COMMENT: Here's why RIL's valuation jump in one day equalled Idea's M-cap

Shishir AsthanaMoneycontrol Research

The market was clearly caught on the wrong foot when Reliance Jio announced that there would be no more free usage for its telecom services. Reliance Industries stock zoomed by over 10 percent, trading above the Rs 1,200 mark for the first time since 2008. The incremental jump in market capitalisation of Rs 38,748 crore almost matches the total market capitalisation of Idea Cellular, which stands at Rs 40,501 crore.

The expectation was that the company might either continue with its policy of free data and voice until the end of 2017 as it builds up its customer base. Reliance surprised most by announcing a plan of Rs 303 per month for 1 GB per day data and free voice calling for all existing subscribers and new ones who enroll before March 31 by paying Rs 99 as enrollment fee.

The figure of Rs 303 per month did the trick for investors. Reports say that Reliance Jio is likely to touch a sales of Rs 1 lakh crore and a subscriber base of 400 million by FY18.

For many analysts the tariff plan was a sign that a large portion of the company’s balance sheet which was not contributing to the revenue will now be put in play. At Rs 1 lakh crore Jio is expected to contribute nearly one-fourth of the company’s revenue of around Rs 4 lakh crore by FY18.

Over the past four years analysts were obsessed with Reliance Jio’s investment. At nearly Rs 2 lakh crore the company had invested about 45 percent of its total capital expenditure over the last four years. However, given the crowded telecom space and initial teething problems in the technology, analysts were not ascribing too much value to the telecom investment in its sum-of-the-parts valuation matrix.

Morgan Stanley valued Reliance Jio at Rs 193 per share based on a 0.36 multiple of enterprise value to invested capital. However, in comparison Idea Cellular was trading at a multiple of 1. If Reliance Jio is measured on the same valuation its telecom venture will be valued at Rs 536 per share.

Telecom was the only missing link in Reliance’s re-rating. The company is in the last leg of its massive capital expenditure. Analyst Jal Irani, in an interview with CNBC TV18, pointed out that Reliance’s projects in the commissioning stage are almost double its productive assets, and the market has not been giving value to these projects.

Further, Reliance is in a sweet spot as far as its telecom venture is concerned. A Credit Suisse report points out that Reliance Jio has 94 percent of India’s mobile data traffic. Incumbents like Bharti Airtel, Vodafone and Idea Cellular are far behind Reliance Jio in terms of both data coverage and 4G coverage, says the report.

Stretched balance sheet sat its competitors would help Reliance keep intact a large portion of its customer base, which in any case has been addicted to high-speed data over the last few months. A Goldman Sachs report points out that 10 percent of Indian mobile subscribers with an average revenue per user (ARPU) of Rs 600 account for 40 percent of industry revenues and this segment would find the Jio offer attractive.

Further, Jio’s offer packs more punch with a 1 GB per day for Rs 303 per month as compared to other players who offer a 1 GB per month pack for similar pricing.

Reliance’s plan to cover 99 percent of the country by the end of 2017 and 400 million subscribers from the present level of 100 million has given more visibility to analysts who are now plugging in the new set of numbers to revalue the shares.

Reliance Jio, through its free introductory offer, managed to acquire 100 million subscribers, many of whom are believed to be using it as a second SIM in their mobiles. But if the company is able to provide quality high speed connectivity, then its pricing point is just right for Jio to be used as the primary SIM. Little wonder Reliance shares added an Idea Cellular in one day.(Disclosure: RIL, which owns Reliance Jio, also owns Network18 and moneycontrol.com).