RJio’s Q2 numbers show up rivals’ predatory pricing call: IIFL

Reliance Jio surprised the market last week reporting a net loss of just ₹270.59 crore for the September quarter backed by a revenue of ₹6,147 crore. Not only does this put a spanner in the works for incumbent telecom players, who are fast losing subscribers to Jio, a recent report by brokerage firm IIFL also says that RJio’s exceptionally good results will dilute the incumbents’ arguments against Jio’s predatory pricing.

“Jio reporting a positive EBIT and a slightly negative PAT was well above industry estimates,” the report said. With Jio’s interconnect usage charge payout set to fall sharply in Q3, it can possibly soon report positive PAT if it continues to capitalise operational expenditure and interest, and only gradually raises its depreciation and amortisation charges.

“With this, it would be difficult for incumbents to argue in regulatory forums that Jio is pricing its services well below cost. Further, Jio will also receive a fillip to its assertion that its rivals’ financial issues are due to the lack of cost efficiency of their legacy GSM networks.”

The three largest incumbent operators — Bharti Airtel, Idea Cellular and Vodafone — have repeatedly approached the Telecom Regulatory Authority of India accusing RJio of predatory pricing practices, including providing services at below cost and forcing large-scale subscriber migration, affecting thier revenues and net income.

IIFL said that by opting to capitalise operational expenditure and interest, Jio reduced its reported loss for the quarter. “Expenses, if calculated conventionally,” the report said, “would lead to ₹4,300 crore instead of ₹43-crore PBT loss.” IIFL revised its enterprise valuation of the newest telecom operator to $40 billion in FY18 from $29 billion with the network reporting a positive EBITDA by the end of the fiscal.

“Appearances matter,” the IIFL research note said, “and regardless of accounting conventions used, Jio’s bright numbers have diluted the predatory pricing arguments incumbents have been using against it.”

IIFL forecast the telecom market becoming a three-way play in the next few years with revenue market share increasing from 11.5 per cent (Jio), 38 per cent (Vodafone and Idea) and 28 per cent (Airtel) to 30 per cent, 30 per cent and 38 per cent, respectively.

V Srikanth, Joint CFO, RIL, told reporters at a press conference last week that he expects Jio to turn profitable at the net level “very shortly”. Jio reported an average revenue per user (ARPU) — a key performance parameter — of ₹156.4 this quarter. On October 19, it raised the tariff on its most popular ₹399 plan to ₹459 for 84 days, indicating a willingness to chase higher revenue per subscriber while at the same time retaining its data-hungry subscribers by offering higher GB consumption on the lower-end packs.

Jio currently has 138.6 million subscribers, of whom 107 million are active users.

A research note by rival brokerage firm Kotak Institutional Equities concurred with IIFL’s findings that Jio’s numbers, while accurate, present a rosy picture. Had Airtel used accounting practices similar to those of Jio’s — that is, capitalised expenses on not-yet-operationalised spectrum bands — its financials for FY18 first quarter would have had 31 per cent higher EBITDA (₹5,800 crore instead of ₹4,430 crore). Further, if it had lowered its depreciation and amortisation charges to its profit and loss account, Airtel’s EBIT margin, the Kotak report said, would have zoomed to 27.7 per cent from the 9.8 per cent it reported in the June quarter.

“Best practices in accounting in a sector are typically set by the sector bellwether (the one who sets the direction; often but not always the leader),” the Kotak report added. “With Jio emerging the bellwether of the Indian wireless sector, it could be time that the rest of the industry study and adopt some of the accounting practices followed by Jio in drawing up its 2QFY18 financials.”

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