Investors in Reliance IndustriesNSE 2.15 % (RIL), India’s biggest private company by profit, will likely watch one key metric while assessing Jio’s future valuations: Its return on capital employed (RoCE).
The telecom arm of the company owned by India’s richest man, Mukesh Ambani, has been at the vanguard of a data revolution in the country, playing a leading role in the re-rating of the Reliance stock over the past couple of years. Jio’s price and capacity-driven strategy to gain revenue market share has forced a consolidation in the telecom industry, making meaningful data packs affordable to millions of Indians.
In the March 2018 quarter, the average revenue per user (ARPU) of Jio was Rs 137, compared with Rs 154 in the previous quarter, while the subscriber base at the Mumbai-based company rose to 186 million from 160 million in the three months.
According to estimates by Kotak Institutional Equities, Reliance Jio had an RoCE of 1.1 per cent in FY18, and it is expected to jump to 8.9 per cent in FY23, with an upward traction in ARPU visible from 2020. For now, however, ARPUs across the industry may remain subdued, declining 12 per cent and 5 per cent, respectively, in FY 18 and FY19.
Jio’s rival Bharti AirtelNSE -0.11 % has also talked about lower competitive intensity. In the post-earnings call, the Airtel management said that while the downtrend in ARPU continues, the worst may be over and the key topline metric for the industry may recover in the long term.
The telecom venture of Reliance has been posting positive operating profit in the past three quarters and had a profit of Rs 723 crore in FY18. It uses the unit of production (UoP) accounting method to compute depreciation, analysts say. Not conventionally used by telecom companies, UoP requires costs to be amortised based on cumulative production over the economic life and, analysts say, is traditionally used in sectors with finite resources such as oil and gas.
