Tariff hikes needed for adequate monetisation of Rs 2 trillion investment in Jio 5G: Jefferies

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Either tariff hikes or enterprise-application business will be needed to monetise Reliance Jio’s $25 billion investment in 5G, said a Jefferies report.

This comes after Reliance Industries chairman and managing director Mukesh Ambani yesterday said at the 45th annual general meeting that they have committed Rs 2 lakh crore (or Rs 2 trillion) to building a pan-India True 5G network. The sum of Rs 2 trillion converts to $25 billion assuming Rs 80 to a dollar.

Going ahead, the Jefferies analysts expect blended average revenue per user (ARPU) at Reliance Jio to be above Rs 200 by FY25 (from Rs 150 in FY22 and Rs 176 in FY23). This increase will be led by tariff hikes, they said. Blended ARPU factors in revenue from prepaid (or lower-end) and post-paid (or higher-end) users.

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The analysts said that for generating 10% return on capital employed from the $25 billion investment, Jio will have to earn $2.5 billion/$7-8 billion incremental Ebit (earnings before interest and tax)/revenue. A bulk of the returns – or $4-5 billion – will need to come from either enterprise applications or from tariff hikes. Tariff hikes are needed for “adequate monetisation”, they wrote.

Enterprise applications cater to business establishments, and as of now Jio's offerings include JioBusiness Solution for small businesses and remote-workforce management-tool JioAttendance. In 2019, Reliance had announced a partnership with Microsoft that would give small businesses access to a subscription for Office 365 products, through Microsoft 365. They were offered at one-tenth the prevailing rates.

“Every 10 million additional home-broadband subscribers could add $0.9 billion revenues. In mobile, we expect the market to grow to $33 billion by FY24 and an incremental market share gain of five percent would add $1.7 billion revenues. This still leaves $4-5 billion revenue to either come from enterprise applications and/or further tariff hikes,” the report elaborated.

The analysts see leverage at comfortable levels, despite higher capex.

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“We raise our FY23-25 revenue/Ebitda (earnings before interest, taxes, depreciation, and amortisation) estimates by one to five percent to factor in higher subscriber numbers in the home broadband segment on the back of investments in this segment. We have also raised our network capex (ex-spectrum) estimates to Rs 40,000-44,000 crore annually over FY23-25 which will depress Jio's free cash flow over FY23-24," they wrote.

"With strong Ebitda growth, the analysts expect the debt levels to moderate by FY25. "We expect net debt/Ebitda to peak in FY23 at 3.7x and subsequently fall to 2.2x by FY25 on the back of strong 27 percent compound annual rate in Ebitda over FY22-25. While higher Ebitda in non-mobile business will drive higher EV, higher capex has resulted in equity value for Jio remaining unchanged at $75 billion,” the report stated.

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