Jio 5G yet to see meaningful growth amid sky-high CapEx

India’s largest telecom operator has practically thrown money at rolling out 5G services with nary an impact on its financial performance. Not yet, at least.

In the January-March 2023 quarter, Reliance Jio Infocomm Ltd. extended coverage of its “True5G” services to more than 2,300 urban centres across India, up from just 134 cities and towns in the previous quarter. With more than 60,000 5G sites already deployed, the company is on track to complete a pan-India rollout by December 2023.

That, however, has come at a cost. The telecom venture of India’s richest person, Mukesh Ambani, spent a total of Rs 33,600 crore in 2022–23 to acquire 700 MHz and 3,500 MHz spectrum and launch 5G operations.

The benefits of that kind of spending are yet to reflect in Jio’s financials.

Revenue of India’s largest telecom operator rose 1.72% over the previous three months to Rs 23,394 crore in the quarter ended March 31, according to its exchange filing on Friday. Growth in net profit—as well as operational profitability and earnings from each of its 43.93 crore users—was moderate at best. The company’s data traffic increased 4.5% sequentially to 30.3 billion GB. The volume of voice traffic rose 3.14% to 1.31 trillion minutes.

For the full fiscal, Jio’s Ebitda rose 24% year-on-year to Rs 46,700 crore, even as net profit increased 23% to Rs 18,200 crore. That was due to robust net subscriber additions during the year amid minimal churn, but ARPU has been flat over the past three quarters.

“Despite the aggressive 5G capex cycle, it is notable that the network operating expenses remained flat for the quarter at Rs 72,000 crore,” Swarnendu Bhushan and Aliasgar Shakir, research analysts at Motilal Oswal Financial Services Ltd., said in an April 23 report. Growth will continue to soften due to a higher base and a lack of tariff hikes amid heightened competition, along with intensifying 5G spending, they said.

The brokerage now expects Reliance Jio to incur a capital expenditure of Rs 38,000 crore in FY24 and Rs 31,000 crore in FY25, as against Rs 28,000 crore and Rs 26,000 crore estimated earlier, respectively.

The higher capex has had a bearing on Reliance Jio’s debt picture as well.

Net debt at parent Reliance Industries Ltd. rose more than threefold annually to Rs 1,10,218 crore in the fiscal ended March 31, due to 5G capex. The large capex has created significant operating leverage, which should drive earnings in FY25, according to JPMorgan analysts Pinakin Parekh and Sarfraz Bhimani.

Still, Reliance Jio’s free cash flow—at Rs 6,700 crore in FY23—was a positive surprise, as it was the highest-ever for a fiscal, despite the capex.

Revenue Mix
For Jio, the best way to ride out this tide of debt would be to increase ARPU by way of tariff hikes and improve the subscriber mix with more high-paying postpaid subscribers.

In March, Reliance Jio unveiled new postpaid plans starting at Rs 399 per month for a family of four users, severely undercutting rival Bharti Airtel Ltd. In response, Airtel has launched unlimited 5G data plans for all customers in what is seen as an attempt to retain customers.

Gaining postpaid subscribers is crucial for both Airtel and Reliance Jio in their endeavour to increase their ARPU from Rs 193 and Rs 179, respectively. Only prepaid users won’t cut it.

But analysts do not see these wooing tactics by India’s biggest telecom operators bringing about any material change in the postpaid user base. That’s because postpaid users are an extremely sticky lot, according to Mayuresh Joshi, head of equity research at William O’Neil & Co. in India.

“For a postpaid user, it becomes very difficult to switch operators, and the telecom companies know that,” he told BQ Prime. “There’s very little churn in terms of postpaid, and they do not get swayed by offers.”

Among the three private telecom operators in India, Reliance Jio continues to have the least number of postpaid users.

Broadband Salvo
Jio, however, has another trick up its sleeve—its fibre-to-home service, which accounts for 60% of all wired broadband connections in India.

In the March quarter, Jio Fibre added a net 7 lakh users—its subscriber base is now 34% higher than that of Airtel, Goldman Sachs said in a report. But its contribution to Reliance Jio’s revenue remains miniscule at 6% in Q4 FY23.

During the March quarter, the company introduced a new Rs 198 backup plan to ensure round-the-clock connectivity, thus making up for the sporadic drops in network seen during the streaming of IPL matches.

It also aims to launch over the next few months Jio AirFiber—a 5G wireless broadband service—for an additional 10 crore subscribers.

What Next?
Jio is now expected to clock revenue and Ebitda growth of 10% and 14%, respectively, over FY23–FY25, considering an 8% increase in subscriber base and a 2% rise in average revenue per user, according to Motilal Oswal.

“Overall revenue growth should soften with a high subscriber base, continued churn, limited visibility on tariff hikes, and slower market share gains as Vodafone Idea holds its turf,” the brokerage said in the note.

“However, the long-term sector outlook remains buoyant, as the market consolidation has left just two strong players. Once VIL’s debt moratorium expires in November 2025, its revenue size may offer strong market share growth opportunities in two years.”

What About Airtel?
Reliance Jio’s flat ARPU growth, despite fewer days in the March quarter, also lends comfort to Airtel’s performance in the March quarter, Jefferies said.

“We see limited risk for Bharti’s subscriber addition estimate of 2.5 million, given that churn levels have been steady for Jio and that it has already added 1.3 million subscribers during January 2023,” the brokerage said in an April 21 note.

“While a pick-up in Jio’s subscriber additions should bode well for the tariff environment, management commentary during the con-call suggests that Jio’s primary focus is on market share gains.” BQ Prime