‘Jio’s first profit is a bit too good to believe’
Amortisation tack ‘unique’: Bernstein
Reliance Jio’s announcement of its first profit within six quarters of starting services is a ‘bit too good to believe,’ according to Sanford C. Bernstein, an investment research firm.
“While we don’t want to take anything away from the amazing achievements Jio has delivered — the company has ‘reset’ what it means to be a disruptor in the telecommunications sector – we find the result a bit too good to believe,” the U.S.-based brokerage said in a report titled “Did Reliance Jio turn a profit in only their sixth quarter since launch?”
Reliance Jio’s reported profit is due to a ‘unique approach’ to depreciation and amortisation, which results in significantly lower expenses than seen elsewhere in the industry, Bernstein analyst Chris Lane wrote in the report. “A deeper dive, comparing the cost structure of Jio, Idea, Bharti with those of other global telcos, confirms what we expected,” Mr. Lane wrote.
According to Mr. Lane, applying ‘normal’ depreciation metrics would imply Jio’s net loss would have been ₹2,770 crore in Q2 and ₹2,410 crore in Q3. Instead the firm reported a loss of ₹270 crore in Q2, before turning a net profit of ₹500 crore in the third quarter.
Global peers
“On a reported basis, Jio’s bottom line has turned positive while Bharti and Idea’s continued to decline… while on a underlying basis, Jio is still making significant losses, Bharti saw improvement in the past quarter and Idea remained flat,” Bernstein analysts wrote in the report.
Reliance Jio’s depreciation and amortisation expenses accounted for only 2% of the total assets compared with an average of 8.6% for top global telcos, the brokerage said, adding that while cash flow was not broken out by segment Bernstein’s ‘pro-forma’ model suggested the company continued to burn through ₹2,300 crore in cash in the quarter. Parent Reliance Industries (RIL) had borrowed heavily on its books and invested in Jio as equity, resulting in lower interest outgo, which was another factor analysts attributed to Jio’s profit. RIL had so far invested more than ₹2 lakh crore in Jio alone, mostly through borrowings.
Expanded equity base
“Do you believe a ₹2-lakh crore venture will have interest outgo of less than ₹700 crore a quarter,” asked another analyst, who did not wish to be identified. “It’s because Reliance Jio’s equity base was expanded to ₹90,000 crore and has debt of only ₹51,000 crore.”
Jio’s finance cost had reduced to ₹663.82 crore while RIL‘s finance cost rose 74% to ₹2,095 crore. This was primarily due to lower capitalisation of finance cost related to commencement of digital services business. RIL’s debt rose to ₹2.13 lakh crore from ₹1.96 lakh crore, making it India’s most indebted firm. The company had cash and cash equivalent of ₹78,617 crore as on December 31
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