Reliance Industries Ltd - Q4 FY'16 update : Surprise after surprise.

Throughout Q4 FY'16, it was widely expected that Reliance will launch it's long awaited & much delayed Jio 4G services on a commercial basis by the start of April'2016. But the company did not fail to Surprise (read as Disappoint) AGAIN as there is absolutely no confirmed announcement about Jio's launch even by the first week of May'2016. More on this later....

The bigger Surprise from Reliance Industries came in terms of continued strong profitability in it's primary business units of Refining & Petrochemicals. The average price of crude hit the lowest levels during Q4-FY'16. Hence it was no surprise that the Revenues from Refining business took a proportionate hit. But the Refining EBIT number did better than expected with only a 1.5% Q-o-Q drop, but was still 30% higher Y-o-Y. The chart alongside shows the T-T-M EBIT progress of RIL's Refining business. The surge seen over the last 3-4 quarters will now lead to stability or only a gradual improvement going forward, unless the company has more surprises in store for us. I am expecting to see the T-T-M EBIT number for Refining to stabilise around the Rs.24,000 to 25,000 crores mark in the coming few quarters. The huge improvement in EBIT numbers from Refining unit of Reliance Industries did not come on the back of big expansion in capacity, but mainly because of improvement in efficiency of the existing capacities. I am not expecting further huge improvement in efficiencies, but there could be minor improvements.

On one hand I am expecting RIL's Refining business to stabilise in terms of EBIT numbers, but on the other hand I am expecting the PetroChemicals to continue deliver further improvement in EBIT numbers. In fact the EBIT improvement journey has just started for RIL's PetChem business. After posting a 27% Y-o-Y jump in EBIT in Q3-FY'16, RIL's PetChem division posted a stronger 35% Y-o-Y jump in Q4-FY'16. With more CAPEX projects coming on stream during the current fiscal, we can expect this division to continue posting strong Y-o-Y growth in EBIT number for few more quarters for sure. The CAPEX at the PetChem unit is leading to increased capacity of certain products as well as improvement in efficiency at certain other products. The full effect of all this CAPEX is expected to be seen in FY'18. That means we still have atleast another 4-6 quarters of continued improvement in EBIT numbers. The growth rates may vary, but they will still be good enough. As of Mar'16, the T-T-M EBIT from Petrochemicals unit has crossed the Rs.10,000 crores mark and could very well progress towards Rs.12,000 to 13,000 crores mark over the next 3-4 quarters.

As of March'2016, the two business segments of Refining & Petrochemicals of Reliance Industries Ltd. together contributed a total EBIT of around Rs.34,000 crores on a T-T-M basis. Over the next one year, I am expecting this figure to increase by atleast another 10% or so to levels of over Rs.37,000 crores.

The remaining three business units of the company together contributed just about 5-6% of the company's Total T-T-M EBIT as of March'2016, down from a contribution of over 15% at the end of March'2015. The primary reason for this is a near 90% fall in EBIT from Oil & Gas production business, which was on expected lines as the International prices of Crude Oil & Natural Gas had seen a collapse during the year 2015. The prices of these commodities seem to have bottomed around Jan-Feb'2016 and have seen a smart bounce back over the last 2 months. The Crude Oil price for example is now trading around $45 per barrel compared to lows of under $30 registered over 2 months ago. Even if the prices continue to trade within a 10% range of current levels, I think RIL's Oil & Gas business too will start posting improved EBIT numbers, mainly because of it's US Shale assets, where the company has managed to bring down operating costs considerably. Hence the recent recovery in prices will help boost profitability from near-zero levels in the most recent quarter. The T-T-M EBIT from the Oil&Gas business has dropped from levels of around Rs.3200 crores to under Rs.400 crores over the last 1 year. Even if Crude Oil stays within the $40 to 50 per barrel range for the rest of the year, I think RIL's EBIT from this business could partly recover to levels of around Rs.1200 crores or so quite easily.

Coming to RIL's most important consumer-facing business (until Jio's launch happens), which is the Retail unit. This business has progressed on expected lines with just over 20% growth in Revenues as well as EBIT. The current year & the next could prove to be the most important years for Reliance's Retail unit. We will see launch of e-commerce verticals of several of Reliance Retail's divisions. This Online expansion will benefit from Jio's infrastructure. In return, Jio will also immensely benefit from the Retail unit's wide network of stores as well as consumer connect. I think we can expect the Retail division to continue posting handsome growth of around 20% Y-o-Y, while the EBIT could post a little higher growth rates.

Coming to the All-Important question of RelJio's launch, I think Reliance will finally start charging for it's services & open it to general public anytime in the next 3 months. Currently the service is being offered completely Free-of-Cost to over 5 lakh users, most of whom are part of the company's employee base or their relatives. As a next step, Reliance has started an invite system where each employee can invite upto 10 people onto the RelJio's network. But there is one condition attached to this invite: the Invitee needs to purchase a LYF handset, which will entitle him to enjoy all of Jio's services without any further costs for a period of 90 days. This invite system could alone add another million users to RelJio's network in the coming few weeks. Apart from this, RelJio's network will see addition of another couple of million users in the form of RCom's CDMA subscribers, who are being migrated to 4G to free up the 850 MHz CDMA spectrum. That spectrum in about 17 circles is either being sold to or shared with RelJio to introduce a third 4G band on the network. This 850 MHz band will enhance the reach & indoor penetration of RelJio's 4G network. The process of integrating this band is what is said to have further delayed RelJio's commercial launch by an additional few months, than the April launch which was earlier expected. So even if RelJio plans for a August or September launch of commercial 4G services (atleast in some crucial circles), it could be having about 3 to 4 million active users on it's network. And once doors are opened for general public, RelJio could easily add another 15 to 20 million subscribers during the 2nd half of the fiscal. By then the company could be easily having a monthly revenue in excess of Rs.1000 crores, which should be good enough to cover about 75% of it's operating costs. I am expecting RelJio to be EBITDA positive during the next fiscal.

Coming to the Valuation part, RIL's share price has come down by about 10% post the announcement of the company's Q4 result. the primary reason being the continued uncertainty on RelJio's commercial launch. I think this is an excellent opportunity for those who still haven't invested enough in Reliance Industries. At the current price of about Rs.975 per share, the company's Market Cap is around Rs.3.15 lakh crores, which is just about 6 times it's current T-T-M EBITDA and less than 8 times the Cash Profit figure. Excluding RelJio, RIL is expected to post further double-digit growth in EBITDA & Cash Profit during the current fiscal & the next. This makes the current valuation of Reliance Industries look very very attractive. RelJio is expected to post substantial EBITDA & Cash Losses during this fiscal, but the numbers will dramatically improve in the next fiscal. Hence on a Consolidated basis, I am expecting RIL's numbers to look bad at the end of this fiscal, but will be substantially better from the next fiscal onwards. With most of the large CAPEX for RIL to end by the end of this fiscal, the company could start reducing it's large consolidated Debt from the next fiscal using the huge Cash Profits from the primary business units. I will further reiterate that FY'18 could be a dream year for Reliance Industries Ltd and nobody should miss the chance of being a part of it, especially when the stock is available at reasonably attractive valuations currently.

Bharti Airtel Q4FY16 - Voice growth saved the day!!

Bharti Airtel reported a strong 3.6% Q-o-Q growth in Total Income for Q4-FY'16, mainly on the back of 4.8% Q-o-Q growth in it's India Wireless business, which alone contributes to around 59% of the company's Topline. But unlike many of the recent quarters, this strong 4.8% Q-o-Q growth was not powered by it's Wireless Data business, but by it's Voice services business.

In the last 8 to 10 quarters, Airtel's Wireless Data business was posting a double-digit Q-o-Q growth, which was single-handedly driving the company's Topline growth in it's India business. But there has been a very sharp deceleration in Airtel's Wireless Data Revenues growth during the March'16 quarter. This wasn't expected to happen, especially because the long-delayed commercial launch of RelJio's 4G service is still in 'Coming Soon' mode. The Q-o-Q growth in Bharti Airtel's Wireless Data Revenues has dropped to a lowest ever figure of just 5.4%. This is despite the fact that the company managed to grow it's 3G/4G Data subscriber base, which now stands at over 35 million, at a healthy rate of almost 15% Q-o-Q. But despite this strong growth in Mobile Broadband user base, the volume of Data consumed grew by just 9.6% Q-o-Q. This lower growth in volume coupled with further 3.8% erosion in Average Rate per MB led to a very disappointing growth of just 5.4% in Bharti Airtel's Wireless Data Revenues.

Now the question is: Why is Bharti Airtel's Data consumption not growing fast enough? If you look at the stats, the Average Data consumed by a Data user of Airtel is just around 850 MB per month. Even in case of 3G/4G customers, the average consumption must be around 1 GB to 1.2 GB per month. With this kind of low usage, most customers are still not using much of Wireless Data for things like watching Videos or Live TV, Video Calling, etc., which will ultimately propel Average Data consumption in the country. And the primary reason most people are not even trying to use these services is the COST. Even after the recurring drops in Average Rate per MB charged by Airtel, 1GB of Data still costs over Rs.220/-, which is quite exorbitant for large scale Data usage. Many of the smaller 3G players like BSNL, Tata Tele, Aircel and RCom are offering plans which are 30 to 40% cheaper than those of incumbents like Airtel, Vodafone or Idea. Hence a portion of the heavy Data users have shifted their consumption to operators which suite them in their region. Most of them also have a sim card of the larger operators, to be used as a back up option.

In many cases, users start to experience high-speed Data service with the larger operators like Airtel or Vodafone or Idea. But as their consumption starts going up and the high rates start pinching them, then they quietly shift their usage to one of the smaller operators. Remember....many of these smaller operators may not have extensive Nationwide 3G coverage, but they do have good coverage in their operational 3G circles. And their networks are almost on par with that of the incumbents in all major cities & towns in those respective circles. I think that severe competition from all existing operators too is pinching Airtel and hence the company is not able to grow the Data consumption on it's network at a rapid pace.

Bigger Worry still lurking around: The bigger worry for Airtel and all other existing operators is still the 'Upcoming' launch of RelJio's 4G service. The continued delay in it's commercial launch has allowed more breathing space for all existing operators. Operators like Airtel & Idea and to some extent even Vodafone, are doing their best to protect their customers & revenues. But if the soft-launch stats announced by RelJio during the recent result announcement are anything to go by, then it's going to be a very very Big Thing to Worry for all existing operators. RelJio already has about half a million (friendly) users on it's network and the Average Data consumption is around 18 GB per user per month!! And RelJio now wishes to add a few more million (friendly) users to it's network in these 2-3 months and then upgrade this soft launch to a full commercial launch. Apart from these (friendly) users, RelJio has put up WiFi Hotspots are several public places across the country, where usage is currently free. All this is also indirectly hurting Airtel as well as all existing operators, atleast to some extent. RelJio is promising to offer a high-quality experience to it's users. And since they are targeting to reach millions of users across the country, they cannot price it at a premium. RelJio is planning to offer not just Data service, but the whole package of Information + Communication + Entertainment alongwith things like e-commerce, digital wallet, e-education, etc. at competitive prices. If rumours are to be believed, RelJio has already built a huge repository of content & apps for most of it's services that it intends to offer.

Players like Airtel, Vodafone & Idea, as well as all other operators, are certainly going to find it difficult to avoid a small portion of their user-base shifting to RelJio with every passing month post the latter's commercial launch. Even though they might be able to bring down their tariffs to something closer to what RelJio offers, but they will need time to match the rest of the services package. Imagine this: Even if just about 1% of Data user base of all existing operators starts shifting to RelJio every month, it will start impacting the traffic on their networks. Couple this with sharp reduction in tariffs and it's a scary few quarters for all existing operators. Forget about growth in Data Revenues, most operators will be facing erosion in their quarterly data revenues for the initial few quarters. Though the Data traffic may not decline as sharply lower tariffs could lead to substantial increase in usage from subscribers who remain with these operators.

The Only Question is WHEN will RelJio start commercial operations?? Till then Airtel has to battle it out with the existing competition, which in itself is giving it headaches.