Reliance Jio may have gotten rid of debt, but remains capital heavy

Reliance Industries Ltd (RIL) said it will take over debt worth ₹1.08 trillion from its telecom subsidiary, in exchange for an equity investment of the same amount. The investment in Reliance Jio Infocomm Ltd will come through the newly created subsidiary of the parent company, which will reportedly be called Jio Platforms Ltd.

For Reliance Jio, what this means is that its net debt-to-equity ratio of about 2.6 times at the end of the September quarter will be down to 0.3.

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But while debt may be on its way down, it doesn’t change the fact that Jio remains a capital-intensive business, and question marks about earning a decent return on capital remain.

Jio’s total capital employed stood at as much as ₹2.37 trillion at the end of the September quarter. This is after transferring assets and liabilities worth ₹1.25 trillion as part of the demerger of the tower and fibre infrastructure units.

Last year, when the company’s balance sheet size stood at ₹2.5 trillion, analysts at Kotak Institutional Equities had said in a note to clients that generating a reasonable rate of return would require a huge leap in profits.

“Generating reasonable returns (say a 10% post-tax return on capital employed) off a balance sheet Jio’s size (current levels) needs the company to generate an Ebitda (we compute it to be $8 billion) that is higher than the peak historical annual Ebitda ever generated by the aggregate Indian telecom industry, including the home broadband and enterprise data players, per our math,” they added.

Ebitda stands for earnings before interest, tax, depreciation and amortization.

In the past 12 months, Jio’s Ebitda stood at $2.2 billion; this was after capitalizing some expenses related to the broadband business, and using a depreciation policy that results in higher reported profit vis-à-vis peers. Clearly, Jio’s profits would need to grow by leaps and bounds to generate decent returns on its massive balance sheet.

For now, though, the debt reduction will help attract investors, something that can help RIL monetize its investment in Jio.

RIL is clearly aiming big. The creation of the new subsidiary, Jio Platforms, is to position it as a digital platform along the lines of China’s Tencent, rather than sell a stake in Jio, which is seen as a mere connectivity business.

But, as has been pointed out in these pages, the big difference between Jio and a company such as Tencent is that the latter isn’t a telecom company, and its services can be used across different networks.

The way things are going on in India’s telecom sector, who knows, Jio may be the only network standing. For investors who were anticipating such a scenario, of course, there is no need to worry about return ratios in the interim.