Concerns over RJio break-even

With RIL likely to exceed its targeted capex in telecom, some brokerages have increased their loss estimates for Jio

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Reliance Industries Ltd (RIL) has stepped up investments in its telecom venture Jio. RIL has already invested Rs 1.34 lakh crore in this ambitious project. With the upcoming spectrum auctions, it might need to invest more funds into the telecom business. While there is a lack of clarity on whether Reliance Jio (RJio) will bid for spectrum, it plans to increase coverage from 70 per cent of the country now to 90 per cent by March 2018. This entails additional investments. The company has not specified the exact investments required for this, but given the business plans, most analysts believe RJio is unlikely to stick to its total capex (capital expenditure) forecast of Rs 1.5 lakh crore.

Given this backdrop, some analysts have become concerned about Jio's turnaround. In a report on RIL after the June quarter results, Vidyadhar Ginde, analyst at ICICI Securities, said: "We have raised Reliance Jio's FY18 loss estimate to Rs 9,000 crore from Rs 5,000 crore due to the increase in project cost to Rs 1.5 trillion (lakh crore)." He believes these losses could stand at Rs 4,600 crore in FY17. Analysts at IIFL, though, expect Jio to incur a loss before tax of Rs 7,000 crore and Rs 10,000 crore in FY17 and FY18, respectively.

The actual impact for FY17, though, will depend on the number of months of commercial operations of RJio, as well as pricing strategy. RIL has started offering a three-month subscription pack where customers can enjoy free data as well as voice services. While this strategy will enable it to accelerate the pace of customer additions, the final pricing across its data and voice services will determine RJio's profitability. With most existing players lowering their rates recently, RJio might have limited flexibility on the same.

Most analysts are estimating RIL's telecom business to break even at the operating level sometime in mid-FY18 or FY19 on the back of healthy subscriber additions. However, the break-even at the net level might take some more time, and will reflect on RIL's consolidated performance in the interim.

"Even assuming break-even Ebitda (earnings before interest, taxes, depreciation, and amortisation) on a ballpark basis, we estimate interest/depreciation charges will hit RIL's FY18 earnings per share by about 15 per cent," write analysts at Nomura in a recent note on the company.

Some like Morgan Stanley, for instance, are more optimistic.

They expect Jio to achieve positive Ebitda of $753 million and a net loss of $757 million in FY18. The analysts estimate RIL's telecom business to post a net profit of $51 million in FY19.

Currently, a dollar is worth 66.75 rupees.

An email questionnaire to the company remained unanswered.

The markets, however, might still be a little lenient even if the actual financial performance of telecom business falls short of expectations, provided RJio establishes itself as a key player in the sector with a good level of growth visibility.

The success of RJio is crucial for RIL given the huge investments made into the business as well as the fact that telecom now forms 20-30 per cent of analysts' sum-of-the-part (SOTP) valuation of RIL.

While a few analysts have accorded it lesser value in their SOTP valuation, any unfavourable development in this business could still have a meaningful impact on the stock.

"Telecom business may be a near-term drag on RIL's earnings given the high upfront capex, as well as high customer acquisition costs," says Mehul Thanawala, analyst at JM Financial.

Most analysts believe the RIL stock will move in line with the news-flow around Jio.

The key positive for RIL is that its core refining business is performing well and could see improvement in earnings as well as return ratios as the capex nears completion. This should provide support to the company's consolidated earnings.

While analysts are positive on the RIL stock, given the strength in its core business, Jio's success will be an important monitorable.

JIO STORY IN NUMBERS
Pan-India unified licence

• 846.1
  Spectrum holding (MHz)
   
• 1.5
  Test users (million)
   
• Over 26 GB
  Average monthly consumption per user (GB)
   
• Over 355 minutes
  Average voice usage per month

MHz stands for megahertz
GB stands for gigabyte

Sources: Company, brokerage reports