After Reliance Jio success, Reliance Industries set to surprise with higher dividends, says Nomura

We think RIL’s recent rally (last 2M, RIL up 23% vs. Sensex 6%), after positive news flow on Jio (100 million plus subs; monetisation from April 1; attractive offerings), was driven by the Street’s overall under-ownership of the stock. Despite the recent outperformance, RIL has unperformed the Sensex by 40% since Jan-2008 (after the last bull-run). This was driven by a long (and large) capex phase, delayed monetisation (particularly Jio), and a sharp decline in E&P fortunes.Including R-Jio, we now expect RIL’s consolidated EBITDA/ PAT to record 19%/15% CAGRs over FY16-20F (vs mere 1%/3% CAGRs in FY11-16).

Importantly, as past capex delivers and current capex pipeline is lighter, RIL will soon start generating high FCF, and could surprise with higher dividends and/or buy-backs. A potential exit from US shale and demerger/ stake-sale/ IPO of R-Jio would create long-term share-holder value, in our view. In the near term, the market will focus on Jio (how many free subs stick, pace of subs adds, average ARPU, EBITDA margins, and PAT).

We think our numbers are conservative on: subscribers (40% retention; 165 million with 13% market share by end-FY19); average ARPU (`210-225, vs base unlimited plan of `303 for 28 days); and EBITDA margins (21-37% in FY18F/19F, vs guidance of over 50%). Our numbers now include R-Jio (we expect EBITDA/PAT to break-even in FY18F/20F). Driven by R-Jio, we expect EPS to decline by 27% in FY18F, before rising a sharp 53% in FY19F, and further by 30% in FY20F.

RIL has sharply outperformed the market of late (last 2M, RIL up 23% vs Sensex 6%). The up-move followed R-Jio announcing the monetisation of its services from April 1 (ending the free offer since its launch in Sept-16), the launch of the Jio Prime membership scheme for a one-time payment of `99 and the introduction of aggressive tariff plans. RIL also reported one of the fastest subscriber ramp-up in the world (100 million subscribers in just 170 days). The tariff plans (for Jio Prime members) include an introductory offer with a base voice plan of `149 (unlimited voice, 2GB data), a base unlimited plan of `303 (unlimited voice, unlimited data; 1GB/ day data at 4G speed), and an offer to match the highest selling tariff plans of leading operators on price, but offering 20% more data. While we have been positive on RIL, the recent sharp rally has surprised us (and the Street).