Street will look for consistency in RJio's revenue growth

The company's telecom revenues for the September quarter was led by industry leading average revenue per user and strong subscriber additions

A year after its launch, Reliance Jio (RJio), the telecom subsidiary of Reliance Industries, continues to spring surprises. First, it was with its attractive bundled plans and now with its financials, which for the September quarter (Q2) are a lot more than Street estimates. While RJio still made a loss of Rs 270 crore at the net level, its profit from operations at Rs 1,443 crore and, more importantly, revenues at Rs 6,147 crore beat estimates. Analysts had pegged revenues at Rs 3,000- 4,000 crore and an operating loss of Rs 700 crore in Q2.

The reasons for the strong revenue performance have been the robust subscriber additions in Q2 and higher-than-expected average revenue per user (ARPU). RJio added 15.3 million net subscribers, taking the total to 138.6 million. An analyst at a foreign brokerage said the revenue number was double most estimates due to the higher ARPUs, partly due to the spillover from the previous quarter. “The ARPU number of Rs 156 (per month) probably has a share of Rs 20-30 from the June quarter (Q1). So, expect the Q2 revenue number to be around Rs 4,000- 5,000 crore,” the analyst said. Another analyst at a domestic brokerage agreed. He said the results were ahead of expectations, but some bit of Q1 revenues were also included in top line in Q2. So, the coming quarters should provide a better understanding.

The key, according to analysts, is the ability of RJio to sustain the revenue trajectory even as they hope the Rs 6,000-crore number would be sustained, both due to higher subscriber additions and marginal price hikes. The other revenue trigger will be the 4G feature phone, which should help RJio fetch about Rs 1,000-1,250 crore per quarter, given estimates of 50 million users with quarterly spend of Rs 250. If RJio is able to sustain its September run-rate, it would cross the Rs 20,000-crore revenue estimate, brokerages had pencilled in for FY18. Given the Q2 results, momentum on subscribers and higher ARPUs, it could lead to a 20 per cent jump in revenue estimates to Rs 24,000 crore. 

Given RJio’s numbers, the sector which had reported revenues of Rs 39,000 crore in the June quarter, will probably end Q2 at Rs 43,000 crore. RJio has shown that if you package the product well, be it pricing or bundling, there is demand which will translate to healthy revenues, an analyst said.

The other reason brokerages were off the mark while estimating the numbers was lower depreciation of Rs 1,183 crore as against estimates of Rs 2,500 crore. An analyst, on condition of anonymity, said RJio had used the unit cost method (for spectrum and wireless telecom equipment), wherein amortisation and depreciation charges are based on an asset’s usage instead of time duration, which is in accordance with applicable accounting standards.

The big relief for RJio, given the drop in interconnect usage charge (IUC) to 6 paise from 14 p from October 1, would be a steep reduction in its access charges from the Q2 outgo of Rs 2,139 crore. Analysts expect this number to fall to about Rs 1,000 crore on account of the IUC cut and higher incoming traffic into RJio’s network. 

Going ahead, for the sector, the focus on profitability by RJio will be a big relief as indications are that the company will aim to bring down costs while improving its top line, thus reducing the chances of a further tariff war. The capex intensity, however, will remain high with RJio per quarter spend of about Rs 7,000 crore to continue.

Meanwhile, the core businesses of refining and petrochemicals continue to be robust. 

In refining, though gross refining margins (GRMs) were a bit lower than analysts’ expectations of $12.3-$12.8 a barrel, at $12 in Q2 they were at a nine-year high and higher than the margin in the previous and year-ago quarters. Volume throughput at 18.1 million metric tonnes was also the highest in at least six quarters. Globally, given better oil demand outlook and slower new capacity additions, the next few quarters look good. 

In petchem, volumes grew by 17 per cent year-on-year (y-o-y), while earnings before interest and tax margins at 17.7 per cent gained 190-250 basis points sequentially and y-o-y. Better prices and product mix also helped. The outlook remains healthy, both for volumes and margins.

Importantly, RIL is at the end of an aggressive capacity expansion programme and as it commissions more projects, expect refining and petchem volumes to rise further. This, in an environment wherein the petchem and refining business cycles are holding firm, should drive profits at a faster pace and result in better return ratios for RIL. 

Another analyst with a domestic brokerage said, “The core refining and petchem business results were in line with expectations, and their outlook continues to remain quite robust.” He, added that the market would be focussing on RJio’s performance, where more clarity will emerge in the coming quarters.