CLSA raises target price on RIL to Rs 1,050

CLSA has raised target price on Reliance Industries to Rs 1,050 from Rs 990 as it sees the sharp cut in interconnect usage charge by Telecom Regulatory Authority of India is a big boost for the company's telecom venture Reliance Jio.

Reliance Jio will be a beneficiary of the lower access cost. TRAI has announced a sharp 60% cut in interconnect usage charge from October and plans to eliminate it completely from January 2020.

The brokerage has a buy rating on the stock.

"Given Jio's unlimited calling plans, IUC (interconnect usage charge) was supposed to be the biggest opex element at US$1-$1.1 billon (12-16% of revenues). This sharp ~60% cut in IUC from 2QFY18 until 3QFY20 drives 8% upgrade in FY18-20CL EPS," said CLSA.

CLSA said that the announcement of cut in IUC to nil from Jan 2020 should remove concerns of Jio remaining loss-making for long.

"This big cost saving will take Ebitda margin of Jio to over 60% in FY21 and allow it to become PBT and FCF positive by early-FY19," said CLSA.

The brokerage expect more such positive triggers for RIL over the next 3-6 months.

The delivery of first lot of the 4G feature phone (JioPhone) in next few days followed by start of next few rounds of pre-booking will allay concerns on limited acceptability or supply challenges, said CLSA.
"This could be a positive surprise for street given our expectation that 100m JioPhones may add over US$2.2bn (at nil IUC) to Ebitda," it said. The brokerage expects Jio to announce another reduction in discounts for its smartphone customers in October-November period which could also improve confidence on its monetisation plan.

The brokerage said strong result for July-September quarter on the back of $1.7 per barrel sequential jump in Singapore benchmark may also drive earnings per share upgrades. The start of key downstream expansion projects will also be a crucial upside trigger, said CLSA.