Reliance Jio Infocomm: Subs, ARPU remain underwhelming, ICICI Securities

During Q2FY22, Reliance Jio Infocomm (RJio) cleaned up some of its inactive subs base which led to a dip in its total subs base. Adjusted for the subs decline, ARPU growth looks underwhelming considering one additional day, and steady growth in FTTH and enterprise revenue.

Network opex inflation is sticky on payments to InVITs which has capped incremental EBITDA margin at 50-55%. Net profit was higher on lower D&A cost, despite Rs570bn spectrum investment. Negative FCF was disappointing on higher capex intensity from rollout of new spectrum and spectrum-related payments. RJio has maintained the launch date of ‘JioPhone Next’ before Diwali. We cut our EBITDA estimate by 5.6% for FY22 but slightly increase for FY23 on higher subs addition from JioPhone Next. We raise our net profit estimate for FY23E by 9.5% as we factor in lower D&A cost.

RJio’s revenue grew 4.1% QoQ / 7.2% YoY (L2L: +16% YoY, adjusted for IUC impact) to Rs187bn in Q2FY22. Subs dipped 11.1mn QoQ to 430m, as the company cleaned up inactive subs base. However, it has denied any further scope for reduction in sub-base. ARPU rose 3.8% QoQ to Rs144; however, if we assume normal growth in subs, ARPU stood at Rs140, which is only 1% QoQ growth. This is lower considering one additional day in the quarter, and growing subs base of FTTH and enterprise.

Churn rate rose to 3.6% (vs 0.9% in Q2FY22) on subs clean-up and gross sub addition rose to 35.6mn (from 26.7mn in Q1FY22). Minutes grew 2.5% QoQ / 16.9% YoY to 1,090-bn, and data usage rose sharply by 13.1% QoQ / 59.5% YoY to 23,000-bn GB. The company attributed the increase to better network quality from deployment of new spectrum bought in Mar’21 auctions.

Net profit boosted by lower D&A; network opex sticky (expected). Network cost grew 4.9% QoQ / 15.4% YoY to Rs62.6bn on rollout of more towers (indicated by higher capex), and is likely to rise further due to payments to InVITs. SG&A costs dipped 6.3% YoY (7.3% QoQ) even on a low base. EBITDA grew 19.8% YoY / 4.3% QoQ to Rs90bn. Depreciation and amortisation (D&A) rose only 2.3% QoQ to Rs32bn despite deployment of spectrum bought in Mar’21 auctions worth Rs570bn. We expect D&A cost inflation to remain high as the company recognises amortisation cost which will restrict net profit growth. Interest cost rose 32% QoQ to Rs10.8bn on rise in deferred spectrum liability. Net profit grew 0.8% QoQ (24% YoY) to Rs35bn.

Jio Platforms’ EBITDA dipped 35% YoY to Rs3bn. Jio Platforms (standalone, which houses most digital properties) revenue has grown only 2.7% YoY / 8.8% QoQ to Rs10.4bn in Q2FY22. Jio Platforms’ EBITDA has dipped 35% YoY with likely accelerated investments, and lower other income.

Observations from balance sheet. 1) Intangible assets grew to Rs114bn (incl CWIP), up 580bn (vs FY21) on recognition of spectrum bought in Mar’21 auction and from Bharti at Rs15bn. 2) Other non-current assets declined by Rs150bn, which included upfront payment made for spectrum, now moved to intangible assets; 3) receivables increased to Rs50bn, up by Rs35bn; 4) deferred spectrum payment increased by Rs377bn from spectrum bought in Mar’21; 5) other financial liabilities rose by Rs63bn to Rs144bn on account of interest accrued on spectrum dues and license fees payables (in Mar’21, it was paid in advance); 6) other current liabilities (includes advances from customers) dipped by Rs21bn on likely revenue recognition, and lower subs addition with one-year recharge.

Observations from cashflow statement. 1) Cash income tax paid is only 2% of the total effective income tax recognised in P&L. it has accrued losses from past years as per income tax accounting which is getting off-set; 2) cash finance cost is just 25% of finance cost reported in P&L due to moratorium on deferred spectrum payment; 3) capex stood at high Rs156bn (42.5% of revenue) in H1FY22. Capex also includes upfront spectrum payment made of Rs49bn in H1FY22, and Rs10bn paid to acquire 800MHz spectrum from Bharti. Non-spectrum capex increase was for rolling out spectrum bought in Mar’21 auction, and rollout of certain key towers; and 4) FCF was negative Rs23bn.

Net debt rose to Rs697bn (vs Rs290bn in FY21). Net debt rose from Rs377bn of deferred spectrum liability recognised in H1FY22 for spectrum bought in Mar’21; and FCF negative of Rs23bn.

Changes in assumptions: 1) Despite cleaning-up of subs, we have increased our subs base assumption for FY23 due to the benefit of the launch of JioPhone Next; 2) we have cut our ARPU assumption from FY22, but maintained our future ARPU assumption as we see tariff hike to be delayed, and not derailed; 3) we have increased our net profit assumption as we now factor in much slower increase in D&A cost; and 4) we have increased our capex intensity assumption for FY22 to 30%, but have not changed future capex intensity at 18%.

The change in above assumption has resulted in EBITDA cut of 5.6% for FY22, but increase by 1.9% for FY23. Our net profit estimates are revised upwards by 9.5% for FY23 as explained above on lower D&A cost.
CT Bureau