Back in April 2017, Morgan Stanley had predicted that Reliance Jio could become profitable by 2020. About six months later, Reliance Industries announced that its telecoms arm would turn profitable at the net level "very shortly", while announcing a pre-tax profit of Rs 260 crore for the business-it's first ever operating profit and the first time earnings were disclosed-for the quarter ended September 2017. The good times have reportedly arrived.
Reliance Jio Infocomm Ltd (RJio) may report its first-ever quarterly profit this month when it announces its December quarter results, sources in the know told Bloomberg today. And Jio owner, Mukesh Ambani, apparently has India's telecom regulator to thank for that.
Last year, the Telecom Regulatory Authority of India (Trai) not only reduced the interconnect usage charges (IUC)-also known as mobile termination rates (MTR)-from 14 paise per minute to 6 paise per minute, but also announced that it would be scrapped entirely from January 1, 2020. At the time rating agency ICRA had claimed that the move would adversely impact the larger incumbents over the medium term, while benefitting the new entrant RJio.
TRAI's move was expected to translate into savings for RJio in terms of the IUC it had to pay to other operators-as per RJio's financials, its IUC charges for the second quarter of this fiscal stood at about Rs 2,000 crore, or over a third of its revenue. RJio had previously reported negative adjusted gross revenue of Rs 1,000 crore in the June quarter as its revenues then were lower compared to the IUC it had to shell out. Perhaps that is why Ambani could confidently announce that "we are ahead of our schedule in terms of the returns that we are generating" at a December 1 event. On the other hand, the likes of Bharti Airtel suffered-MTR had reportedly contributed as much as 14-15% to its India wireless revenues. "The 57% cut in MTR, effective October 1, 2017, is likely to impact Bharti Airtel's and Idea Cellular's India wireless EBITDA by around 8% and 11% (on 2QFY18 base), respectively," Kotak Institutional Equities said in a recent report.
It's hard to imagine a telco achieve this crucial milestone within 15-odd months of starting out, but then RJio is known to go against the norm. After all, it had disrupted the industry with its inaugural promise of free voice calls and data on dirt-cheap prices, triggering off a price war that bled out a once sunshine sector and resulted in several players merging forces to survive. Its customer base is currently 160 million strong and growing, and it hiked tariffs in October last year, all of which is good for its bottomline. However, RJio's profitability hinges on several factors like depreciation rate, interest pay-outs due etc. Moreover, as a Bank of America Merrill Lynch analyst recently said in a note, "Unfortunately a (unknown) portion of costs are still capitalized as RIL has not yet commissioned its entire telecom infrastructure," Jio's earnings numbers are hard to pin down.