How RelJio's Financials could impact Reliance Industries Ltd's Quarterly Results

Reliance Industries Ltd (RIL) is a behemoth when it comes to Total Income numbers with an annual figure of close to Rs.4,50,000 crores, which translates into an average Quarterly number in excess of Rs.1,00,000 crores. About 70% of RIL's Total Income comes from it's huge Refining business, 20% from it's Petrochemicals business and the rest 10% is contributed by it's Oil & Gas business and it's Retail business combined. On the Net Profit front, RIL does about Rs.5,500 crores on a Quarterly basis and about Rs.22,000 crores annually. Most of the Net Profit comes from Refining & Petrochemicals businesses. Oil & Gas business is around the break-even level at a Net basis and the Retail business has just broken-even at an Operating level.

With RIL's biggest & most ambitious investment in any new business set to start it's journey anytime now, let's try & build some estimations on how it's financials in the first few quarters will be & what will be it's impact on RIL's consolidated numbers. The preparation for the journey is almost complete with RIL already having invested close to $11 billion in acquiring spectrum in 2300 MHz & 1800 MHz bands and building network infrastructure across the country and setting up Data Centers at several different locations to handle the huge amount of Data Traffic expected to travel on it's 4G LTE network. Until the company starts commercial operations of it's 4G services, all it's expenses related to that business will be Capitalised & will be considered as CAPEX. As soon as the 4G services are launched, the regular Profit & Loss account will be prepared for that business.

As per media reports, RelJio is expected to have a Network coverage in about 5000 cities & towns and another 4,00,000 villages within a few months of launch, if not at the start itself. This coverage is not much less than the kind of coverage that Airtel or Vodafone or Idea Cellular have at the moment, after being in the business for nearly 2 decades. Let's say that RelJio's expected coverage is about 75-80% of the coverage of any of the Top-3 operators. RelJio is also expected to have set up over 1,00,000 BTSes, most of them on Rented Towers. Compare that to a number of about 1,45,000 BTSes active on Airtel's Network. So, in terms of Network Operating Costs, we can expect RelJio's costs to be about 70% of Airtel's costs. Taking Bharti Airtel's latest Quarterly numbers as a reference, the Operating Costs + Employee Costs for RelJio could be in the region of Rs.3000 to 4000 crores per Quarter. So RelJio will be able to break-even at an EBITDA level as and when it manages to generate a Quarterly Revenue of around Rs.4000 - 5000 crores.

Now the question is: By when will RelJio be able to generate revenues of around Rs.5000 crores on a Quarterly basis?

As per media reports, RelJio's plans involve being more than just a Wireless Data service provider. RelJio already has acquired lots of content that it will offer it's customers over it's Fibre network as well as it's 4G LTE network. It includes Television services, Movies on Demand, Episodes of popular TV Serials/Shows on Demand, possibly even Educational services where Live or Recorded lectures of certain courses from certain institutes can be accessed sitting at home. Infact a reliable High-speed Internet backbone can be used to provide services in various categories like Entertainment, Education, Security, Healthcare, etc. With the advent of 4G networks, we could see more & more people using Video-call services as well. The point I am trying to make here is that considering RelJio's plans, the ARPU (Average Revenue Per User) per month for the company will be much higher than what other operators enjoy. I am expecting RelJio's ARPU to be atleast around Rs.700 per month.

The main target customers for RelJio are the ones who are currently using 3G services or USB Dongles. They are currently giving substantial revenues to existing operators. They are the ones who will shift to using RelJio's services. On a conservative side we can expect between 1 to 2 million customers to take up RelJio's 4G connection every month. Initially most of them will be buying the 4G MiFi device, which can support upto 10 WiFi devices at a time. There are millions & millions of Smartphones, Laptops & Tablets with customers across the country, which do not support 4G network, but can use WiFi services. RelJio will be targeting all these customers with the MiFi device. At the same time we are already seeing 4G Smartphones being introduced in India and many more are on the way in coming months. It will take atleast 6 to 9 months for the 4G Smartphones to get popular amongst the buyers.

To calculate the EBITDA Break-even point for RelJio, I have kept my estimates simple & conservative. I have estimated a monthly addition of 1 million new customers & an ARPU of Rs.700/- per month. That will mean a recurring revenue addition of Rs.70 crores every month. At this rate, RelJio should be close to EBITDA break-even in about 6 to 8 Quarters time.

During the First Operating Quarter for RelJio ( RJIL - Reliance Jio Infocom Ltd ), the company is expected to post a mammoth EBITDA as well as Net Loss. The EBITDA Loss could be to the tune of over Rs.2500 crores and Net Loss could be in excess of Rs.4500 crores. In addition to the EBITDA Loss, there will be things like Depreciation, which is expected to be to the tune of atleast around Rs.1500 crores, and Interest Cost, which is expected to be well in excess of Rs.500 crores. Hence as & when RJIL launches it's 4G service, the first quarter is expected to be the biggest Pain Quarter for Reliance Industries Ltd's Quarterly result. RIL's Consolidated Net Profit could get wiped out to the extent of 80 to 90% in the first quarter. But the Pain will reduce with every passing quarter as the Revenues build up at a handsome pace. Eventhough RJIL is expected to Break-even at an EBITDA level within 6 to 8 quarters, it will continue to post Net Loss for 3 to 4 more quarters after EBITDA break-even. So, RJIL's financials are expected to have a negative impact on RIL's Quarterly numbers for about 8 to 10 Quarters, with the impact being the maximum in the initial quarters and reduce substantially with every passing quarter.

For RJIL to take rapid strides on the subscriber acquisition front & on the Revenues chart, it will have to do a stellar marketing of it's services and offer a good service experience to all the customers joining their network. The initial months will be full of euphoria but after that it will be the marketing & word-of-mouth that will enable the company to pile up new subscribers & revenues. Let's see how & when things unfold, but please be prepared to see a negative impact on RIL's Quarterly results initially because of RJIL's Financials.

Happy Investing !!!

Airtel's plan to charge Data usage for VoIP calls separately is plain stupidity!!!

Over the past 2-3 days we have been reading that Bharti Airtel plans to exclude Data usage for VoIP calls from the Data Packs activated by a wireless customer and charge it at a standard rate of 4p/10KB for 3G customers, which translates into about Rs.4 per MB. Rates for 2G customers is 2.5 times higher, but it's pointless as 2G network is not suitable for VoIP calls. With a VoIP call needing about 0.5 MB to 1 MB per minute on 3G network (depending on the VoIP service provider's efficiency), the Data Usage charges alone will be atleast Rs.2 per minute, making it senseless for most users, except for those who make International calls to regions where Call Rates are expensive. And the customer might even think of moving away from Airtel if it persists with this new policy and other operators do not adopt this policy towards VoIP calls.

Apart from the economic reason from the customer's point of view, another reason why this new policy is Plain Stupidity is that it might not please the regulators. Until now most operators had specific plans for Facebook / Whatsapp usage, which made sense especially for those customers who use their Smartphones primarily for those apps. Such plans brought down the monthly Data cost for those customers to more attractive levels. Such plans were not premium plans, they were aimed to bring down the cost for the customer and the operator also benefits by encouraging more & more Smartphone users to try Data service. This VoIP usage exclusion policy will make it very expensive for customers using that service and hence the Regulators will step in to avoid that possibility very soon. In any case Customers themselves will shift their usage to other service providers and ultimately Airtel will lose some portion of their Data Volumes from all such customers.

Overall, this new VoIP tariff policy adopted by Airtel is neither good from the customer's economic point of view, nor is it good from the Regulatory angle, nor is it good from Airtel's own Data Volumes growth angle. Airtel will have to immediately introduce some new plans specific to Data usage for VoIP calls, which don't make VoIP usage so exorbitant. Such plans will give a little more flexibility to customers who do make good use of VoIP service, but I still feel that it won't make economic sense unless those plans bring down the cost of Data usage for VoIP to levels on par or lower than rates charged in other Data packs. This I feel is an unnecessary complication that the operator is adding.

Fear of RelJio launch pulling down Telecom stocks.

Earlier in May'14, I had written about the stupendous pace of growth being experienced by all Mobile Operators in their Wireless Data Service business. (Click here for that article. It will open in a new window) As expected the Wireless Data business is the one that has been driving all the growth for Mobile service providers. This business has not just boosted revenues, but profitability too has improved sharply. This is especially evident in the quarterly results of Bharti Airtel and Idea Cellular. If one looks at the results, times have never been better for Idea Cellular on the profitability front. Even for Bharti Airtel the numbers have sharply perked up in the recent quarters. The demand for Wireless Data is growing at such a pace that all the players have confidently hiked the rates for all their 2G Data plans by as much as 50-70% in the last 1 year and none of the Top-3 have cut their 3G data tariffs until now. Smaller players like Tata Tele, Aircel & even RCom have started offering attractive 3G Data plans in the recent months.

But the demand is so high that customers have shown very high levels of elasticity in Data tariffs. It's quite obvious that Internet usage is very very addictive as well as infectious. Many people are upgrading their Smartphones almost every year and with newer Smartphones they need faster Internet speeds too. But despite all these positives for Telecom operators, almost all of them have seen their stock prices correct sharply soon after hitting new peaks sometime around September-end or early October this year. Both Bharti Airtel & Idea Cellular are down by about 20-22% from their peaks, while stocks of RCom & TTML have seen much sharper falls.

The reason for this correction, as the title of this article suggests, is the upcoming launch of RelJio's 4G services. As per expectations, RelJio's 4G tariffs are going to be atleast 50% cheaper than the 3G tariffs currently charged by the trio of Airtel-Vodafone-Idea. And the 4G speeds will be 5 to 10 times faster too. If these rumours/expectations do turn out to be true, then all these 3G operators will have no choice but to sharply cut their 3G Data tariffs to levels under RelJio's 4G plans. And RelJio is also expected to have a network coverage which is as good as that of the competition (all combined together!!!), if not wider than them. This means the existing 3G operators will have no major advantage over 4G service, except for maybe the fact that the Smartphones that people are currently using are not 4G compatible and the users will be forced to either replace their phones or invest in an additional device which will convert 4G signals into Wi-fi signals. I don't think this is a very big impediment and a huge portion of the user base can think of shifting to 4G in the first year itself.

As per the launch dates for RelJio, nothing has been finalised as yet. But there is a strong expectation that Mukesh Ambani will think of repeating the feat of launching his mega telecom venture on his father's birth anniversary on 28th December, just as he had done with Reliance Infocom about a decade ago. Even if it doesn't happen on 28th December, the rollout across the country has to happen before the end of May'2015. That means there is a window of only 5 more months within which RelJio has to start it's commercial services. As per the newsflow we have seen in the recent months, RelJio had started testing it's network for security & compliance as well as performance, over a month ago. RelJio also has tie-ups in place with all Telecom Tower companies. It has laid it's own fibre-optic cable network on all routes where the traffic is expected to be the maximum. And RelJio now has a Data Center capacity which can easily claim to be the highest in the country, even overtaking Tata Communications' capacity, which is a leader till now. All these indications are clear enough to suggest that RelJio's network coverage & capacity will be good enough to accommodate a huge number of subscriber base with very high usage levels. Not just that, RelJio is even expected to launch multiple services where it's network can act as a backbone. Television service as well as Movies on Demand is one such example. There will be many more in various different fields like Education, Security and various other Internet-of-Things applications. We will come to know about them in the near future.

The way Telecom stocks will behave after RelJio's launch will depend on how well they are able to compete against it in trying to protect their Revenue-Market share. We are certainly going to see some casualties in the Telecom sector in the next 1 or 2 years or some large M&A deals happening. Bharti Airtel is already preparing it's war-chest by building a strong Capital base by divesting it's tower assets in Africa and raising more resources in the form of ECBs. Idea Cellular & Vodafone too are currently in a very healthy financial state & have able promoters who can infuse more funds. But an M&A deal involving any one of these cannot be ruled out. The obvious potential casualties are RCom, Tata Tele, Aircel, and other fringe players like Telenor, MTS & Videocon. There is a possibility that RCom will be saved by RelJio. Tata Tele has already made it clear that it is not too interested in remaining in this business & will be happy to merge into another stronger player, possibly Telenor or MTS. But valuations will play spoilsport as Tata Tele's financial health isn't good currently and it could worsen rapidly once RelJio's launch happens. Aircel's future is equally uncertain & problems are quite similar to that of Tata Tele. Large Debt & Cash Flows are not strong enough to attract a buyer. MTS too has said that it can bring more capital & look at acquiring an existing operator, but the M&A rules need to be simplified. Videocon too might get acquired or shut down by selling off it's spectrum & license.

To summarise, the next 12 months are going to be very very exciting for the User base, but very very challenging for those who are Invested in Telecom stocks. I think Bharti Airtel, Vodafone and maybe Idea Cellular (either singly or by aligning with another player) will be able to face RelJio's challenge in the market place. But their businesses may not post any positive growth in the first year or two of RelJio's launch, until things stabilise and some of the smaller competitors shut down their operations or merge. The first 2 years will be a fight to protect their existing Revenue-base.

My expectation is that in 4 years time RelJio will be amongst the Top-3 service providers in terms of Revenues, either organically or inorganically.

Ignore all the Negativity: Time to Dig-into Indian stocks

Last 10 days have been time for some good amount of correction, not just in the Indian markets, but globally. In fact the correction has probably been instigated by the substantial fall in Crude prices, which are down by a whopping 40% in just the last 2-3 months. As we all know Crude does impact economies of almost all countries, either positively or negatively, and there is a lot of International money movement happening to take care of Crude payments. Hence the huge fall in Crude prices is even impacting the Currency rates across the globe. Add to all these factors the fact that the year-end Christmas vacation is approaching, which is a very important festival for most of the western world.

The NIFTY Index is today at levels around 8100, down by a good 500 points from the peak of little over 8600 it hit recently. Most of the Blue-chip stocks are down by around 10% or so, except for Bank stocks, which haven't corrected much. This is a very healthy correction. But as with any sudden correction, most Business News channels start talking all Negativity and predicting more downside in the markets. Remember all that talk is for short term traders.

Investors who have either a medium term or long term outlook, should take advantage of this opportunity and tank-up on their favourite stocks. The HUGE correction in Crude prices is a Very Very Very BIG Positive News for Indian economy. And reports suggest that the Crude prices could remain in the $40 to $80 per barrel range for the next few quarters. This factor alone will prove to be a big booster for Indian economy in the coming months. And hence it will be an excellent idea to buy stocks which can benefit from an expanding Indian economy.

The direct benefit of lower crude prices will be felt by companies which use Crude or it's derivatives as an Input/raw material, which includes industries like Paints, tyres, certain Chemicals & even Petrochemicals. Oil Refining & Retailing companies could also be amongst the larger beneficiaries. The secondary beneficiaries will be all those companies who spend substantial amounts on transportation of goods, either raw materials or finished goods. Almost all manufacturing companies & all Logistics companies come in this category as they have varied requirement of 'Transportation' in their business. Even Telecom tower companies who spend substantial amounts on Diesel to run their generators will benefit from this price correction.

The other part of this benefit is going to be the falling Inflation, which will not just help consumers spend more, but also will allow RBI to reduce Interest Rates in our Banking system, sooner or later. Here again all companies who borrow Capital from Banks, either for CAPEX or for Working-Capital purposes, will be beneficiaries. This benefit will be felt a quarter or two down the line. But it's coming for sure and will boost profitability of most companies.

Mark my words, Indian markets will be rallying in the near future, primarily because of Crude Oil price correction, provided the prices remain under $80 per barrel range for a substantial amount of time. And hence this correction is an excellent time to tank-up for good quality stocks.

Educomp Solutions: Rumours about sale of K-12 business subsidiary, Pros & Cons

There have been rumours floating the market after a news report said that Varkey Group & the Birla Group are in talks to acquire Educomp Solutions' K-12 business subsidiary. Educomp Solutions owns 75-80% stake in that subsidiary, while the rest is held by Educomp's promoter Shantanu Prakash. The News report published by Times of India/ET in the month of September mentioned that the Buyers are valuing the business at about $250 million, including the debt of about $150 million. That means the Equity will be valued at about $100 million.

If this News Report does turn out to be true along with the valuation numbers, then Educomp Solutions will receive about $75-80 million for it's stake, i.e. about Rs.450 to 500 crores. Shantanu Prakash will receive about Rs.120 to 150 crores for his stake. First lets look at the positives: Firstly, Educomp's Consolidated Long Term Debt of about Rs.3200 crores (at the end of Sept.'14) will reduce by about Rs.1000 crores, which is the K-12 subsidiary's debt. The Rs.450-500 crores that Educomp Solutions will receive for it's stake will further help reduce it's own debt or a part of the Cash could be used to fund expanding it's core business of SmartClass & other such products like SmartClass Tab, English Mentor, etc. More than the company, the promoter Mr. Shantanu Prakash might be more keen on encashing his stake as the Cash he receives can help him fulfil his commitments towards the CDR scheme. Last month, the company had announced that the promoter had pumped in about Rs.30 crores in the company, but I am sure that he needs to bring in more funds. All-in-all if the deal does go through in the expected manner, then it will help improve Educomp's existing Cash position as well as help improve the future Cash Flows as the Interest Cost could reduce by 30-40%.

Coming to the Negatives: Educomp will be exiting a business which has big potential at a distress-sale like valuations. The buyer knows that Educomp is in dire need of funds and hence is negotiating hard to pull down the valuations. We all know that the K-12 Schools business has HUGE potential, but Educomp will need much more funds to expand this business and bear losses in the initial years until the schools mature. And unfortunately, Educomp currently does not have that capacity.

What could be best is that Educomp brings in an Investor by selling only part of it's stake and Mr. Prakash selling his entire stake. Educomp could continue holding something like 49% or atleast 26% stake in that business. The money that the new Investor brings in could help the K-12 subsidiary get back to growth ways. If Educomp does exit completely, I am sure there will be non-compete agreement too signed where Educomp will be barred from re-entering the K-12 business for a period of atleast 5 years or so. That too will be OK as Educomp can use these 5 years to get back to strong profitability and a strong Balance-sheet position and then look at re-entering the K-12 schools business in a measured way.

Either way you look at it, there are more positives in this deal than negatives.