Irrational exuberance in RIL stock
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Is Reliance Jio Infocomm Ltd worth $5.8 billion more in one day? The Reliance Industries Ltd (RIL) stock had moved up 1.4% on Tuesday when its chairman and managing director Mukesh Ambani announced (during market hours) Reliance Jio’s decision to start charging its subscribers from 1 April. However, the RIL stock’s 11% jump on Wednesday has left many analysts shell-shocked. The rise meant that the company’s market capitalization increased Rs38,732 crore (or $5.78 billion) in a single day.
That’s at a time when analysts feel that the stock was pricing in an implied negative equity value for the telecom business earlier. Some analysts believe that rumours about a strategic investor in Reliance Jio or possibilities of listing the firm separately may have boosted the stock.
Nevertheless, Reliance Jio’s announcement removes a key overhang for the RIL stock. “Over the last few weeks, a key investor concern was the possibility of Jio extending its free offer period or starting with nominal tariffs at the onset,” analysts from Goldman Sachs wrote in a note.
However, it’s worth noting here that while revenue will flow ahead of what the Street had forecast, Ebitda (earnings before interest, tax, depreciation and amortization) break-even will take some time. Cash break-even is further away into the future. Morgan Stanley analysts believe RIL’s telecom venture can break even at the Ebitda level in about four quarters and achieve cash break-even in fiscal year 2021.
But competitive pressures will remain intense for the sector and incumbents are unlikely to let go without a fight. “We remain watchful on the likely reaction from competitors, who may also attempt to retain a large portion of their high-end customers (over Rs300 average revenue per unit),” wrote Kotak Institutional Equities in a report on 22 February. It will also be interesting to watch the percentage of the current subscriber base that will remain with Reliance Jio after 1 April.
The RIL stock has been a consistent underperformer, dragged down by worries over Reliance Jio and the recent move corrects that underperformance. Also, the refining environment has remained strong this quarter and that should reflect in RIL’s refining business performance. The stock is currently trading at 12.8 times expected earnings for FY18 and seems to be capturing most of these positive sentiments.