Jio burnt cash for years. Now its cash registers are ringing

The company burnt cash worth ₹22,000 crore in fiscal 2016, the year before its commercial launch, showed data collated by Jefferies India Pvt. Ltd. And in the four years hence, cash burn totalled ₹1.47 trillion as the company undercut competitors and rapidly rose to become the largest telco in India.

But Jio turned a corner in fiscal 2021, generating positive free cash flow (FCF) for the first time ever. Of course, the FCF of ₹5,500 crore, according to Jefferies’ calculations, may seem like a drop in the ocean when compared with the massive cash burn of the past. But analysts say the firm is sitting in a pretty position now, and it is highly unlikely that it will slip back to negative cash flows, even after accounting for payments related to 5G auctions.

The manner in which Jio’s journey has panned out thus far isn’t unlike the strategy of some large internet firms, who are willing to burn a large amount of cash in their early years of business with large investors willing to back these ventures eyeing supernormal returns in the future in a ‘winner-takes-it-all’ industry outcome. In Jio’s case, of course, that future is already here.

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While it may not exactly be in a monopoly position, it is the clear market leader in terms of revenues and subscribers. As a result, it now gets to gain the most from any market repair measures such as tariff hikes.

Indeed, one of the biggest factors that drove cash-flow generation last year was the tariff hike taken by the industry in December 2020. Jio’s operating profit jumped 43% in fiscal 2021 to more than ₹30,000 crore. As it turns out, even Bharti Airtel Ltd reported operating cash flow for its India mobile business last fiscal, after burning cash (albeit at lower levels) in the preceding years.

But the jump in profits alone wasn’t responsible for the cash flow generation. Jio’s capex intensity has come down considerably. In fiscal 2021, capex amounted to only around ₹26,000 crore, of which ₹15,000 crore was on account of the upfront payment for the 2021 spectrum auctions.

Adjusted for this, capex was only around ₹11,000 crore, far lower than the spend of around ₹51,000 crore in fiscal 2020. While Jio’s capital expenditure on its network has reduced considerably, another factor that is driving down capex is the reduction in the quantum of operating expenses that are capitalized.

Earlier, since the fixed broadband services hadn’t been fully rolled out, a fair amount of expenses were still getting capitalized. But this has changed.

“Based on the disclosures of FY20, we had estimated opex capitalization of ₹4,700 crore in FY20. In FY21, over 50% of the charges paid to the fibre SPV (special purpose vehicle) was expensed (in FY20, most of this was capitalized), and this resulted in a ₹2,500 crore year-on-year (y-o-y) increase in network opex. Based on this, we estimate that opex capitalization in FY21 fell to around ₹2,000 crore," analysts at IIFL Securities Ltd said in a report.

What’s more, Jio’s interest expenses have also fallen sharply as the majority of its debt was moved out to the parent entity. While this may have earlier looked like a mere book entry, the parent company has now raised substantial equity capital and reduced indebtedness, addressing leverage levels at the group. At Jio, all this has meant a sharp drop in outgoes on account of interest costs and, hence, better cash flow.

It also had lower tax outgoes in FY21, thanks to some smart manoeuvres. “Despite pre-tax profit more than doubling, cash tax was only ₹140 crore in FY21 vs ₹1,170 crore in FY20. In 1HFY20, Jio paid cash tax as per minimum alternate tax. Jio opted for the new tax regime from 2HFY20. In FY21, it paid just the TDS, despite the 25% effective tax rate, as there were carry-forward losses on its tax books," analysts at IIFL explain in their note. Given that carry-forward losses still remain on its books, analysts expect cash taxes to remain low going forward.

It’s interesting how various important factors are falling in the right place for the company. To be sure, cash generation and return ratios are still at suboptimal levels. Return on invested capital stood at around 7% in fiscal 2021, up from around 5% in the preceding year. Unless tariffs increase meaningfully from current levels, return ratios are likely to stay depressed.

As pointed out in these pages, one area where the company fell short in fiscal 2021 was subscriber growth. But with Jio acquiring a significant amount of spectrum in the recent auctions, capacity issues are now behind it, and it is expected to resume taking leadership on this front as well.