Reliance Jio FY21 annual report analysis, ICICI Securities  

RJio’s FY21 ARA key takeaways: 1) Non-Reliance Retail revenue stable at 9.5% of total revenue despite sharp jump in mobile recharge revenue on tariff hike. It was Rs71bn in FY21, 2) cost inflation was high, but still rental cost was much below expectations on rise in payment to InvIT, therefore, high inflation in cost will continue for few more years until the entire payout to InvIT normalises; 3) related-party contribution in expenses rose sharply; 4) cash tax payout dipped 88%, while PBT rose 111%; 5) net debt to EBITDA rose to 2.9x if we include spectrum payment / debt committed in Mar’21; and 6) capex stable at Rs142bn, but capex intensity dipped to 20.4% of revenue. RIL AGM is on 24th June, 2021 and the key to watch will be 1) low-end smartphone launch; 2) update on 5G rollout; 3) enterprise services for large corporates and 4) plans for digital business.

JioMeet link for RIL AGM on 24th June, 2021

• Non-Reliance Retail revenues jump. RJio’s revenue grew 28.7% YoY to Rs699bn in FY21, while advanced received from Reliance Retail (adjusted for 18% GST) rose 28.6% YoY to Rs628bn. Revenues earned from non-Reliance Retail jumped 28.9% YoY to Rs71bn. Non-Reliance Retail revenue contributes 9.5% to total revenue; we have no clarity on the nature of this revenue. Non-Reliance Retail revenue contributed only 0.9% to total revenue in FY19; in the past two years, it has risen to ~9.5%.
• Costs had higher inflation; likely to sustain. Expenses, excluding regulatory cost such as license fees and access charges, rose sharp 25% YoY to Rs266bn. This was driven by rise in network operating cost by 30% YoY to Rs221bn. Surprisingly, employee cost and selling & distribution (S&D) cost dipped 8.6% and 8.2% YoY, respectively. Network opex rose from rise in 1) rental cost (adjusted for Ind AS 116) by 10% YoY to Rs104bn; 2) power & fuel cost was up 15%, 3) repair & maintenance cost rose 57% YoY to Rs17bn; and 4) other expenses (including fibre usage) grew 178% YoY to Rs38bn. It looks likely that some of the cost paid to tower and fibre InvIT is still getting capitalised; payment to InvIT is likely to rise sharply over the next 2-3 years at least, thus keeping pressure in incremental EBITDA margin. S&D cost, includes commissions paid to Reliance Retail, for FY21 is lower than the commission paid to Reliance Retail as per related-party transactions; commission to Reliance Retail has grown 72% YoY to Rs14bn.
• Rising related-party transactions. 1) Summit Digitel (tower InvIT) is not strictly a related party, but RJio is the largest customer (or sole customer). Revenue, which includes rental and pass-through (energy cost), for Summit Digitel rose 10.3% YoY to Rs82bn. This was lower compared to tower InvIT document disclosure which implied rental cost increase of Rs14bn in FY21 compared to Summit revenue rise of just Rs7.7bn. Summit Digitel net debt dipped by Rs36bn to Rs333bn in FY21, but net debt to EBITDA is still high at 10.9x. Summit Digitel contributed 45% of rental and power & fuel cost of RJio in FY21; 2) fibre InvIT – though we don’t have much detail, but other expenses within network opex grew 178% YoY to Rs38bn; majority of it should be due to payment to fibre InvIT. Nonetheless, it is still significantly lower compared to the details provided in fibre InvIT document; 3) commissions paid to Reliance Retail are higher than the entire S&D cost; compared to average 64% of S&D in previous three years; 4) other expenses – related party contributed 67% of total cost (34% in FY20). Related-party cost rose 158% YoY to Rs13.6bn in FY21 while non-related party cost dipped 36% YoY to Rs6.6bn.
• Depreciation & amortisation (D&A) cost normalising. Depreciation cost rose 52% YoY to Rs66bn in FY21; it is 5.8% of the tangible gross block. Bharti’s standalone depreciation cost is ~7.7% of gross block in FY20. Thus, we expect inflation in depreciation to sustain for the next few years as cost normalises; amortisation cost rose 63% YoY to Rs49bn; it is 7.3% of intangible gross block. In FY22, amortisation cost would rise from spectrum acquired in Mar’21 for Rs571bn.
• Cash tax expenses down 88% despite 111% rise in PBT. RJio’s PBT rose 111% to Rs161bn in FY21; p&l effective tax rate was 25.3%, but entirely coming from deferred tax expense, while current tax has been nil for the past two years. However, RJio had reported current tax in FY18 and FY19. Cash tax expense, which is reported in cashflow has dipped 88% YoY to Rs1.4bn. Cash tax expense as a % of PBT has been falling for the past four years from ~21% in FY18 and FY19 to less than 1% in FY21.
• Net debt (including all debt-related items) to EBITDA at 2.9x in FY21. Borrowings dipped 52% YoY to Rs108bn, while capex creditors and interest due but not paid rose 73% and 33% YoY to Rs75bn and Rs96bn, respectively. Net debt rose 3% YoY to Rs461bn; if we include committed spectrum payment and debt of Rs421bn, net debt jumped to Rs882bn. Net debt to EBITDA rose to 2.9x (from 2.1x in FY20). However, if we exclude spectrum purchased in Mar’21, net debt dipped by Rs137bn in FY21.
• Capex was stable at Rs143bn (20.4% of revenue). This compared to Rs148bn capex in FY20 (27.2% of revenue). The company has said it is near completion of 4G capex, which has led to a dip in capex intensity. Further, tower and fibre capex is incurred by InvITs. RJio’s cashflow from operations (post interest cost) rose 335% YoY to Rs293bn in FY21 on account of rise in EBITDA and dip in interest cost. However, upfront payment for spectrum purchased in Mar’21 auction of Rs150bn led to FCFE generation of only Rs32bn.
• Key takeaways from Reliance Industries annual report. 1) RJio remains excited about the development of a new generation cloud native 5G RAN technology that is open, and software defined. Qualcomm and RJio successfully tested 5G solutions in India, achieving 1Gbps milestone on RJio 5GNR solution. 2) Qualcomm and Radisys announced efforts to develop open and interoperable interface compliant architecture-based 5G solutions with a virtualised RAN. This work is intended to fast-track the development and roll-out of indigenous 5G network infrastructure and services in India; 3) completed testing of indigenously developed end-to-end RJio 5G Radio and core network solution for a self-sufficient and cost-effective rollout. In-house development of Multiple-in Multiple-out (MIMO) and indoor 5G small cell is in advanced stages; 4) RJio is working with Microsoft to enhance the adoption of leading technologies like data analytics, artificial intelligence (AI), cognitive services, blockchain, internet of things (IoT) and edge computing for SME; 5) JioPhone subs were over 100mn in FY21 (flattish over FY20).

CT Bureau