Over the next 12 months, Reliance Jio is expected to reach the top position on both subscriber and service revenue metrics and it expects to surpass Vodafone Idea service revenues in FY 19-20, according to a report by Bernstein.
But the report also warns that the aggressive push to be number one comes at a heavy cost and and some strategies need to be changed to become profitable in the long run.
"Over the next 12 months, we expect Jio to reach number one on both subscriber and service revenue metrics. On a service revenue basis, Jio passed Bharti in Q3. We expect they will also pass Vodafone Idea in FY 19-20," the report said.
"Jio's reported service revenue totalled Rs 10,380 crore for the quarter, beating Bharti (Rs 10,060 crore) for the first time. Moreover ... they continue to heavily subsidize JioPhones... We expect Jio to take the lead in both service revenue and subscribers in FY20."
The report states that if Jio's "non-standard" depreciation metrics and all the handset subsidies being booked though Reliance Retail which does not show on Jio's P&L account are taken into account, then it would show up potential losses at Rs 15,000 crore.
"The reason we highlight the tremendous expense Reliance is incurring to position Jio as number one is to make it clear this strategy cannot be maintained. We have always felt that once Jio reaches its target market share, they will switch their focus to monetization. While we think FY 19/20 is likely too early for this, we would not be surprised to see ARPU start to creep back up starting FY21. We are currently forecasting ARPU increases of 8.2 per cent in FY21 and 11.2 per cent in FY22," it said.
Last year, the inevitability of Jio's drive to become the number one operator in India helped it to gain market share. Though from a global perspective this was a major accomplishment, it came at a very high cost. While detailed numbers have not been disclosed, estimates suggest total invested capital in Jio has reached Rs 2.6 lakh crore ($37 billion).
Bernstein expects the recent push of JioPhones has resulted in net handset subsidies, likely totalling a further Rs 7,200 crore. The subsidies are carried by Reliance Retail (part of Reliance Industries) and so are not visible on Jio's profit and loss statement.
Reliance Industries will ultimately want to make a positive return on its investment which will require a reduction in handset subsidies and a boost in subscriber revenue.
Bernstein expects ARPUs to eventually start to rise to enable this. Bharti Airtel and Vodafone Idea were not being irrational by not following Jio down the subsidy path, it said.
Bharti and Vodafone both reported losses for the quarter on an underlying basis, whereas Jio reported a profit, the report said, adding these results were not directly compatible.
Jio has been using a 'non-standard' approach to D&A (using 'unit of production' accounting). "If we attempt to normalize D&A based on total fixed assets, the quarterly charges would jump by Rs 4,700 crore and would result in a quarterly net loss of Rs 2,250 crore. Moreover, the highly subsidised JioPhone continues to drive Jio's subscriber acquisition numbers."
Jio's net additions were coming from rural areas of India.
