Telecom experts say Reliance Jio is likely to report a profit when it announces Q3 results on Friday due to a sharp cut in IUC, increasing subscriber count and stability in pricing.
Achieving profitability less than eighteen months after its launch may seem like a great achievement, but Reliance Jio investors should note that the company may still be capitalising some of its expenses.
Bharti Airtel Ltd’s December quarter results show its India wireless business ran up losses after accounting for all expenses. The chief culprit: a 57% cut in the interconnection usage charge (IUC) by the Telecom Regulatory Authority of India effective 1 October. Idea Cellular Ltd has already been reporting losses for some time now, and they are expected to expand in the three months ended 31 December thanks to the IUC cut.
Airtel’s India wireless business reported earnings before interest and tax of Rs167 crore in the quarter. But around 60% of the company’s finance cost of Rs2,088 crore is attributable to the India wireless business, according to analysts. As a result, pre-tax losses would be more than Rs1,000 crore.
Ironically, Reliance Jio Infocomm Ltd, which started operations a little over a year ago, is expected to report profits for the quarter. Analysts at Jefferies India, Kotak Institutional Equities and Nomura Research have estimated profits for Reliance Industries Ltd’s telco business, citing the sharp cut in the IUC, increasing subscriber count and stability in pricing. Because there are far more outgoing calls from Jio’s network than incoming calls, it gains from a cut in the IUC.
Another major reason is that the company may still be capitalizing some of its expenses. As such, it makes sense to look at measures other than just reported profits.
A far more important metric would be cash flow, given the fact that each of these firms already operates with high debt. If cash outflow sustains at high levels, debt can reach unwieldy levels. Airtel’s India wireless business reported a negative free cash flow of Rs1,427 crore in the December quarter.
Jio’s revenues in the September quarter were about half of its cash outflows of Rs11,700 crore in the form of operating and capital expenditure. In rough terms, therefore, it had a huge net cash outflow in that quarter. “Patience may be tested on free cash flow, which we expect to lag Street estimates”, Jefferies India analysts said in a December quarter preview note.
First Published: Thu, Jan 18 2018. 03 20 PM IST
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