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How Reliance Jio Ended Up With Less Red In Q2

The 3 factors that helped Reliance Jio report an operating profit in just 3 months.



Customers stand in line in a Reliance Digital store. (Photographer: Anindito Mukherjee/Bloomberg)
Customers stand in line in a Reliance Digital store. (Photographer: Anindito Mukherjee/Bloomberg)

Reliance Jio Infocomm Ltd., the telecommunications business of Mukesh Ambani - led Reliance Industries Ltd. pulled a surprise by turning in an operating profit within just three months of its commercial launch.

Jio reported higher than expected revenue based on subscription recharges and lower than expected operational cost in its July - September 2017 quarterly earnings.

  • Net revenue: Rs 6,147 crore
  • EBIT: Rs 260 crore
  • Net loss: Rs 271 crore

Reliance Jio started operations in December 2016 but pegged its commercial launch to “quality of service” conditions and has hence reported the July to September 2017 period as its first commercial quarter.

The business beat analysts’ expectations of continuing losses on the basis of 3 important factors.

1. Higher Than Anticipated Revenue

Jio reported an average revenue per user of Rs 156, so far the highest amongst its competitors.

The key revenue contributors were

  • Recharges done in the July - September 2017 period.
  • Prime membership revenue proportionate to the quarter.
  • Subscription recharges done in April, accounted for in July.

This resulted in Jio reporting revenue from the earlier quarter in Q2. Because subscribers who paid for promotional plans ‘Summer Surprise’ and ‘Dhan Dhana Dhan’ were provided free services for the first three months starting April, effectively making the fourth month, i.e., July chargeable.

This was emphasised in an earlier statement by the company.

Every JIO PRIME member – when they make their first paid recharge prior to 15th April using Jio’s Rs 303 plan (or any higher value plan) – will get services for the INITIAL 3 MONTHS on a complimentary basis. Your paid tariff plan will be applied only in July, after the expiry of the complimentary service.
Mukesh Ambani, Chairman, Reliance Industries (Statement on March 31, 2017)

Brokerages have acknowledged the company booked revenue from the earlier quarter.
Reliance Jio “did benefit from some revenue booking of Q1 which helped push up the ARPU,” said a note by JP Morgan’s Asia Pacific Equity Research team.

Our calculations suggest Jio’s realisable ARPU for Q2FY18 must have been around Rs 121/month, instead of the reported amount of Rs 156/month, including Rs 8 for IUC, Rs 107 pertaining to recharges and  Rs 7 for prime plan
Kotak Securities

The number of active subscribers at 13.1 crore (131 million) versus 13.86 crore (138.6 million) total subscribers also surprised the street.

This was a bigger number than most estimates which were based on reported VLR (active subscribers) data which suggested 100 million. Jio explained that as many of its subs are pure data users who may use it only few days in a week they do not feature in VLR methodology but are still paying for services. 
CLSA

2. Capitalisation Of Costs

The CLSA note said employee and other expenses came in lower than anticipated and may have been capitalised.

We were expecting a run rate of Rs 8 billion versus reported opex of Rs 3 billion, we estimate that ~Rs 5 billion may have been capitalised from employee costs.
CLSA (on employee costs)

The Kotak Securities note said “The management indicated that a part of network costs and employee costs, related to non-wireless business were capitalized”.

The company also reported lower average tower rent costs due to self-owned towers and on the back of power and fuel efficiency. Analyst reports indicated that on average Jio paid a rent of Rs 13,000 per month versus the average industry rent of Rs 31,000 per month.

RJIO’s operating cost surprised positively with unit network cost 49 percent lower than Idea’s in Q1FY18 due to lower tower rentals and significantly lower subscriber acquisition cost riding its digital onboarding. We now estimate EBITDA breakeven in FY18 and have revised up FY19E EBITDA 144 percent to Rs 210 billion, assuming 9 percent higher subscribers, 5 percent higher ARPU and 43 percent EBITDA margin.
Edelweiss Securities

Furthermore, Reliance jio stands to benefit from a further lowering of costs starting Q3 as interconnect charges have been slashed to less than half, from 14 paise to 6 paise, by telecom regulator TRAI.

In Q2 Jio reported a close to Rs 2,200 crore interconnect cost. That will decline by half starting Q3.

3. 50% Lower Depreciation Rate Than Competitors

The bigger impact on costs was due to a lower than anticipated depreciation charge.

Reliance Jio has chosen a depreciation method different from that of its key competitors. It charged depreciation on assets based on a unit-of-production method, also understood as a usage-based method. In this, depreciation is calculated as per asset capacity utilised. Other telecom service providers such as industry leader Bharti Airtel Ltd. and Idea Cellular Ltd. charge depreciation on a straight-line method basis.

This led to a depreciation rate of 3.25 percent on capitalised assets of just over Rs 1,45,000 crore versus the 7-8 percent rate accounted by other telecom companies, said the Kotak Securities note.

JP Morgan calculated Jio’s depreciation rate at 2 percent.

Also no depreciation was charged on assets worth Rs 62,000 crore belonging to the wireline business segment, said the CLSA note. These have not been capitalised as they are yet to start commercial operations.

For the Rs 1.45 trillion (Rs 1,45,000 crore) capitalised, Reliance has opted for unit of production method of depreciation rather than the typical Straight Line Method methodology for depreciating electronics and spectrum which will form a big chunk of this amount. Therefore, Reliance’s depreciation in earlier years will be lower when actual network utilisation and throughput is much lower as compared to later years when the network hits appropriate utilisation.
CLSA