RIL Q2: Jio surprises with operating profit

Posts revenue of ~6,147 cr in first quarter of commercial ops; RIL net up 13%

In its first quarter of commercial operations, Reliance Industries Ltd’s (RIL’s) telecom business, Jio, sprang a surprise by posting a profit of ~1,443 crore at the operating level for the three months ended September. The strong profitability of RIL's petrochemicals business, with profit margins at a 10-year high, was another surprise element.

Anticipating the strong show, RIL’s stock price saw a fresh high of ~891 before closing at ~876.70, up 0.48 per cent, on Friday. The results came post market hours.

Chairman and Managing Director Mukesh Ambani said, “Our company reported another quarter of robust performance. I am delighted to share that this includes the financial performance of Jio, which had a positive Ebit (earnings before interest and tax) contribution in its first quarter of commercial operations.”

Jio, which is reported as RIL's digital services business, saw revenue from operations come in at ~6,147 crore. It clocked earnings before interest, tax, depreciation and amortisation (Ebitda) of ~1,443 crore, translating into Ebitda margins of 23.5 per cent. Jio currently carries a debt of ~49,000 crore, translating into a debt-equity of 0.54.

RIL has invested over ~2,00,000 crore in the telecom venture, which was launched last year, with offers of free voice and data. The launch led to intense pressure in the industry.

Though Jio reported a net loss of ~271 crore, it was much lower than expected. In fact, analysts at Phillip Capital had estimated a loss at the operating profit level of ~700 crore. Abhijeet Bora at Sharekhan said that Jio surprised positively with Ebit of ~261 crore as compared to an expectation of a loss.

“OUR COMPANY REPORTED ANOTHER QUARTER OF ROBUST PERFORMANCE. THIS INCLUDES THE FINANCIAL PERFORMANCE OF JIO, WHICH HAD A POSITIVE EBIT CONTRIBUTION IN ITS FIRST QUARTER OF COMMERCIAL OPERATIONS” MUKESH AMBANI, CMD, RIL

Analysts said the strong profitability could lead to upgrades for the RIL stock, as the timeline for the breakeven of the telecom business would be advanced.

Led by average revenue per user of ~156.4 per month and 138.6 million subscribers, Jio reported consolidated revenues of ~7,213 crore. The company's net subscriber addition stood at 15.3 million in September quarter. Brokerages had pegged the company’s average revenue per user (ARPU) at ~110-130, given the ~399 plan (for three months, including tax). Analysts said Jio’s revenues were as much as Idea’s, though the latter’s subscriber base was 31 per cent more at 181.5 million subscribers. Idea is expected to end the September quarter with revenues of ~7,400 crore and operating profit of ~1,350 crore, lower than Jio’s.

“The strong financial result of Jio demonstrates the robust business model and the significant efficiencies that the company has built through its investment in the latest 4G technology and right business strategy,” Ambani said.

A key point to note is that in the September quarter alone, Jio spent ~2,140 crore as access charges (net), which is mainly the interconnect usage charge (IUC). The call origination operator pays IUC to the operator on whose network the call terminates. IUC has been at the centre of debate recently with incumbents opposing the 57 per cent cut in these charges from 14 paise per minute to 6 paise (effective October 1) by the telecom regulator. The regulator had also said that IUC would be completely eliminated by 2020. A lower IUC benefits Jio.

The other big surprise came from RIL’s petrochemical segment, wherein revenue grew 24.9 per cent year-on-year to ~27,999 crore. Its profitability improved substantially as the segment’s Ebit at ~4,960 grew 45.2 per cent year-on-year; it was up 23 per cent sequentially.

The company said that the petrochemicals segment’s Ebit was at a record level supported by strong volume growth, higher margins and improved product mix with ethane cracking stabilising at the Dahej and Hazira plants. Ebit margins during the September quarter expanded to 17.7 per cent and were highest in the past 10 years.

“This is the highest profit in our petrochemicals business ever. At 18 per cent Ebit margin, this is at a 10-year high. This was on the back of strong delta on the polymer and polyester chain that we have seen this expansion. Also, our production was higher,” said V Srikanth, joint chief financial officer. “How our cash flow has started to come from our refining and petrochemicals expansion and the way Jio has started, to us the trajectory of cash flow from the money that we have invested, it is clearly evident that it is coming back as reverse cash flows.”

RIL’s consolidated revenue at ~91,481 crore was up 20.1 per cent year-on-year, ahead of Bloomberg consensus estimates of ~90,086 crore. The profit before interest, depreciation and tax (PBIDT) at ~17,896 crore also improved by 32.2 per cent yearon-year, with PBIDT margins rising 110 basis points to 17.68 per cent. Rising revenue and improving profitability helped RIL clock a net profit of ~8,097 crore, a rise of 12.8 per cent yearon-year. The figures were well ahead of consensus estimates of ~7,317 crore indicated by a Bloomberg poll.

In the refining business, however, the numbers disappointed marginally as compared to the expectations. The benchmark Singapore gross refining margins (GRMs) averaged at about $8.3 a barrel, improving significantly from $6.4 a barrel in the previous quarter. Though RIL saw a minor rise in its GRM from $11.9 a barrel in June quarter to $12 in Q2 of FY18 — which reportedly is at its nine-year high — analysts were anticipating it to come between $12.3 and $12.8.

With not much rise in the GRM, the refining and marketing segment revenue at ~69,766 crore grew four per cent sequentially (up 15.3 per cent year-onyear). The segment’s Ebit at ~6,621 crore declined 11.4 per cent sequentially, but was up 10.8 per cent year-on-year.

RIL’s standalone revenue increased by 16.8 per cent to ~75,165 crore, PBIDT increased by 17.2 per cent to ~15,040 crore and net profit rose by 7.3 per cent to ~8,265 crore. Anshuman Thakur, Jio's strategy and planning head, said that Jio saw the highest per capita voice consumption at 626 minutes per month and its users consumed over 1.78 billion hours of highspeed video per month during the quarter. Jio's customer churn is currently at one per cent per month. This figure is expected to reduce further, Thakur said.

He added that on gross add basis, Jio achieved over twothird of the market share of the incremental smartphones sold in the country. Jio has over 85 per cent market share in the LTE smartphone base in the country. Capex for Jio going forward is likely to be around ~7,000 crore.