Launch of Jio paid service a key stock catalyst for RIL

Investors will now focus on monetisation of Jio revenues and subscriber churn after March 2017

Reliance Industries’ (RIL’s) move to extend the free services of its telecom venture Reliance Jio till March 31, 2017, was largely on expected lines.

This means the capitalisation of Jio’s losses and its break-even will be pushed further forward. Notably, clarity on the monetisation or commercial launch of Jio is a requisite for any re-rating of the RIL stock. Clarity on operational and financial details of Reliance Jio would have helped ascribe a valuation to the company and acted as a big catalyst for RIL stock, says Sanjay Mookim of Bank of America Merrill Lynch.

This is now pushed out by another three months, he adds. The company has, so far, made huge investments — about Rs 1.45 lakh crore in Jio and Rs 14,000 crore towards new spectrum purchase. The management expects to further shell out Rs 18,000-crore capital expenditure (capex) for Jio this financial year. The company has also given a capex forecast of Rs 2.5 lakh crore in this venture, depending on the performance and data usage. Thus, there is uncertainty on the amount of capex for telecom in FY18.

Total number of subscribers and average revenue per user (ARPU) are key in determining the success of Jio, believe analysts. The company had targeted a total subscriber base of 100 million users by the end of 2016 and has achieved 52 million since September. 

The 100-million subscribers target, thus, appears an uphill task in the next one month, believe analysts. The key question is will this extension trigger fresh churn of subscribers towards Jio? The answer is not very straightforward because the existing subscribers are already witnessing slowdown in data speed thanks to the high traffic. 

“Reliance Jio outlets have started receiving complaints that data speeds are down by 70-80 per cent over three months,” says Aliasgar Shakir, telecom analyst at Motilal Oswal Securities in a recent report. This, along with the ‘note ban’, has led to a slower pace of subscriber additions, say analysts. 

RIL’s Jio Money offering and a cap on data usage to one GB a day could help ease some of these pains. Assuming that Jio loses some of its users after discontinuation of free services, analysts says it is crucial for Jio to achieve an ARPU of Rs 250 or more to achieve break-even. “From here, the next relevant data point would be the revenue subscriber base and ARPU as and when actual billing starts in April 2017,” says a JPMorgan report.

Currently, many subscribers are using Jio as a second number to avail the free services. Conversion of free users to paid ones is critical and amid increasing competition from incumbents, RIL’s task will not be easy. For now, most analysts say Jio could achieve Ebitda (earnings before interest, tax, depreciation and amortisation) break-even in the second half of FY18 with some expecting it in FY19. High interest and depreciation costs though mean that pre-tax profits will take at least a few more years to materialise.