Telecom Regulatory Authority of India’s (Trai) 57% cut in interconnection usage charges (IUC) was always expected to benefit Reliance Jio Infocomm Ltd, which ran a huge bill on this account. So, it isn’t entirely surprising that about 90% of the increase in Jio’s operating profit in the December quarter (Q3) is on account of savings in IUC.
IUC savings amounted to Rs1,058 crore when compared to Q2, while Jio’s earnings before interest and tax (Ebit) rose by Rs1,179 crore sequentially. Trai cut IUC, also called access charges, to 6 paise effective 1 October. “(Access charges) should have gone down even lower. It should not have been six paise; it should have been zero paise,” Anshuman Thakur, head of strategy and planning, said in a press conference.
Such is the extent of savings, they have even driven profit growth at parent Reliance Industries Ltd (RIL). Consolidated Ebit rose by Rs1,706 crore sequentially to Rs15,315 crore in the December quarter. As such, about 62% of RIL’s profit growth was on account of IUC savings. Without these savings, the parent company’s profit would have grown by just 4.8% sequentially, compared to the reported 12.5% growth in Ebit.
Of course, there’s more to Jio’s results than just the cut in IUC.
Revenues rose 11.9% sequentially to Rs6,879 crore—a welcome sign for the company’s investors. The pace of subscriber additions was brisk and improved over the September quarter.
Average revenue per user stood at Rs154 per month, higher than what the company’s flagship plan delivers. Perhaps, the company enjoys a decent mix of subscribers signing up for higher value plans.
On the other hand, the company continues to capitalize some expenses, since all of its businesses haven’t been commercially launched. As such, its profit and loss statement still doesn’t provide the full picture of profitability.
Interest costs, for instance, stood at Rs2,655 crore on an annualized basis, based on reported Q3 numbers, far lower than the expense of over Rs7,000 in the company’s FY17 annual report (see chart).
According to an analyst at a multinational brokerage, it makes more sense to look at gross cash outflows and compare them to gross cash inflows. Total cash expenses, including operating and capital expenses, amounted to Rs11,900 crore in Q3, more or less the same as the Rs11,700 cash outflow in Q2. Since revenues stood at Rs6,879 crore, this means the net cash outflow stood at roughly Rs5,000 crore last quarter. As long as this number remains high, the company’s debt will continue to rise, points out the analyst.
While the company’s subscriber base is growing at a fast clip, the near-term outlook on revenues took a hit after the company revised tariffs downward by around 13% in January. According to the company, this was in response to what competitors did in late 2017. “People have missed the fact that it (the tariff revision) was in response to some of our competitors reducing prices. This has been very consistent with what we said—if someone matched our prices we will give 20% more value,” Srikanth Venkatachari, joint chief financial officer of Reliance Industries, said in the press conference.
This leads to the question: If incumbents now match Jio’s latest tariffs, will it cut tariffs again to provide more value? It remains to be seen how things play out, although it’s reasonable to assume the path to stability in tariffs will be rocky.
Apart from Jio, the other major contributor to Reliance Industries’ profit growth last quarter was the petrochemicals division, which reported a 16% increase in Ebit to Rs5,753 crore. Ebit of the refining business fell, which was more or less expected, given the pressure on refining margins last quarter.