Annual Report Analysis Jio: Network costs rose in double digits, net debt increased

29 Aug 2022 , 12:54 PM

Key takeaways from the FY22 AR of Jio and JPL are:

1) Jio’s network cost per tower remains lower but has been climbing faster than that of Bharti Airtel.

2) There was a sharp increase in equipment capex versus FY21 and FY20.

3) Net debt + liabilities-to-EBITDA rose from 1.44x as of end-FY21, to 2.45x as of end-FY22 – mostly on spectrum purchases – and analysts at IIFL Capital Services expect this to cross 4x in H1FY23, post July 2022 auctions.

4) The 700-MHz band will let Jio take a crack at the high-ARPU segment, but the 700-MHz handset ecosystem will have to improve rapidly, and Jio will also have to step up its execution in the market place, as per analysts at IIFL Capital Services.

5) Though they have maintained EBITDA estimates, near-term PAT estimates see cuts on higher investments.

6) They have raised EV estimate from US$88 billion to US$90 billion, however, this is offset by higher debt.
 
Network costs rose in double digits; other expenses flat YoY

Jio’s reported network opex + depreciation of RoU assets + finance cost on lease, rose 16% YoY in FY22, after witnessing a 26% increase in FY21. Jio saw a double-digit YoY increase on network costs per tower, and the gap versus Bharti Airtel has narrowed. Other expenses were flattish YoY in FY22, after rising in line with revenue in the previous 2 years.

Net debt rose, while effective borrowing cost remained stable

In FY22, adverse working capital swing resulted in pre-interest OCF declining by 4% YoY to Rs313 billion, despite 22% EBITDA growth to Rs376 billion. Equipment capex on capacity creation rose sharply to Rs237 billion. This resulted in FCF pre-spectrum payment declining to Rs70 billion from Rs191 billion YoY. Though net debt + liabilities doubled YoY in FY22, effective interest rate remained stable. Net debt + liabilities are set to double further in H1FY23 post the recent spectrum auctions.

Other observations

1) Net current assets as % of revenue have progressively deteriorated to -4% from -19% in the past 4 years.

2) As per Jio’s related party transactions disclosure, commission paid to Reliance Retail (RR) as a % of Jio’s revenue rose sharply to 3.4% in FY22 versus 2% in FY21.

3) Handset-related debt has been completely repaid.

4) Bank guarantees provided by Jio came down YoY – from Rs56 billion to Rs26 billion – after the implementation of the telecom reform package.