New account method helps Jio stay profitable despite ARPU fall
Adoption of Ind-AS 116 standard for tower assets lifts Ebitda; lower access and staff costs also help.
They added that the slowing sales of the 4G feature phone, JioPhone, difficulty in cracking the post-paid market, and Brookfield’s over Rs 25,000-crore investment in the tower asset are likely to prompt Jio to stick to low prices for the next few months, which would in turn may lead to Vodafone Idea ceding further revenue market share (RMS) and Bharti Airtel capitalising on it.
“Jio turned in a surprisingly strong performance despite a falling ARPU as its access costs fell 23% on-quarter and employee expenses too were down 14% sequentially following staff transfers to the respective tower and fibre infrastructure investment trusts (InvITs), which in turn, boosted its quarterly Ebitda (earnings before interest, tax, depreciation & amortisation),” Rajiv Sharma, co-head of research at SBICap Securities, told ET.
Brokerage Kotak Institutional Equities said in a note to clients, seen by ET, that the adoption from Ind-AS 116 accounting standards—on tower assets—from April had lifted Jio’s reported quarterly Ebitda by Rs 370 crore to Rs 4,670 crore, which was 26% ahead of its estimated Rs 3,710 crore.
Essentially, Ind-AS 116 enables companies to recognise leases (towers in this case) as assets in the balance sheet from April 1, 2019, and as such, the relevant lease rentals do not get reflected in the network opex but as an element of depreciation cost, in turn, pushing up the Ebitda.
“Adjusted for this, Ebitda would have declined around 0.6% on quarter versus the reported 8% growth. Jio clarified that most of the infra usage charges paid to the fibre SPV have been capitalised (thus not reflected in the P&L) as the fibre assets are mostly allocable to the FTTH (fibre-to-home or home broadband) business (which is expected to be commercially launched later this year). This delta accounts for most of the Ebitda beat,” said brokerage IIFL Institutional Equities.
Jio’s net profit climbed 46% on-year to Rs 891 crore in the quarter to June, well above the roughly Rs 800 crore estimated by the markets. Its ARPU—a key performance metric—though fell for the sixth successive quarter—to Rs 122 from Rs 126 in the previous three-month period. IIFL said revenue of Rs 11,679 crore was a growth of 5% sequentially, or a daily revenue run-rate (DRR) growth of 4%, but marked a “significant” slowdown from recent quarters.
“On the other hand, we expect Bharti/VIL to see 1%-2% on-quarter DRR growth. Thus, revenue outperformance for Jio is likely to narrow versus peers. In our view, Jio’s capacity constraints in urban areas have perhaps contributed to the revenue slowdown. A solution lies in getting more spectrum in metros,” IIFL said.
Analysts said the company’s reasons behind the 3.3% on-quarter ARPU decline, included higher adoption of longer term value packs, cash-backs of Rs 51 on increasing digital recharges and continued addition of low-revenue generating JioPhone users.
Kotak said Jio should have seen an ARPU bump-up from sale of cricket pack top-ups (read: the Rs 251 top-up), especially since the company had indicated good adoption of the top-up plan during the calendar 2018 IPL season.
“Jio admitted that the post-paid market remains difficult to crack due to high customer inertia and customers’ long-term relationships with the older telcos. We think that lack of international roaming partnerships is a key factor,” IIFL said, adding though that the post-paid segment currently is of “lower priority” to the telco.
The brokerage said Airtel would gain from any potential price hike by Jio, given its greater 4G spread and base relative to Vodafone Idea. “If Jio does not hike, VIL’s weak balance sheet even after fund raise makes it vulnerable to unrelenting pressure and RMS loss, which Bharti should be able to capitalise on,” it said.