Investment in Reliance Jio is over half of RIL’s turnover; Will Mukesh Ambani reap benefit from this telecom arm

Mukesh Ambani celebrated 41st AGM meeting of Reliance Industries by referring it to Golden Decade. The highlight of the latest meeting was definitely RIL’s nearly two years old telecom arm Reliance Jio. We have been talking about how RJio since September 2016 has managed to disrupt the entire telecom sector especially giant Bharti Airtel. RJio’s impact is so vast that it can be felt in the new trend which is called as consolidation in telecom market. Almost everyone is consolidating right from state-owned BSNL, MTNL to Airtel, Idea Cellular, Vodafone and even Mukesh Ambani’s brother Anil Ambani’s Reliance Communication has felt the heat of RJio’s vast offers. The trend is such that small telcos are trying to survive while major telcos consolidate in order to take on RJio who is at the moment alone ruling the market.

But interestingly, did you know the amount of investment made by business magnet Mukesh Ambani in Reliance Jio is more than the turnover of his money making Reliance Industries.

It can be seen that Ambani has taken a lot of risk by investing such hefty money through RIL in their telecom subsidiary.

As on March 2018, investment made in Reliance Jio stands at Rs 2,50,000 crore, while the consolidated turnover of RIL is about Rs 4,30,731 crore.

In its annual report of FY18, RIL stated that, “Reliance Jio is the flagship digital communications and services initiative of Reliance Industries Limited and epicenter of Group’s digital revolution and transformation.”

It is quite clear Reliance Jio is the centre of focus for Reliance Industries among the other business, but the question that we need to ask ourselves, will Mukesh Ambani reap the benefit of such behemoth investment in RJio.

At first one should note this that, Reliance Industries gross debt stands at Rs 2,18,763 crore in FY18 which is higher than compared to debt of Rs 1,96,599 crore in FY17. It has tangible and intangible asset of Rs 5,85,094 crore during FY18 compared to Rs 5,18,471 crore in FY17.

Meanwhile, RIL witnessed cash profit and net profit of Rs 56,034 crore and Rs 36,075 crore in FY18 compared to Rs 42,800 crore and Rs 29,901 crore in FY17.

But what was eye catching is that RIL’s net debt is almost half of its turnover.

This is how Reliance Jio has performed in 22 months.

Reliance Jio in Q4FY18, posted revenue of Rs 7,128 crore compared to  Rs 6,879 crore in Q3FY18, while net profit came in at Rs 510 crore as against Rs 504 crore in Q3 and net loss of Rs 271 crore in Q2.

The performance has seen gradual increase but still better then what rivals have witnessed in Q4FY18. RJio free voice and dirt-cheap data offering have hampered the financial metrics of incumbent operators, deepening the impact of regulatory decisions like cut in termination charges.

RJio's AGR increased by 15% qoq to Rs 62 billion as against Rs 54 billion. While, Airtel's AGR declined by 7.5% qoq (31.6% yoy) to Rs 71 billion with RMS of 29.1% (+117bps qoq and -442bps yoy).  

Decline was also posted by Idea and Vodafone. Idea's declined by 15% qoq (37% yoy) to Rs 40.3 billion with RMS of 16.6% (-75bps qoq and -414bps yoy). While Vodafone's AGR declined by 9.9% qoq (29.8% yoy) to Rs 51 billion with RMS of 20.9% (+30bps qoq and -255bps yoy). Revenue declined in 17 out of 22 circles.

According to 41st annual report, 215 million customers within 22 months of RJio’s start is a record that no technology company has been able to achieve anywhere in the world. This is definitely true, because Airtel has been in business since 1984 and has managed to have a total subscriber of  413.8 million across 16 countries. Such does indicate that, RJio is not far away in earmarking a new record in future ahead.

In 22 months of RJio, data usage has grown from 125 crore GBs per month to more than 240 crore GBs per month.

Mukesh Ambani said, “We were the world's largest mobile data network last year and the gap from the others has only widened in the last12 months.”

Voice usage on the network has grown from 250 crore minutes per day to more than 530 crore minutes per day. The amount of video consumption has grown from 165 crore hours per month to more than 340 crore hours per month.

Will Reliance Jio become a success story for Mukesh Ambani?

Tarun Lakhotia, Rohit Chordia and Akshay Bhor analysts at Kotak Institutional Equities post 41st AGM meet said, “ Our concerns on standalone capital-WIP and Jio’s capitalization of operating costs remain unaddressed given limited disclosures in RIL’s FY2018 annual report.”

The trio adds, “Our FY2014-18 capex reconciliation suggests material overruns in downstream projects besides higher and rising capex on Jio. Key takeaways from AR include—negative FCF, increase in borrowing cost, lower RoACE, yet-to-be capitalized intangible assets in Jio and retail, write-offs in shale and higher related-party payments.”

On a consolidated basis, RIL’s gross capital assets increased to US$75 bn in the ongoing capex cycle during FY2014-18, including US$27 bn in downstream, US$8 bn in E&P and US$33 bn in its telecom business.

RIL has announced to launch  fixed-line broadband service in FY19 via RJio. CLSA says, “This would add Rs40bn to Ebitda and US$5bn to the valuation.”

CLSA is optimistic that RJio will be a profit making firm for Ambani. It adds, “Using same 8.5x EV/Ebitda of the wireless business gives us potential US$5bn fair value (6% of current price) from this opportunity. While this is unaccounted upside, full utilisation of off-gas cracker, stabilisation of its gasification project and ramp-up of JioPhone should boost profit in coming quarters.”

One key factor that also appoints the potential of RIL in recovering their debt would be debt-to-equity ratio which has been muted in past two fiscal year.

RIL’s debt to equity ratio has been decelerating since RJio came into inception. In 2016, when RJio was launched the debt to equity ratio of RIL stood at 0.42:1, that came down to 0.37:1 each in FY17 and FY18.

Debt/Equity (D/E) Ratio means how much debt a company is using to finance its assets relative to the value of shareholders' equity. Generally, when a high debt-to-equity ratio arrives that means the company may not be able to generate enough cash to satisfy its debt obligations. However, low debt-to-equity ratios reflects that a company is not taking advantage of the increased profits that financial leverage may bring.

Ambani is very confident about future of Reliance Jio and one can only expect it definitely is up for some historic changes in telecom market.