at INR199/month)
* JioTranslate - AI-powered multi-lingual communication app for translating voice call, voice message, text and image (priced at INR 99/month).
EBITDA to rise 17%
Though in line with our expectations, the ~20% tariff hike may lead to incremental revenue/EBITDA of INR243b/INR177b in FY25, translating into 24%/34% YoY growth, factoring in 73% incremental EBITDA margin. The hike would increase ARPU by 15% to INR206 (exit ARPU of INR223 in FY25). Accordingly, we increase our EBITDA estimates by 17% in FY25/FY26 to INR701b/INR798b.
Valuation and view
* We expect the 20% tariff hike would increase ARPU by 15% (INR206 ARPU in FY25E) since the prices are not increase for all plans.
* As a result, we raise our revenue/EBITDA estimates by 11/17% in FY25/FY26. We expect EBITDA of INR701b/INR798b. We factor in a CAGR of 17%/23% in revenue/EBITDA during FY24-26.
* RJio is valued at an EV/EBITDA multiple of 12x on FY26E EBITDA, thereby arriving at a valuation of INR840/share, adjusted for its 66% stake (vs. INR810/share previously).
* Based on SoTP, we value the Refining and Petrochemical segment at 8x FY26E EV/EBITDA to arrive at a valuation of INR1,029/sh for the standalone business. We ascribe an equity valuation of INR840/sh to RJio, INR1,593/sh to Reliance Retail and INR37/sh to the new energy business. Consequently, we reiterate our BUY rating on RIL with a TP of INR3,275
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