Reliance Jio Needs to Add A Lot More Users to Turn Profitable

Reliance Jio Infocomm Ltd said it retained nearly three-fourths of its 100 million subscribers as the Mukesh Ambani-led company moved from free services to paid plans this month. It will also earn a higher revenue per user than peers, analysts said.

Yet, the country’s newest telecom operator will not turn profitable till it nearly triples the number of subscribers to 200 million, according to a report by Moody’s Investors Service.

Vikas Halan, vice-president of the corporate finance group at Moody’sReaching that target will depend on customer perception, quality of service, the tariffs Reliance Jio announces to take on rivals, and smartphone penetration in India and that is why we believe achieving 200 million users is not going to be as fast as compared to the first 100 million.

So far, 72 million Reliance Jio users have migrated to its Prime offer, under which existing subscribers or new customers who become a Prime member by paying Rs 99 can avail the benefits of the plan by buying a Rs 303 recharge for 28 days.

This offer marked the beginning of paid services from 1 April, after the company provided free data and voice for six months, triggering a tariff war in the world’s second largest telecom market by users.

For now, the company’s aggressive and controversial launch strategy appears to be paying off with a large number of users opting for the Prime membership, brokerage Citi Research said in a report. Reliance Jio, which had extended the Prime offer till 15 April along with a three-month free data plan under ‘Summer Surprise Offer’, had to roll back the complimentary services under regulatory pressure.

One of the incentives is to onboard customers to a higher plan, said brokerage Phillip Capital. “While this may seem as a mixed response to the monetisation capability, we see it as a push to keep customers hooked to high usage patterns and settle for plans that are above Rs 303.”

Reliance Jio’s Financials

The 72-million user base will earn an annual revenue of Rs 21,200 crore, assuming everyone subscribes to the Rs 303 plan, said Halan. But the average revenue per user (ARPU) per month will be closer to Rs 200, he said. That compares with Bharti Airtel Ltd’s data ARPU of Rs 175.

At an ARPU of Rs 200, Reliance Jio would earn a revenue of Rs 15,000-20,000 crore in the ongoing financial year 2017-18 – maybe more if the number of subscribers goes up, Halan said.

And using its rivals’ 30-40 percent operating margins as a benchmark, the company’s earnings before interest, taxes, depreciation and amortisation (EBITDA) is estimated to be Rs 6,000- 8,000 crore, Halan said.

There will be also depreciation costs of up to Rs 7,500 crore a year, as a large part of Reliance Jio’s Rs 1.7-lakh-crore capital expenditure was on equipment and spectrum acquisition and will be capitalised over 20 years. The company invested Rs 47,000 crore on spectrum, including Rs 22,000 crore in deferred spectrum charges it would make over the next five to seven years.

Reliance Jio’s yearly depreciation. (Photo Courtsey: BloombergQuint)

Given that the company’s capital expenditure will be around Rs 15,000 crore or so per year, a revenue of Rs 15,000-20,000 crore will not be sufficient to generate free cash flows. So Reliance Jio will be cash-flow negative in the first two years, Halan said.

Vikas Halan, Vice President, Corporate Finance Group, Moody’s Investors Service We estimate that the revenue they need to be cash-flow positive will be somewhere in the range of Rs 45,000-50,000 crore. You need to go to more than 200 million subscribers to get that revenue, at an ARPU of around Rs 200 per month.

Brokerage CLSA too expects the company to turn profitable in the financial year 2019-20 if it manages to get 200 million subscribers.

Reliance Jio already has a revenue market share of 4-5 percent and this is expected to grow over the next 12 months. The company targets a 50 percent revenue market share and 50 percent EBITDA margin by 2020.

(This article was first published on BloombergQuint.)