Analysts upgrade EBITDA, revenue estimates for RJIO post IUC charge

Analysts have revised upwards their estimates for earnings before interest, taxes, depreciation and amortisation (EBITDA) and revenue for Reliance Jio (RJIO), the telecom arm of Reliance Industries (RIL) after it hiked the interconnect usage charge (IUC) by 6 paise per minute. The IUC hike by RJIO, analysts say, would pave the way for the other telecom operators to adopt a similar strategy.
The Mukesh Ambani-controlled telecom company, however, plans to compensate the users for this hike by offering them 1 GB to 10 GB free data. This move, however, came in as a surprise for analysts, who feel most subscribers will view the compulsory IUC top-up voucher as an additional spend for no incremental value.
“The other aspect we find puzzling is the mode chosen to recover the off-out IUC instance. This dilutes the ‘simplicity’ proposition of Jio’s pricing architecture, one of the most critical changes Jio brought to the industry, in our view,” wrote Rohit Chordia and Aniket Sethi, analysts tracking the sector at Kotak Institutional Equities in a report.
On the other hand, analysts at Edelweiss Securities expect RJIO to resort to further hikes for higher payout towards InvIT—to fund incremental capex for its fibre-to-home (FTH) business and bring down net debt. For RJIO, they expect additional charges to drive up revenue by around 5 per cent, which would translate into nearly 10 per cent increase in EBITDA.
Analysts upgrade EBITDA, revenue estimates for RJIO post IUC charge“RJIO’s tariff hike is prima facie positive for the industry as it enables other operators to raise tariffs too. We are already building in around 4 per cent higher Q4FY20 average revenue per user (ARPU) for Bharti Airtel and Vodafone Idea than Q1FY20," wrote Pranav Kshatriya, Sandip Agarwal and Nisha Jain, analysts tracking the sector at Edelweiss.
At the bourses, telecom stocks remained outperformers on Thursday, with the S&P BSE Telecom index rallying over 3 per cent in intra-day deals. In comparison, the S&P BSE Sensex traded nearly 0.6 per cent weak. Among stocks, Idea, Bharti Airtel, OnMobile and Reliance Communications (RCom) gained in the range of 1 per cent to 5.3 per cent in intra-day trade.
According to reports, Jio pays net-IUC charges at the rate of 6 paise per minute and has paid cumulative IUC charges of Rs 135 billion since it commenced operations. While these charges are on declining trend, they remain high and stood at Rs 8.5 billion in Q1FY20.
Analysts at Nomura believe the key reason for RJIO to introduce a recovery of IUC charges is to pressure the regulator into not deferring the current plan of implementing zero IUC or bill-and-keep (BAK) regime from January 1, 2020. That said, it expects JIO's ARPU to gradually increase as subscribers will need to purchase top-up IUC vouchers when they recharge next.
"While the IUC top-up will likely inconvenience customers and increase their monthly outgo, we do not see many customers moving out of Jio due to these IUC charges. We estimate that an ARPU increase of even Rs 10/month could result in additional annualised revenue of over Rs 42 billion. But this would be partly offset by net IUC charges if these were to continue beyond January 1, 2020," wrote Anil Sharma and Aditya Bansal, analysts tracking the sector at Nomura in a report.
Those at Jefferies, too, see gains accruing for RJIO post this move, but see the telecom regulator, TRAI, setting a sunset date for IUC in the next 12 – 18 months.
“If IUC continues until FY21-end, the move will lead to 10 per cent increase in ARPU for Jio, around 20 per cent increase in EBITDA, and around 5 per cent rise in consolidated EBITDA. Cumulative gains will be Rs 73 billion. The benefits of the current move for incumbents is unclear. We expect Jio's focus to remain on subs and sustainable price hikes until it crosses 40 per cent market share (in FY21). Competitive intensity is likely to remain high. Remain cautious on Bharti and VodaIdea,” their analysts wrote in a recent note.
RJIO - Access / IUC charges (net) trend
Period Rs billion
Q2FY18 21.4
Q3FY18 10.8
Q4FY18 10.7
Q1FY19 10.6
Q2FY19 10.5
Q3FY19 10.1
Q4FY19 11
Q1FY20 8.5
R-Jio's net IUC had declined sharply in 3QFY18 as IUC was cut from
14paise to 6paise per minute from 1 Oct 17; these have been on a
declining trend, and declined to Rs 8.5bn in 1QFY20; with planned
zero IUC regime from Jan 1, 2020; IUC on domestic calls were
expected to become negligible from 4QFY20F; Source: Nomura report

PSB merger on expected lines; buy stocks for the long-term: Analysts

Analysts have given a thumbs-up to the government’s move to consolidate public sector banks (PSBs). Calling it a step in the right direction, analysts say this merger could be a game changer for the PSU banking space over the long-term.
ALSO READ: Amalgamating 10 govt banks into 4 entities in mega consolidation move: FM
While they see the related PSU bank stocks reacting to the development when markets open for trade next week, they suggest only those investors who can hold from a long-term horizon buy into these counters. Investors need to understand the share swap ratio and the other details of the proposed merger, they caution. That apart, there could be challenges as regards integration and the likely benefits of the amalgamation will take a long time to play out, they said.
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PSU bank merger on expected lines; buy stocks for the long-term: Analysts
“The announcement was overdue. There are synergies to be had from the proposed merger, but all this will take a long time to play out. That said, a bounce in the related counters cannot be ruled out, which the investors can capitalise on,” said Ambareesh Baliga, an independent market analyst.
ALSO READ: FM unveils merger of 10 govt banks to revive economic growth from 5-yr low
G Chokkalingam, founder and managing director at Equinomics Research agrees. He expects economies of scale to kick-in overtime if the proposed merger fructifies on-ground and aid financial performance.
“The government now needs to bring down its stake in the PSU banks. This can change the face of banking sector in the country for good. At the current levels, PSU banks can be bought from a long-term perspective,” Chokkalingam says.
ALSO READ: Government creates banking behemoths to boost India's flagging economy
PSU bank merger on expected lines; buy stocks for the long-term: Analysts
On the other hand, analysts at IIFL do not seem too enthused with the proposals and caution that except for growth on current account, savings account (CASA), and reduction in cost to income ratio, the merger of Bank of Baroda with Vijaya Bank and Dena Bank in 2018 was not appreciated by the market. That apart, the proposed merger of relatively better run Indian Bank with Allahabad Bank came in as a disappointment, they believe.
“We have not seen any significant fall in the credit cost leading to continued pressure on the stock price of BOB. Merger of relatively better-run Indian Bank with Allahabad Bank is disappointing. It may be lack of appetite for some of the weak bank that they were left out of this merger exercise. Considering that still three fourth of saving accounts are with PSB and that there could be significant cost savings by merger, we do see this to be positive for the sector for a longer-term perspective. Immediate release of funds for growth will ensure improvement in loan growth for the banks,” said Abhimanyu Sofat, Head of Research at IIFL Securities.
PSU bank merger on expected lines; buy stocks for the long-term: Analysts
PSU bank merger on expected lines; buy stocks for the long-term: Analysts