RIL: Long way to generate positive value from Jio

Over 72 million subscribers have enrolled for Jio’s Prime offering so far, well above our and market expectations. Yet, Reliance extended its free service under Prime by a quarter pushing back monetisation yet again.

We revise our fair value for Reliance to reflect higher value for Jio given the better initial response – however, the stock price is already implying an enterprise value (EV) of $28 billion+, not adequately discounting the risks in our view.Reliance reported that over 72 million subscribers have enrolled for the Jio Prime membership, which allows members unlimited data for an upfront annual subscription of `99 and a monthly fee of `303. This is well above our and market expectations of 25-50 million Prime subscribers.

Reliance has extended the offering to April 15, which could further add to this number by the time it reports its Q4 results.Despite the better than expected response, Reliance has made its offering free for 3 months all those who enroll under Prime and do the first re-charge before April 15 under its ‘Summer Surprise’ offer. This has pushed back monetisation by at least another quarter – Jio has also indicated that this is the first of many surprises for Prime customers.

Given that incumbents have matched Jio’s prime offering, we believe this will help bridge any gap between those who have paid the upfront amount but have not made the monthly payment.We revise our fair value for Reliance to `1,210 as we now build in $23.5 billion for Jio vs. $18 billion previously based on 30% steady state market share and faster ramp up. We also roll forward our fair value basis to FY18 end.

Our consolidated EPS improves to reflect lower losses in initial years for Jio.We believe there is still a long way before Reliance generates positive value from Jio given significant upfront investments $30 billion by FY18 end, competitive intensity – expect significant price competition in near-term and capex intensity.

Reliance stock price is already implying an EV of $28 billion for Jio vs. $25 billion for Bharti, and is not adequately discounting risks in our view.

Reliance Industries Limited (RIL)