Is Reliance Jio really India’s most profitable telecom firm?
Appearances can be deceptive, and so can reported profits
Appearances can be deceptive, and so can reported profits. Reliance Jio Infocomm Ltd was the only Indian telco to report a pre-tax profit in the March quarter. Its pre-tax profit of Rs 784 crore last quarter stands in stark contrast to losses of Rs 2,052 crore and Rs 1,582 crore, respectively, in Idea Cellular Ltd and Bharti Airtel Ltd’s India wireless businesses. How has the company managed to stay immune from the pain inflicted on the telecom sector?
Reliance Jio’s operating costs indeed look far lower than its peers. But the company still capitalizes some expenses, since some of its operations such as home broadband and enterprise services are yet to be commercially launched. Besides, it follows a different depreciation policy which results in lower charges vis-à-vis peers, at least in the initial years of operations.
For this reason, Reliance Jio’s annual report is a much-awaited affair to figure out what the company’s total costs really are. Its FY17 annual report had revealed these hidden expenses in a fair amount of detail. The FY18 annual report not only conceals the break-up of operating expenses that were capitalized, but it even hides the total amount of capitalized expenses. One of the few new pieces of information in the report is that interest costs worth Rs 5,799 crore were capitalized. As such, total interest costs on a quarterly basis are Rs 1,962 crore, far higher than the interest cost of Rs 711 crore listed in the March quarter profit and loss statement.
Analysts at JM Financial Institutional Equities estimate operating expenses worth Rs 7,500 crore were capitalized in FY18, the majority in the June quarter, when all expenses were still being capitalized. On an ongoing basis, it is estimated that expenses worth Rs 800 crore are being capitalized each quarter.
Adjusted for all this, Reliance Jio’s pre-tax profit, or rather losses, stood at Rs 1,267 crore. Of course, it can be argued that the above-mentioned expenses don’t pertain purely to the wireless business, and hence may not be a fair comparison. Even so, it helps to get a sense of how much the home broadband and enterprise businesses need to add in terms of revenues, alongside growth in the wireless segment, for the company to turn profitable.
From what is visible, some analysts marvel at Reliance Jio’s low-cost structure—especially with respect to network operating costs—while others raise questions about a sharp drop in staff costs from FY17 and the unusually low levels of general and administration expenses vis-à-vis peers.
Perhaps we shouldn’t worry about profitability, since there are more questions than answers.
What matters most is the movement of cash. After all, negative cash flow needs to be funded through debt or other means and has a bearing on investors’ fortunes. Reliance Jio generated Rs 3,570 crore in cash from operations, but spent almost 10 times that amount on capital expenditure. Free cash flow stood at a negative Rs 32,200 crore. Besides, capex spend using credit from suppliers rose by another Rs 4,700 crore. In short, Reliance Jio’s funding needs remain huge, which are largely met through borrowings by the company and its parent.
There aren’t exactly comparable figures for Airtel and Idea, although using a proxy Ebitda-capex measure, their cash outflows were far lower. Airtel’s negative free cash flow stood at Rs 4,380 crore, while Idea curtailed capex and limited it to Rs 1,050 crore. Ebitda stands for earnings before interest, tax, depreciation and amortization.
Of course, Reliance Jio’s large capacity creation is helping it tap the boom for data services, as opposed to, say, Idea, where capacity constraints can result in market share losses.
Having said that, revenues and profitability need to rise meaningfully from current levels to cover large recurring cash outflows and also repay debt. For this to happen, tariffs need to rise meaningfully from current levels. Unfortunately for investors, the news on that front is quite the opposite and continues to worsen almost every passing week.
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