Reliance Industries Rating: Buy- Tariff hike to boost Jio’s ARPUs, valuation

The emergence of a new Covid variant could impact fuel demand and B&M retail if restrictions are imposed. Revise PT to Rs 2,950 to factor in higher valuation of Jio. Maintain Buy.

Jio hiked pre-paid tariffs by 20% in the smartphone segment. The hike restored Jio’s tariff discount relative to Bharti and should keep its subscriber momentum intact. We upgrade RIL’s consolidated EPS 3-4% for FY23-24e and raise Jio’s valuation to $96 bn following 6-7% upgrade to our ARPU estimates. The emergence of a new Covid variant could impact fuel demand and B&M retail if restrictions are imposed. Revise PT to Rs 2,950 to factor in higher valuation of Jio. Maintain Buy.

Focus on both subscriber additions and ARPUs: Reliance Jio’s tariff hikes have brought its discount back to 13-20% vs. Bharti in the prepaid smartphone segment. Since March-21, Reliance Jio has added 24m active subscribers as against 2m additions for the sector. Given that Jio has not changed these JioPhone plans despite Bharti’s sharp increase in voice tariffs, we believe subscriber traction on JioPhones should remain strong.

Migration to JioPhone Next still a tall ask: Post the tariff changes, on an absolute spend basis, 2G feature phone users, low-end JioPhone users and high-end JioPhone users will have to spend 2.6x-4.4x more over a 24-month period to upgrade to JioPhone Next. This will likely keep the addressable market for JioPhone Next limited to 105m low-end smartphone users unless Reliance cuts the device pricing in the coming months.

Raise Jio’s estimates: A sharp 20% hike in Prepaid smartphone segment is ahead of our expectation of 7% hike in Q4FY22 and Q4FY23. Given this, we believe another tariff hike may be unlikely in Q4FY23 and as a result, we expect Jio to have ARPU of Rs 172 by FY24. We raise our FY22-24 revenue/ Ebitda/profit estimates by 5-23% and expect Jio to deliver 18-31% CAGR in revenues and profits.

Upgrade PT to Rs 2,950: The emergence of a new Covid variant could impact fuel demand pushing out a sustainable recovery in refining to mid-CY22. It could also weigh on the growing footfalls in B&M retail if restrictions are imposed. Retail should see accelerating growth with improved profitability if infections are contained. Progress with capex in the renewable business should be supportive of RIL’s valuation. Maintain Buy.