Jio outpaces rivals in Q4, but analysts question D&A metric

Reliance Jio has outpaced rivals Bharti Airtel and Idea Cellular, reporting a sequential growth in net profit in the March quarter with higher average revenue per user (ARPU) and voice and data usages, but analysts have again questioned the depreciation & amortisation (D&A) norms applied by the Mukesh Ambani-owned telco, saying the numbers are not in sync with its reported data volume growth.

“Even with a unit-of-production (UOP) methodology, we would have expected Jio’s D&A charge to broadly go up in line with data volumes consumed on the network, but it remains flat for the third consecutive quarter,” brokerage Kotak Institutional Equities said in a note ET saw.

Jio’s D&A charge is flat at just under Rs 1,200 crore, Kotak said, despite the “17.4 per cent sequential growth in data volumes” in the fiscal fourth quarter, which also reflects a whopping “cumulative 34 per cent jump over the September quarter. Higher D&A charge would have dented Jio’s net profit.

Analysts say Jio uses a ‘unit of production’ method for its wireless network costs that includes spectrum and capex causing costs to scale up with higher utilisation of network capacity. Bharti Airtel and Idea Cellular use the more prevalent straight-line method, where costs decrease over the life of the asset.

Hence, Bharti Airtel’s and Idea’s D&A costs in the January-Mach quarter at Rs 4,899.1 crore and Rs 2,085.4 crore, respectively, were far higher than Jio’s.

In a written response to ET’s queries, Jio said under its D&A policy, “The expected pattern of consumption of the expected future economic benefits of the relevant assets is monitored periodically, and depreciation amount computed accordingly in line with the Accounting Standards.”

Earlier, Anshuman Thakur, Jio’s head of strategy & planning, had told reporters on Friday that the company’s accounting is in line with the Indian Accounting Standards (Ind-AS), when Jio reported a 1.2 per cent sequential rise in its March quarter net profit to Rs 510 crore.

Its numbers were preceded by market leader Bharti Airtel reporting its first loss in 15 years in India, followed by No 3 carrier Idea, which reported a net loss for a sixth successive quarter and onyear losses widening to Rs 930.6 crore. The older telcos were stung by continuing price wars and cuts in call termination rates.

Analysts aren’t too concerned about Jio’s ARPU — a key performance metric — that has shrunk sequentially in the March quarter to Rs 137 from Rs 154 following the sharp cut in its base offer to JioPhone users. If anything, they said, Jio’s earnings numbers underline the company’s focus on market expansion through its continuing pricing aggression and its readiness to take any short-term ARPU dips in its stride, which means more pain for the likes of Airtel, Idea and Vodafone India.

Sanjiv Bhasin, executive VP (markets & corporate affairs) at IIFL, said Jio’s ARPU, against Idea and Bharti’s Rs 105 and Rs 116, respectively, only “suggests the 4G newcomer’s plans are seeing strong traction both in urban markets as well as the hinterlands amid continuing price wars”.

But there are skeptics too.

“Given that Jio has invested over Rs 2.5 lakh crore in the telecom business, the annual depreciation should be near about Rs 15,000 crore and the quarterly number around Rs 4,000 crore. In addition, there would be some interest costs of about Rs 1,000 crore,” said an analyst with a global brokerage who did not wish to be identified.

“So, with as much as Rs 5,000 crore of costs below operating income, the net profit in the March quarter came as a surprise,” the analyst said.

Jio said “certain assets of the company are currently under development and therefore not depreciated, which again is clearly described in the financial statements”.

Brokerage Kotak, on it’s part, said it had expected Jio’s ‘D&A per GB number’ to be flattish as it had assumed the company’s total production over the economic life of the assets, an important input to the UOP method, would have incorporated future capex and associated capacity expansion.

Jio also reported a 3.6 per cent on-quarter rise in revenue to Rs 7,128 crore. This was against Bharti Airtel’s 3.37 per cent fall in consolidated revenues to Rs 19,634 crore and Idea’s 5.7 per cent fall sequentially to Rs 6,137.3 crore.economictimes


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