Jio Hiding Losses Through Subsidy From Retail Arm: Report

Countering Mukesh Ambani’s Reliance Jio Infocomm’s disclosed financial statements which showed positive returns during the current financial year, brokerage firm Bernstein’s report released on February 26 estimated a potential loss of Rs 15,000 crore in financial year 2018-2019 for the operator, far worse than rivals Bharti Airtel and Vodafone Idea.

Bernstein stated that Jio’s disclosures (about 3.1 per cent return on invested capital) as not compatible as the company has been relying on ‘non-standard’ depreciation metrics (which is using ‘unit of production’ accounting). Furthermore, Jio’s subscriber acquisition numbers are on rise, significantly because of the highly subsidised Jio feature phones. As the handset subsidies are borne by the promoter’s Reliance Retail company, Bernstein stated that the extra costs in boosting Jio’s subscription revenues are not reflected in Jio’s accounts.

“The highly subsidised Jio Phone continues to drive Jio's subscriber acquisition numbers. We believe this is what explains the growing proportion of Jio's net additions coming from rural areas of India. we estimated 5 million net adds a month are explained by Jio feature phones. If true, this represents a further investment totaling Rs 7300 crore. These costs are borne by Reliance Retail and so are not visible in the Jio P&L. Had they been fully expensed upfront on Jio's P&L we would have seen further costs in the order of Rs 1780 crore for the quarter. this is much worse than Bharti but slightly better than Vodafone Idea. Absent the subsidy expense, it still would have been a loss of Rs 2250 crore,” concludes the report.

While expecting Jio to reach number one rank on both the subscriber and service revenues over the next 12 months, the report forecasted that the company would focus on greater monetisation (increase in average revenue per user - ARPU upside) during Financial Year 2020-2021.

Furthermore, the report stated that both Bharti Airtel and Vodafone Idea are “not being irrational by not following Jio down the subsidy path”.

Jio had reported a net profit of Rs 830 crore in the third quarter of 2018-19, but, as per Bernstein analysis, which claims to have considered both depreciation normalisation impact and subsidy expenses, Jio could have incurred a net loss of Rs 3,800 crore during the quarter.

At the end of October- December quarter of this financial year, Vodafone Idea had 387 million subscribers, Bharti Airtel had 284 million and Jio had 280.1 million. As of December 31, 2018, Jio registered a revenue market share of 29.7 per cent against 30 per cent for Airtel and 31.4 per cent for Vodafone Idea.

Subscriber Exodus

Bharti Airtel had disclosed that it had about 100 million low-spending customers (less than Rs 35 per month), whereas the figure for Vodafone Idea is estimated to be about 150 million. With the introduction of minimum monthly recharge requirements, Airtel disclosed that it lost about 45 million subscribers in the third quarter and Vodafone Idea reported a decline of 35 million. As per the Bernstein’s estimations, the two operators would further lose 37 million subscribers over the next quarter. However, the report forecasted that the operators would see increase in ARPUs in the upcoming quarters (estimated to be Rs 104 ARPU for Vodafone Idea and Rs 120 ARPU for Airtel during next quarter).

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