ET Intelligence Group: Savings from the sharp cuts in the interconnect usage charges (IUC) should result in an upgrade in the projected valuations of R Jio, the telecom venture of Reliance Industries BSE -0.54 % (RIL). That should create room for further upside at RIL BSE -0.54 %, now trading close to record highs.
The stock has gained nearly 20 per cent in the past three months, compared with 3 per cent for the benchmark Sensex in the same period.
Before the reduction in the IUC, the street had been ascribing the telecom venture a valuation in the range of Rs 150 to Rs 300 per share. However, the IUC rate cut by 60 per cent to 6 paise per minute from 14 paise could mean substantial savings in operational expenditure for RJio.
Interconnect usage charge is the fee paid to telecom operators where the call is terminated by the operator from where the call is originated. Jio will be a prime beneficiary of a cut in the IUC rate as it has a higher share of outgoing calls. According to the June 2017 quarter data analysed by Credit Suisse, RJio would have incurred Rs 30-40 per subscriber month as net termination outflows. RJio will save this termination charges from October 2017. IUC fees were one of the biggest items of oper ..
According to CLSA, the reduction in IUC would translate into 8 per cent higher consolidated earnings per share (EPS) at RIL between FY18 and FY20. Besides this, the Trai said that IUC would be nil from January 2020. After the announcement on IUC, CLSA raised RIL’s target price to Rs 1,050 from Rs 990. Similarly, Morgan Stanley in a note said the cut in IUC rate would translate into 76 per cent upside for the FY19 EBITDA and Rs 54 per share in the net asset value of RJio assuming the rate cut be..
Interestingly, even after the IUC cut announcement, there are still more short term triggers for the telecom venture. First, RJio will start delivery of the first lot of 4G feature phones in the next few days.If the 4G feature phone subscriber base reaches 100 million, it could add more than $2 billion to operating profit.
Furthermore, the results of the core refining and petrochemicals businesses are likely to be better, driving a further EPS upgrade. Every $1 per barrel improvement in the gross refining margin may boost Reliance’s EPS by 6-9 per cent.