Kolkata: Reliance Jio Infocomm is staring at a potential loss of Rs 15,000 crore ($2.1 billion) in FY19, which isn’t immediately visible because the Mukesh Ambani-led telco uses non-standard depreciation metrics and relies on another group company to bear handset subsidies, brokerage Sanford C Bernstein said.
However, Bernstein expects Jio to become the No 1 telco in India by both subscribers and service revenue over next 12 months, “based on the assumption that Jio will continue to heavily subsidise JioPhones.”
The subsidies aimed at popularising the VoLTE feature phone – JioPhone – are shouldered by group company Reliance Retail.
Jio, which started services in September 2016, had garnered 280.1 million subscribers by December, compared with Vodafone Idea’s 387.2 million and Bharti Airtel’s 284.2 million. Jio’s revenue market share of 29.7% in December is only a shade behind 30% for AirtelNSE 1.81 % and 31.4% for VIL.
The US research and brokerage firm expects Jio to focus more on monetisation once it reaches its stated target market share of 50%. Some analysts expect Jio to start increasing prices on attaining 30% market share.
Jio did not immediately reply to ET’s queries on the report. Parent Reliance Industries’ stock fell 1% to Rs 1,219.70 at the close on the BSE Tuesday.
The report said Jio’s potential FY19 loss would be “far worse” than that of Bharti Airtel or Vodafone Idea, which have “not been irrational” and have steered clear of the handset subsidy path.
Bernstein said if an estimated Rs 7,200 crore of handset subsidies had “been expensed upfront on Jio’s P&L – instead of being booked through Reliance Retail – then the telecom arm of Reliance Industries would have also reported a ?3,800 crore loss in the December quarter, instead of the Rs 831 crore net profit.”
This would be because Jio would have been saddled with further costs of Rs 1,780 crore in the fiscal third quarter, it said.
The brokerage estimated Jio’s normalised loss – excluding exceptional items – as “much worse than Airtel’s (Rs 630 crore), but better than Vodafone Idea (Rs 4,430 crore).” Bernstein’s normalised loss estimates for Airtel and Vodafone Idea exclude exceptional items.
Jio’s disclosed income statements, the brokerage said, show a positive 3.1% return on invested capital but “the company has been using a nonstandard approach” to depreciation and amortisation by using a unit of production accounting.
“If we attempt to normalise these factors, (including) all the handset subsidies being booked through Reliance Retail, it points to a potential loss of Rs 15,000 crore in FY19 for Jio,” Bernstein said.
The report highlights the huge expenses that Reliance incurs to position Jio as No. 1.