Richest Indian Mukesh Ambani’s telecom venture is on course to record its first-ever quarterly profit this financial year, aided by the government’s decision to slash interconnection fees, people with knowledge of the matter said.
Reliance Jio Infocomm Ltd., a unit of the nation’s most valuable company Reliance Industries Ltd., may report a net income this month itself when it lays out its December-quarter performance, the people said, asking not to be identified discussing private information.
The crucial financial milestone would come less that 18 months after Jio, as the company is known, stormed into India’s mobile-phone market with free services that triggered a tariff war and forced consolidation in the sector. Achieving profitability would be one of the parameters that will decide the company’s path to an initial public offering after Ambani pumped at least $31 billion into the venture. Parent Reliance Industries has surged 77 percent since Jio started operations and dislodged rivals to become the nation’s No. 4 wireless carrier.
A Reliance Industries spokesman didn’t respond to an emailed query on Jio’s timeline for reporting profits. “We are ahead of our schedule in terms of the returns that we are generating,” billionaire Ambani had said at a Dec. 1 event without giving any timelines.
Jio reported a surprise operating profit in the September quarter, the first time the unit’s results were segregated. It had a net loss of 2.71 billion rupees ($42.5 million) on revenue of 61.5 billion rupees. Costs have since declined substantially after a reduction in the fee an operator pays its counterparts for allowing calls to go through. The saving will flow directly into Jio’s net income, the people familiar said.
The Telecom Regulatory Authority of India reduced interconnect charges by 57 percent to 0.06 rupees a minute starting Oct. 1 last year. The fee is set to drop to zero from Jan. 1, 2020. Jio spent more than 21 billion rupees on access charges in the quarter ended September 30, or more than a third of its revenues, according to a company statement.
The reduced interconnection costs will be pitted against any increase in depreciation charges and in the interest Jio pays on loans, which would erode net income. If these charges are high enough, the telecom unit may print a loss for the last quarter.
“Unfortunately a (unknown) portion of costs are still capitalized as RIL has notyet commissioned its entire telecom infrastructure,” Sanjay Mookim, a Bank of America Merrill Lynch analyst in Mumbai wrote in a Jan. 9 note, explaining why Jio’s earnings numbers are hard to pin down.
Cost structures are also likely to change once Jio completes the acquisition of spectrum, tower and fiber assets from debt-laden Reliance Communications Ltd. The deal won’t dent Jio’s December earnings as it is expected to close between January and March. Profits for Jio may be around the corner, boosted by a customer base that has swelled to about 160 million and tariff hikes in October, Jefferies analysts led by Mumbai-based Somshankar Sinha wrote in a Jan 8 report.
Telecom could turn profitable in the three months to Dec. 31 despite higher capital charges, Sinha wrote in the report, describing it as “a quarter of many firsts” for Reliance Industries earnings.