Reliance Jio outlook enticing; all is well with this Mukesh Ambani telco, but for capital employed

Mukesh Ambani led Reliance Jio is shaking up the telecom sector like no else has ever done. In its latest quarterly report, the data shows that RJio has gone from strength to strength and it is eyeing strong growth going forward despite the industry seeing thin margins due to cheap calling and data plan offers. Rivals Bharti Airtel and Vodafone-Idea have been taking a severe hit in revenues because of RJio and things are not expected to get better. In his report, here is what Himanshu Shah, Research Analyst, HDFC Securities, has to say about RJio:

Reliance Jio’s (RJio) subscriber additions (37mn in 2Q) and engagement (voice/data usage/sub) is healthy and steadily inching upward. Acquisition of leading cable companies-  Hathway,  Den and GTPL will fast-track home broadband acquisitions (Jio aspires 50mn).

RIL is swiftly strengthening its business and consumer propositions with investments in media/technology companies and through exclusive content deals. This bodes well from the strategic perspective. That said investor’s patience is getting tested with rising cash burn and capital investments.  Capex during the quarter was Rs.160bn (Rs 330bn in 1H)  and net debt  ~Rs  1.7tn (vs. Rs 1.4tn in Mar18).

Balance sheet size increased from Rs 2.53tn in Mar18 to Rs 2.9tn in Sep18. This is in addition to investments in Saavn, Hathway, Den, GTPL, Eros, TV18, Balaji, Rcom etc that supports  Jio’s business but resides in the parent company- RIL. Ask rate for future revenue and earnings growth inches-up for reasonable ROCE with persistently rising investments.

EBITDA  growth in 2Q was lower than expected due to increase in network and SG&A  costs.  This is despite pending commercial launch of Jio Giga Fiber. Interest costs increased by 30% QoQ to Rs 10bn. Disclosures on content, Jio phone, project development costs accounting etc would be opportune. We value RJio at 10x Sep-20E EV/EBITDA at an EV of Rs 3tn (Rs 510/sh).

Key highlights

Wireless momentum healthy: Led by Rs 501 exchange monsoon hungama handset exchange offer, Jio reported healthy 37mn sub additions in 2Q (114mn in trailing 12m) to 252.3mn (+17% QoQ). ARPU declined by 2% QoQ to Rs 131.7. Data usage grew by 20% QoQ. Data usage/sub grew by 3.2%  QoQ  to 11GB/mth. This is despite increasing mix of Jio feature phone users and is positive. Revenue/EBITDA/PAT grew by 14/13/11% QoQ.

MSOs acquisitions to speed-up Giga fiber launch: Jio’s parent RIL has announced acquisition of leading MSOs Hathway (51%) and Den Networks (66%)  primarily through fresh issuance of shares for Rs 53bn. It would also make open offer for these companies. Jio is having robust product propositions for home security and solution. However, last mile connectivity is a challenge.

Hathway and Den’s partnership with 27,000  LCOs, last mile connectivity of 22-24mn cable homes and 1mn broadband subscribers will significantly improve Jio’s go-to-market in terms of time for its aspiration to acquire 50mn broadband customers.

RIL  also acquired  12.7% stake in a  US based technology company ‘Skytran’. It is a developing state of the art technology in the field of Personal Rapid Transit Systems (driverless cars etc). It has 8 approved and  40+  patents pending approval.  RIL has option to further invest upto $25mn in convertible notes.

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Near term outlook: Led by strong subscriber additions, healthy ARPU and thus revenue growth, short-term outlook for Jio is enticing.

Source: DNA Money