What’s behind Reliance Jio’s profitability?

Mukesh Ambani-led firm posts profit for the first time since its launch in September 2016, while others struggle
What’s behind Reliance Jio’s profitability?

The biggest story in the past week in the telecom space has been about Jio’s profitability. The company reported a profit of `504 crore for the quarter ending December 2017.

This is the first time Jio has reported profits since the launch of its commercial services in September 2016.

It is also the only operator in this quarter to post positive numbers. Airtel’s net profit came down by 39.3 per cent and revenue by 13 per cent in the quarter ending December 2017. On the other hand, Idea Cellular recorded a loss of `1,284 crore in the same time period.Jio also recorded an average revenue per user (Arpu) of `154, about 25 per cent more than that of Airtel’s `123 in the same period. 

But, Jio was able to post profit with a little help from the Indian government. A key reason for Jio to be profitable is the decision of the Indian regulator to bring down Interconnection Usage Charges (IUC) from 14 paise per minute to 6 paise. The IUC is the fee that a telco needs to pay on calls that start on its network but end on the other service provider’s network. Jio initially had to pay a huge IUC because it was a new operator and most of the calls were ending on the rivals network. After this decision, its quarterly payout came down from `2,140 crore in the September quarter to `1,082 crore in the December quarter. 

Jio is the largest startup with capital investment of more than `150,000 crore. Telecoms business demands huge capital expenditure with a long-gestation period. It is almost unheard of a service provider to make profit within 15 months of the launch. However, Jio has broken new grounds since its launch. The company disrupted the market by offering free voice services for life and free data services for the first six months of the launch. JioPhone, a low-priced 4G feature phone, helped the company in expanding the mobile broadband market in the India. Jio boasts of more than 150 million subscribers today. 

Jio’s profit also seems to be the result of different accounting methods used. Deepak Shenoy, founder of Capital Mind, explains in a series of tweets and an article. “Reliance Jio is NOT profitable. The accounting is like this. Reliance INDUSTRIES takes a loan. Buys shares of Jio. Jio doesn’t have to pay interest since hey, equity. Jio shows profit because it has to pay no interest. But Reliance Industries pays the interest,” says one of his tweets.

However, he emphasises that there is nothing illegal about this practice. “All in all, in my book, the Reliance Jio ‘profit’ is a legal way to describe what seems to be a positive number on accounting sheet. But when you read between the lines, it’s not quite there yet,” That sums it up!
(The writer is an independent journalist)

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