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Reliance Jio Infocomm: Ex-SUC, cost inflation restrict EBITDA margin expansion

Reliance Jio Infocomm’s (RJio) revenue grew 3% QoQ (in line), while ARPU growth of 0.9% QoQ to Rs177 was largely led by one-additional day in Q2FY23. Cost inflation surprised negatively in the quarter / H1FY23 – 1) employee cost and selling cost increased by 16% and 20% QoQ, respectively; and 2) network opex was up 5% QoQ to Rs72bn; this is after the rise in repayment of lease liability by Rs20bn in H1FY23. Including lease liability, network opex has grown 30% YoY. However, lower SUC charges on 5G spectrum purchase (saving of 3% of AGR for 45days) have helped the company grow EBITDA at a strong pace. Capex for H1FY23 was at Rs150bn (excluding spectrum payment), and it should significantly accelerate as the company is likely to roll out 5G network in H2FY23. 5G network capex guidance is Rs700bn. Net debt (excluding capex creditors and interest accrued but not paid) jumped to Rs1,536bn on Rs880bn purchase of 5G spectrum. We have marginally tweaked our EPS estimates for FY24E, but have increased by 31% for our FY23E on assumption of lower depreciation and interest cost on 5G spectrum as the company may capitalise on these costs until the commercial launch in FY24.

  • RJio’s revenue was up 3% QoQ / 20.2% YoY to Rs225bn in Q2FY23, which was in line with our estimates. Subs rose 7.7mn to 4208mn, up 1.8% QoQ. Subs base growth from RJio has been much better vs Bharti; also aided by strong addition in FTTH base. ARPU grew 0.9% QoQ / 23.4% YoY to Rs177 largely due to one-additional day in the quarter. Mobile revenue acceleration from here is possible on tariff hike, or better ARPU from 5G adoption.
  • Churn rate was stable at 2% while gross subs addition dipped to 32.7mn (vs 35.2mn in Q1FY23). Minutes dipped 1.6% QoQ / up 12.8% YoY to 1,230-bn on seasonality, and data usage was up 8.9% QoQ / 22.6% YoY to 28,200-bn MB. Data usage growth was also aided by FTTH subs that use higher data quantity, and their number is growing fast for RJio.
  • Significant cost inflation includes rise in repayment from lease liability. Network costs rose 5% QoQ / 14.6% YoY to Rs72bn, and it is after the rise in repayment of lease liability (rental cost treated as financial lease as per Ind-AS) to Rs24bn in H1FY23 vs Rs4bn in H1FY22. If we add repayment of lease liability to network cost, network cost is up ~30% YoY. Access charges dipped 27% QoQ / 13% YoY to Rs1.9bn. SG&A expenses were up 27.5% YoY (0.9% QoQ); employee costs increased 20.6% YoY to Rs4.3bn. Licence fee & SUC cost dipped 8.5% QoQ as RJio benefits from lower royalty fees as SUC as % of AGR dipped ~3% (of AGR). EBITDA grew 27.8% YoY / 4.8% QoQ to Rs115bn and EBITDA margin was 51% (up 90bps QoQ). EBITDA growth on YoY basis would be significant lower if adjusted for rise in lease liability, which sits below EBITDA in depreciation in finance cost.
  • Depreciation and amortisation (D&A) rose by a sharp 6.9% QoQ (41.9% YoY) to Rs45bn partly on rise in lease liability. Finance cost dipped 6.3% YoY to Rs10bn on refinancing of deferred spectrum liability with low-cost NCDs. Net profit grew 28% YoY (4.2% QoQ) to Rs45bn.
  • Jio Platforms’ revenue rose 68% YoY (10% QoQ). Revenue of Jio Platforms (standalone, which houses digital properties) grew by an impressive 10% QoQ / 68% YoY to Rs17.5bn in Q2FY23. This was helped by three components: 1) Tech support for group technology platforms including JioMart, and other popular apps; 2) rise in content revenue from higher subs base in FTTH and postpaid mobility; and 3) technology subsidiaries. EBITDA jumped 13.5% QoQ / 71% YoY to Rs5.2bn.
  • Observations from balance sheet and cashflow statements. RJio has recognised spectrum purchased in July’22 auction (for 5G services) in balance sheet which has led to increase in CWIP (for intangible) for Rs880bn; as RJio has opted for 20years annual payment, deferred payment liability has increased excluding upfront instalment of Rs79bn. Other financial liability (current + non-current) has increased by Rs111bn likely on rise in interest accrued but not paid, and higher capex creditors.

Cash capex for H1FY23 stood at Rs195bn; however, it includes upfront spectrum payment. Underlying network capex was Rs150bn and we believe it would significantly accelerate in H2FY23 as the company starts rolling out 5G network.

Net debt (including deferred spectrum liability but excluding capex creditors and interest accrued but not paid) stood at Rs1,536bn. The rise is large due to 5G spectrum purchase.

For report,

CT Bureau

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