'Wait and watch' for Reliance

India is currently the second-largest telecommunication market and has the third highest number of internet users in the world. Reliance Jio just in 170 days of its launch has been able to add 100 mn of subscriber base. As per the Credit sussie reports, existing median revenue per user of leading Indian telco company such as Bharti Airtel is around Rs 301/month ( $4.5) . As we know the reliance introductory price of Rs 303, is very close to the rival’s median price. Going ahead, to prevent customer switch to Jio, rivals price are bound to fall.

Knowing the fact that since Jio has come in the picture, it has added pressure on RIL valuation as well as margins. To accomplish long pending dream of having a telecom company, Mukesh choose to spend heavily in the next generation internet based data network. By 2019, Jio may account for about $30 billion (40%) of the total capital employed at Reliance, with energy and petrochemicals making up the rest. Currently, a dollar of capital in Indian telcos used to produce roughly half a dollar in sales, however sustainability of the same going ahead looks impractical on the back of price war. Going by Mukesh Ambani’s Jio investment  plans of adding $ 30bn dollar till 2019, we suppose it to derive $ 10 bn revenue out of $ 30 bn (With each subscriber bringing in $4/ month, it would take 200-250 million subscribers to hit that goal).

The subscriber base which jio has added so far looks difficult to retain after the introductory offer starts on the back of low reliability of connectivity and support from the rivals. We believe, till the time Jio doesn’t handle all telecom issues properly, customer retention is bit difficult. Further, mounting heavy expenditure in the sector is likely to add pressure on RIL going ahead. Yesterday, market participant remained in the jubilant mood for RIL thinking that ‘all z well’ for JIO. But having written the above statement, I have doubt in my mind for further upside from 52 wk high of Rs 1222. So I would suggest, wait and watch and look how does Jio turns.