Investors starting to understand Mukesh Ambani’s telecom game – Angel Broking

Investors are only now starting to realize the plan that Mukesh Ambani and his telecom brainchild, Reliance Jio, have put into practice, and are therefore driving stock prices of his company higher, said Angel Broking, a retail-only stock-broker.

Reliance Industries share prices surged 11% on Wednesday, the first time it has moved so much in the last eight years.

“What shareholders are beginning to appreciate is that notwithstanding the low prices, there is a methodical move towards return on investment,” the broker said.


Reliance Industries’ stock had been a big laggard in the market for the last five years.

Five years to this day, it was trading at Rs 820, and at the beginning of last week, it was at Rs 1030.

This represented a return on investment of 4.33% per year in an economy where inflation was in the double digits through much of those five years and even fixed deposits were earning 9%.

One of the primary overhangs on the Reliance Industries’ stock was the big investments that the company was making into its telecom venture.

It is estimated to have invested around Rs 2 lakh cr into the telecom venture so far.

To get a rather modest return of 10%, the business would have to generate net profit of Rs 20,000 cr a year.

To get that kind of profit, it would need to have revenue of around Rs 1 lakh cr.

Given that the average revenue that a single telecom subscriber was generating in India was around Rs 2,000 per year, this would require the company to have 50 cr subscribers.

However, the total population — including children and old people — in India is only around 130 cr. In other words, there was no way Reliance Jio would have been able to get 50 cr of them to sign up for its 4G data services.

Not surprisingly, the market took a dim view of the company’s aggressive investments.

However, said Angel Broking, investors are now able to see the company’s bet on data in a different light. Like it did with voice in 2001-02, Reliance Industries could ‘explode’ the data market by driving down tariffs and making it affordable, Angel Broking said.

“In fact, data was the one area where large scale cost reduction was possible,” it pointed out.

“A small to medium-sized data user who approaches Vodafone or Airtel for a 2GB data top-up ends up paying around Rs.400. That is roughly $3/GB. This may be comparable to many developed countries, but in a country like India with a per capita GDP of $1700, this is a recipe for putting an upper limit to the data market.”

But Jio, it pointed out, is pricing data at Rs 303 for 30 GB, or about Rs 10 per GB. (It should be noted that the data is valid only for one day, and not one month like case of rivals.)

“At $0.15/GB, the Jio offer promises to actually expand the Indian data market exponentially,” said Angel Broking.

Moreover, even at this cut-throat pricing, Jio will still be able to make a profit, said Angel. Besides, it could push competitors out of the market by making their existing business models — predicated on data prices in the range of Rs 220 per GB — unviable.

“On the data front, Airtel has an average revenue per user of less than Rs 190 (per month) while Vodafone’s data ARPU is less than Rs 160. That is still lower than the Rs 303 ARPU that Reliance Jio is targeting,” it pointed out.

But the pain for the company’s rivals will not come just from cheaper data tariffs, said Angel. Since Jio is not charging for voice, the others — who get 80% of their profits from voice — will be forced to radically alter their pricing structures and earnings models.

“In the explosive growth in the data segment, Reliance Jio may emerge as the biggest beneficiary of the “Winner takes it all” syndrome. Either ways, shareholders of Reliance have reasons to rejoice,” it said.

Shares of Reliance Industries closed at Rs 1,186.80 on Thursday.