Q1FY20 Telecom AGR update: BSNL is on a surprise comeback

TRAI announced the Q1FY20 Financial Numbers for all Telecom operators a couple of days back. I have considered the Adjusted Gross Revenue (AGR) numbers for the Top-4 Telecom operators in my analysis. For Q3FY19, Vodafone Idea was No.1 (31.4% Market-share), Bharti Airtel was No.2 (30.7%), Reliance Jio was No.3 (29.2%) and BSNL+MTNL was No.4 (8.7%). Things have changed substantially over the last 2 quarters.

Vodafone Idea was expected to lose some market share as it is undertaking a massive Network Integration exercise since November'2018. This has resulted in Vodafone Idea slipping to No.3 position with 27.2% market share in Q1FY20. Bharti Airtel had lost it's No.2 position during Q4FY19 due to some one-off adjustments. It has now regained the No.2 position with a market share of 29.6%. Reliance Jio has jumped to No.1 position in Q1FY20 with a market share of 30.2%. But all these developments were more or less expected. What is surprising is the fact that BSNL seems to be on a strong comeback. BSNL+MTNL combine had reported an AGR of just Rs.2864 crores in Q3FY19, which jumped to Rs.3546 crores in Q4FY19, which was a Q-o-Q jump of about 24%. BSNL+MTNL combine has managed to post an even stronger Q-o-Q growth in Q1FY20 to improve it's AGR to Rs.4703 crores, which is a jump of almost 33%. This strong growth has resulted in BSNL+MTNL combine's market share improving substantially to 13% in Q1FY20.

If we compare the Q1FY20 numbers with Q3FY19 numbers, Bharti Airtel has managed to increase it's AGR by 5.5%, but lost market share by 1.1%. Vodafone Idea has seen it's AGR dip by 5.5%, resulting in it's market share dropping by 4.2%. Reliance Jio has reported an AGR increase of 13% and a market share increase of 1%. On the other hand, BSNL+MTNL combine has managed to increase it's AGR by 64%, resulting in it's market share increasing by 4.3%. BSNL has managed to post such strong growth entirely on it's own since MTNL's performance continues to be disappointing. It will be interesting to see if BSNL manages to continue to post healthy positive growth in the coming quarters. Over the last few months we have been reading many reports of BSNL delaying salary payments to it's staff due to paucity of funds. Government of India is seriously considering some major boost to BSNL, including handing over of MTNL's operations to BSNL. If this happens soon, BSNL will be able to improve it's services & presence in the 2 important Metro circles of Delhi & Mumbai. This should help to further improve BSNL's quarterly numbers. Let's wait & watch how things pan out in the coming quarters for BSNL.

Coming to Vodafone Idea, the company is expected to improve it's performance from Q2FY20 onwards. It's Network Integration work has progressed well over the previous 2 quarters and the company continues to rapidly Integrate the networks in more & more towers in various circles. Very soon we will see the company increasing it's marketing efforts to spread the word of it's Stronger & Larger Network in several cities across the country. Initially this marketing effort will be more localised, limited to only those cities where the Network Integration work is over and the capacity has been increased. As the company gets closer to achieving the Network Integration work in over 80-85% of it's towers across the country, then we will see Vodafone Idea pushing for large scale advertisements across various mediums. I am expecting this to start before the end of December'2019.

Bharti Airtel & Reliance Jio continue to aggressively market their services across the country & also continue to incrementally increase their coverage & capacity. While Bharti Airtel has started switching off it's 3G network from some locations and utilise that spectrum for 4G service, Reliance Jio is simultaneously working on rolling out it's wireline services on a commercial basis next month. This might reduce some of it's aggression on the wireless front and we could see some slow down in subscriber addition on Reliance Jio's Wireless network in the coming months.

The next data point awaited is the Subscribers data for the month of July'19, which should be released in the 3rd week of next month.

Do Share your thoughts on this report or Views on the points discussed. Awaiting your Comments.

Telecom: Q4-FY'17 Analysis: BSNL is the surprise Winner.

It was widely expected that Q4-FY'17 will produce the worst Revenue numbers for all telecom operators as Reliance Jio had extended it's Freebie offer till 31st March'17. Reliance Jio started adding subscribers on it's 4G-LTE networks in a big way from latter half of Q2-FY'17. Hence Q1-FY'17 numbers will become the benchmark for pre-Jio era. The Top-8 operators (Airtel, Vodafone, Idea, BSNL/MTNL, Tata Tele, Aircel, RCom & Telenor) together generated Adjusted Gross Revenues (AGR) of Rs.40,089 crores in Q1-FY'17. From that point onwards, the Industry AGR numbers have been on a downward trend in each of the next 3 Quarters so far, reaching a number of Rs. 33,149 crores in Q4-FY'17. That means Reliance Jio has managed to pull down the Industry's Quarterly AGR by nearly Rs.7,000 crores or about 17.5%, over the last 3 Quarters.

How did Reliance Jio manage to make such a large impact even when it's Active Subscriber Base market share reached just about 8% by the end of March'17? That is because of 2 reasons: Firstly, these 8% subscribers shifted almost their entire Mobile (Voice as well as Data) usage to Reliance Jio from their Primary operator; Secondly, in an attempt to hold on to their precious customer base, the existing operators had to make big changes to their tariff plans and introduce many new offers to attract attention of existing as well as new subscribers. In fact many of the attractive offers from the Top-3 players (Airtel, Vodafone & Idea) were given only to new subscribers, which led to millions of existing mobile users buying new sim cards just to avail these special one-time offers. This boosted the subscriber numbers of these operators at a time when Reliance Jio was aggressively eating into their usage market share. Ofcourse most of these recently activated sim cards, purchased only to avail the special one-time offers, will soon be thrown away once the validity period of the offers expire.

Between Q1 and Q4-FY'17, all telecom operators (barring 2) have seen substantial double-digit percentage drops in their AGR numbers. The Top-3 percentage losers are: Aircel (31.5%), Tata Tele (28.4%) and Telenor (24.3%). Each of India's Top-2 telecom operators, Airtel & Vodafone, have seen their AGR shrink by 19.4% between Q1 and Q4 of FY'17. Idea Cellular too lost 17.9% of it's AGR, more than the Industry shrinkage of 17.5%. Surprisingly, two operators managed to buck the AGR shrinking trend: RCom and BSNL, but their stories are different. RCom's Q1-FY'17 AGR number of Rs.1274 crores was already lower by 33% compared to it's year ago number of Rs.1864 crores. It dropped another 25% to report a number of just Rs.968 crores in Q3-FY'17. But the company has managed to pull it back smartly to Rs.1270 crores in Q4-FY'17. Could this pull back be a result of it's association with Reliance Jio for 4G-LTE services? This will only be confirmed if RCom manages to maintain this number or improve further in Q1-FY'18. Coming to BSNL/MTNL, the PSU combine has managed to post a 7.6% increase in it's AGR numbers between Q1 and Q4 of FY'17, which is really a surprising performance. Even it's Q2 and Q3 numbers were quite stable and Q4 number has been an improvement on both. The charts above clearly show how Public Sector combine of BSNL/MTNL managed to maintain it's Quarterly AGR numbers throughout the 3 Quarters of Reliance Jio onslaught, even when none of the Private Sector players could not save themselves from 17% to 31% erosion in AGR numbers over the 3 quarters.

BSNL/MTNL have managed this strong performance even without 4G-LTE service offering. It just did the basics right. Firstly, the operator worked on improving it's 3G networks at various important urban locations. Secondly, it worked on reducing the monthly Wireline surrenders and managed to report an increase in Wireline customer base in March'17. If this trend continues, it will give further push/stability to BSNL/MTNL's AGR numbers in coming quarters. Thirdly, BSNL/MTNL surprisingly made some very swift moves to introduce new Data Plans for both 3G as well as Wireline Broadband services and marketed the same over various mediums, both at local level as well as National level. This seems to be working for the company. If BSNL continues to strengthen it's 3G network in semi-urban and rural areas as well, then it could certainly prove to be a strong challenger to Reliance Jio and the Trio of Airtel-Vodafone-Idea. With Reliance Jio finally making it's service chargeable during the current quarter of Q1-FY'18, it will be very interesting to see how the numbers pan out for different operators over the next few quarters.

Telecom: Dec'16 Quarter AGR numbers - Who lost how much??

Soon after Reliance Jio's 1st September'16 announcement of commercial launch on 5th September'16 with Welcome Offer, I had presented my estimates expecting a drop of anywhere between 5 to 10% in Total Revenues compared to June'16 quarter numbers. I had also mentioned that the June'16 quarter numbers will continue to remain a benchmark for Quarterly Revenues for most operators for a considerable amount of time. We now have the December'16 Quarter AGR numbers for all Telecom operators in India. While most operators have reported a drop within my expected range, some smaller operators have even exceeded my expectations with over 10%. Let's have a quick look at the Quarterly Progress of AGR numbers for the Top-6 Telecom Operators in India, via the following charts:

Amongst all the Telecom Operators in India, only the Top-3 were posting a healthy rate of growth in Revenues until June'16, which is a well-known fact. It was also expected that the Top-3 operators (Airtel, Vodafone & Idea) will be the least affected by Reliance Jio's onslaught. Hence it becomes even more interesting to check whether these expectations have been met or not.

Let's start with India's No.1 operator: Bharti Airtel, which reported an AGR of Rs.12496 crores in Dec'16 quarter. This is a 8% Q-o-Q drop and 10.6% drop compared to the peak hit in June'16. In fact Airtel's Dec'16 number is nearly 2% lower than even Dec'15 number. For Bharti Airtel, the Top-5 circles which have reported the largest actual drop in AGR number for Dec'16 compared to June'16 are: Karnataka (Rs.223 crores), Bihar (Rs.163 crores), Rajasthan (Rs.133 crores), J&K (Rs.126 crores) and Delhi (Rs.106 crores). Punjab is the only circle where Airtel's Dec'16 AGR is slightly higher than it's June'16 AGR. The Top-5 circles in terms of largest Percentage Drops between the two quarters are: J&K (64.8%), Kerala (20.5%), Bihar (14.8%), UP-West (14.4%) and Rajasthan (14.2%). Airtel's largest circle in terms of AGR continues to be Karnataka despite the 13.9% drop in AGR from June'16 level. The Best-5 circles for Airtel, who have reported least change in AGR since June'16 are: Punjab (+2.1%), North-East (-3.5%), Kolkata (-4.8%), Tamil Nadu (-5.2%) & Andhra Pradesh (-5.9%).

Vodafone India reported an AGR of Rs.8305 crores in Dec'16, a Q-o-Q Drop of 5.1% and a drop of 7.8% compared to June'16 AGR. Vodafone India's AGR drop is certainly a better performance compared to Bharti Airtel, despite having lesser 4G coverage compared to the latter. For Vodafone India, the Top-5 circles which have reported the largest actual drop in AGR number for Dec'16 compared to June'16 are: Delhi (Rs.130 crores), Gujarat (Rs.105 crores), UP-East (Rs.100 crores), Maharashtra (Rs.74 crores) and UP-West (Rs.36 crores). The Top-5 circles in terms of largest Percentage Drops between the two quarters are: Delhi (16.2%), Himachal Pradesh (15.5%), Madhya Pradesh (14.6%), Haryana (12.9%) and UP-East (12.7%). The Best-5 circles for Vodafone, who have reported least change in AGR or reported Growth since June'16 are: North-East (+4.1%), Karnataka (+3.5%), Kerala (+2.2%), J&K (+1.8%) and Andhra Pradesh (-2.3%). Gujarat circle continues to be the highest AGR-contributing circle for Vodafone India, but is closely followed by Tamil Nadu & Maharashtra circles.

India's No.3 operator Idea Cellular reported an AGR of Rs.6958 crores in Dec'16, which is a Q-o-Q drop of 4.9% and a drop of 10.8% compared to June'16. For Idea Cellular, the Top-5 circles which have reported the largest actual drop in AGR number for Dec'16 compared to June'16 are: Madhya Pradesh (Rs.145 crores), Maharashtra (Rs.122 crores), Kerala (Rs.109 crores), UP-West (Rs.91 crores) and Andhra Pradesh (Rs.87 crores). The Top-5 circles in terms of largest Percentage Drops between the two quarters are: J&K (33.7%), Himachal Pradesh (26.9%), Bihar (17.2%), Haryana (16.1%) and Madhya Pradesh (15.4%). The Best-5 circles for Idea Cellular, who have reported least change in AGR or reported Growth since June'16 are: Kolkata (+45.9%), Tamil Nadu (+7.6%), Delhi (+6.8%), Karnataka (3.8%) and West Bengal (-2.9%). The Maharashtra circles continues to remain the largest AGR-contributing circle for Idea Cellular by a large margin.

BSNL+MTNL combine is probably the only operator which has reported no Q-o-Q drop in AGR and an improvement in AGR in Dec'16 when compared to June'16 AGR number. The PSU combine reported an AGR of Rs.3869 crores in Dec'16, which is about 4.9% higher compared to June'16 number. The volatility in Wireline Revenue numbers for BSNL & MTNL seems to have helped the operators to report an improvement in AGR for Dec'16. The spike in March'16 AGR followed by a sharp drop in June'16 number is proof of this phenomenon. Hence there is no point in studying the circle-wise numbers for BSNL & MTNL too seriously. One thing is quite certain, BSNL & MTNL combine is slated to report over 10% drop in AGR for FY'17 compared to FY'16 numbers.

Tata Teleservices was the biggest loser in the October-December'16 quarter in terms of number of subscribers lost. During the quarter Tata Tele lost nearly 8% of it's active (VLR) subscriber base or 3.65 million users. But despite being much much smaller than both Aircel & RCom in terms of number of Subscribers, Tata Tele's AGR for Dec'16 is still nearly 25% larger than Aircel and nearly 125% larger than RCom. This speaks volumes of the poor quality of Aircel & RCom's subscriber base. Tata Tele's Dec'16 AGR of Rs.2209 crores is about 12.7% lower Q-o-Q and about 15.7% lower compared to June'16 AGR. Tata Tele's AGR from 15 out of 19 operating circles has reported a double-digit percentage drops in Dec'16 compared to June'16. It has lost big time even in it's 3G circles. This alarming pace of revenue decline looks extremely scary. Tata Tele

needs to take some swift action towards consolidation or else it will have to die a very painful death. Operators like Tata Tele, RCom & Aircel can come together and offer 3G service in nearly all circles across the country. A good quality 3G service with aggressive pricing can certainly offer a good alternative for several price conscious subscribers across the country.

India is seeing some big consolidation moves in the Telecom sector, something which I had predicted over a year ago. Bharti Airtel has already gobbled up Videocon's Band-3 spectrum, Aircel's Band-40 spectrum and Telenor India's entire business is also being taken over. But the bigger consolidation move is that of Vodafone India with Idea Cellular, which could potentially create India's largest Telecom player, atleast for the time being. Even though the operators will continue to face pressure on Topline, this consolidation will help them rationalise their network resources and save atleast 20 to 30% of their operating costs. The combined entity will also be able to offer wider & stronger 3G/4G coverage across the country to combat competition from Reliance Jio as well as Bharti Airtel.

March'17 quarter is going to be even more painful for all telecom operators, thanks to the continued Free Services of Reliance Jio till 31st March'17. The real competition will start from April'17 onwards when Reliance Jio will finally start charging it's customers for availing it's services. But the new 4G-only operator is expected to remain extremely aggressive with it's pricing in it's effort to pile up large number of paying subscribers in the coming months. The AGR numbers reported by all existing telecom operators in June'16 will continue to remain the peak values for most of them for atleast another 4 to 6 quarters, if not more. I am expecting Reliance Jio to start with a AGR market share of nearly 15% in it's very first Revenue-Reporting quarter of April-June'17. And it will continue to build on it from there with an aim to be the No.1 player in another 3 to 4 years time.

Bharti Airtel Q3 Numbers - Finer Details

I was anxiously waiting to have a look at Bharti Airtel's Q3 numbers last evening as this is the first quarterly result to have full impact of Reliance Jio's launch momentum. The numbers for Q2 only had partial impact due to Jio. And the numbers have turned out to be exactly as per my expectations. Ever since Jio's launch on 5th Sept'16, I had estimated a drop of between 5 to 10% in Revenues for both Bharti Airtel & Idea Cellular, when compared to their numbers for June'16 quarter. As it turned out, Bharti Airtel's Revenues from India Mobile services business has dropped just over 8% from Rs.15,053 crores to Rs.13,837 crores. Bharti Airtel's Consolidated Total Income is also down by 8.5% during the same period at Rs.23,416 crores. The drop in Non-India Revenues is mainly due to exit/mergers from a few markets in Africa and South-East Asia. Bharti Airtel's Non-Mobile India revenues posted some decent growth, which helped reduce the impact due to drop in Data as well as Voice Revenues from it's India Mobile business.

Getting to analysing the finer details of Traffic & Financial numbers of Bharti Airtel for October to December'16 quarter, it is very important to note that the impact on revenue flow for the operator due to Reliance Jio must not have been uniform for each of the 3 months. The impact must have been the smallest in October and the largest in December. Reliance Jio had about 16 million users at the start of the quarter, while it is estimated to have ended the quarter with about 70 million users. That means the 4G competitor added an average of about 18 million users every month. Also if we look at the overall user experience of Reliance Jio's services, it was pretty bad in most parts of the country during the first half of the quarter, with over 75% of the Voice Calls attempted from Jio numbers to non-Jio numbers failing to connect. Even the Data speeds on Jio's 4G network was quite patchy & inconsistent due to huge number of users abusing the network with full utilisation of FUP limits. Hence during the first half of the quarter, most Jio users must have required to recharge & use their primary mobile numbers, which must have been from one of the other operators (including Airtel). The user experience on Reliance Jio's network improved dramatically from the middle of November'16, when most Voice Calls to non-Jio numbers were getting connected on first or second attempt. Even the Data speeds became more consistent, though it was not as fast as expected, but fairly use-able. Hence the latter half of the Oct-Dec'16 quarter is when the older operators must have suffered the most slowdown in revenue flow due to Reliance Jio's Free services. Not just Data usage, but a substantial portion of Voice usage too must have shifted to Jio.

Have a look at the chart alongside, which shows the progress made by Bharti Airtel's Consolidated Quarterly Total Income since the December'13 quarter onwards. Notice the sharp slide after hitting a peak value of just over Rs.25,500 crores in June'16. The figure for December'16 quarter is even lower than that for June'15 quarter. That means the gains made by Bharti Airtel over 4 or 5 quarters upto June'16, have been wiped out in just 2 quarters. And things are expected to get even more worse for March'17 quarter as Reliance Jio's Free services have been extended till the end of March'17. At the current pace of revenue erosion, I am expecting Bharti Airtel's Total Income to fall to something around Rs.22,000 crores, if not lower, for the March'17 quarter. Airtel has managed to limit the damage to it's EBITDA via some smart Cost-reduction measures during the Dec'16 quarter. But there may not be too many cost-cutting avenues left as it cannot compromise much on the quality of service aspect. This erosion in revenues will stop only when Reliance Jio starts charging for it's services and we get to see some fair tariff-based & quality-based competition amongst all players.

Coming to Users & Usage statistics, this is probably for the first time since Wireless Broadband services over 3G/4G networks were launched, when Bharti Airtel has reported a Q-o-Q drop in number of 3G/4G users as well as the amount of GBs carried by it's network during the

quarter. The volume of GBs consumed by Airtel's customers was growing at a compounded double-digit Q-o-Q Growth rate until September'16. But it has seen a Drop of 3.5% during December'16. This drop in Volume, coupled with another 10.5% Q-o-Q drop in Rate per MB, meant that Bharti Airtel's Revenues from Wireless Data services have taken a hit of about 14% Q-o-Q. Bharti Airtel's Average Rate per MB has now dropped to just under 18 paise, which translates to about Rs.180 per GB. We all know that the Average Rates for most of the heavy Data consumers of almost all operators have now dropped to something around Rs.100 per GB or even lower. Hence I won't be surprised if Bharti Airtel reports an average Rate of around 12 to 14 paise per MB for the March'17 quarter. To compensate for this 25 to 30% drop in average realisation per MB, the volume needs to increase by a similar pace. But it certainly looks difficult in the current scenario and hence we can expect easily another 15 to 20% Q-o-Q drop (if not more) in Revenues from Wireless Data services for Bharti Airtel's India business for March'17 quarter.

Going by the way we have seen improvement in Reliance Jio's user experience since the start of the new calendar year, especially on the Data services front, it is very unlikely that a user of Reliance Jio will pay anything to other operators for availing Data services, atleast till the end of March'17. Most of the owners of 4G Smartphones across the country have already taken a Reliance Jio Sim, atleast as a secondary connection. There won't be much revenue coming to any of the incumbent operators for availing Data services. Operators like Airtel/Vodafone/Idea have been trying their best to entice buyers of new 4G Smartphones with Special Offers of something like 10 GB 4G-Data for the price of 1 GB or the latest offer from Airtel, which offers additional 3 GB 4G-Data every month for a period of 12 months on certain recharge plans, for users upgrading to 4G Smartphones until the end of February'17. All such efforts are being made with an aim to increase usage on their networks and maintain some decent level of ARPU from active users. 

At the same time, these older operators are aggressively trying to attract 2G & 3G users of smaller operators with competitive Voice &

Data tariffs. With intensifying competition from larger rivals with much wider network coverage & matching tariffs, survival will get more & more difficult for smaller operators. I think the shift is already happening at a healthy pace. But there is bad news for the incumbents here as well. There are rumours floating around that Reliance Jio is planning to launch 4G-VoLTE enabled feature phones at aggressive price points of under Rs.1500/-. This coupled with Unlimited All-India Calling & Roaming plans, Reliance Jio could start grabbing market share even in the feature-phone users space, which is still pretty large in our country. I am expecting the launch of the 4G-VoLTE enabled feature phones to align with the point when Reliance Jio starts charging for it's services. This launch will only mean more trouble for incumbents and other smaller operators.

For the December'16 quarter, Bharti Airtel did manage to post some decent growth in Voice minutes. But this growth was powered by the surge in Incoming Calls from Jio network. This resulted in lowering of average realisation rate per min more than the increase in Volume, hence resulting in a small drop in revenues from Voice services as well. Until now most Jio users are using their Jio Sim as a secondary connection. As and when large number of users start porting their primary numbers to Jio network, the Voice service revenues for all existing operators will start getting impacted even more. The Q3-FY'17 results for Bharti Airtel have now given us a fairly good idea of the kind of pain all operators are expected to go through over the next few quarters. Yes, things are expected to remain painful for not just one or two quarters, but for atleast 4 to 6 quarters. We can expect things to stabilise & bottom out Bharti Airtel & others, sometime by the end of 2017 and start improving from first half of 2018 onwards. All eyes are now on Idea Cellular's Q3 numbers. Story is expected to be similar for India's No.3 operator. But it doesn't have the cushion of Non-Mobile services that Bharti Airtel has. Hence Idea Cellular will most probably report slightly larger drops.

Reliance Industries Ltd. - Segmentwise Numbers Progress

India's No.1 company in terms of Annual Net Profits as well as Market Capitalisation, Reliance Industries Ltd., announced it's Q3-FY'17 numbers yesterday. The numbers were fairly good & mostly in line with expectations mentioned by most analysts. In my report here I will focus on things which are generally not mentioned anywhere else. I like to study the progress of a company on a Trailing-Twelve-Months (T-T-M) basis. The study of T-T-M numbers over a period of last 2 or 3 years gives us a fairly good idea of the company's performance trend.

Before we get to the Segment-wise Numbers, first lets quickly have a look at some of the key Consolidated numbers for Reliance Industries Ltd. The following charts are showing the T-T-M progress of RIL's Total Income, EBITDA, Interest Cost & Net Profit figures starting from the period ending December'13 upto period ending December'16. Have a look at the charts:

After hitting a peak of about Rs.4,50,000 crores in June'14, RIL's T-T-M Total Income figure saw a sharp slide and finally bottomed out at about Rs.2,86,000 crores in June'16. There was nothing wrong with the company's performance during this period. The sharp drop in Total Income was purely due to sharp drop in Product prices. 90% of RIL's turnover is contributed by Refining, Petrochemicals and Oil&Gas Production businesses, all of which derive it's product prices from Crude Oil. The Crude Oil prices had started sliding during the 2nd half of the year 2014 and bottomed out sometime in the early part of year 2016. With the Crude Oil prices slowly moving up over the last couple of quarters, we can already see RIL's T-T-M Total Income figure also reflecting the trend. RIL's T-T-M EBITDA chart gives us a better idea of the kind of performance RIL has managed even during the falling product prices regime. While RIL's Total Income started sliding after June'14, it's EBITDA was quite steady around the Rs.45,000 crores mark till September'15, which means the company was able to protect it's profits comfortably even when product prices were falling as it managed it's raw material cycle too very well.

After September'15, RIL has seen it's EBITDA margins genuinely expand from improvement in process efficiencies at both it's Refining as well as Petrochemicals units. Reliance Industries Ltd. has been undertaking a massive CAPEX program for it's Petrochemicals complex, which is expected to help the company improve it's cost efficiency substantially, which will in turn help the company expand it's profit margins. The commissioning of the CAPEX program has started a few weeks ago & will be done in stages over the next few months. We should start seeing it's impact on the company's results from Q4-FY'17 onwards. On one side we will see RIL's EBITDA from it's primary businesses of Refining & PetChem expand over the next few quarters, but we should also be mindful of the fact that RIL's single largest CAPEX program in it's entire history, Reliance Jio Infocom Ltd, is also expected to start billing it's customers from Q1-FY'18. The commissioning of Reliance Jio Infocom Ltd. is expected to be EBITDA negative for the initial year or two. Hence there is a strong likelihood of RIL reporting a Y-o-Y drop in Consolidated EBITDA for a few quarters, starting from Q1-FY'18. Apart from the drop in EBITDA, RIL will also see it's Interest Cost and Depreciation provisioning shoot up substantially from current levels, which might result in wiping out of most of it's Net Profit, atleast for a few quarters. The first couple of quarters of RJIL's commissioning will be the worst for RIL's financial numbers, but things will progressively improve at a rapid pace after that.

Segment-wise Revenue Performance: Currently RIL reports it's results distributed over 5 segments: Refining, Petro-Chemicals, Oil & Gas, Retail and Others (which includes it's Media & Broadband businesses). Once RJIL (Jio 4G) starts billing it's customers, it will form a separate segment.

Let's look at T-T-M progress of RIL's 4 basic operating segments (excluding Others). RIL's primary businesses of Refining & Petrochemicals continue to contribute nearly 90% to the company's Revenues and are responsible for the entire Net Profits. In fact the company is using strong Cash Flows from these businesses to help support & fund it's investments into newer avenues like Media & Telecom.
Refining business of RIL has seen it's T-T-M revenues falling from a peak level of little over Rs.4,00,000 crores to around Rs.2,25,000 crores levels (a drop of about 45% from the peak), which has been steady since the last 3 quarters. Despite the Q-o-Q rise in Crude Oil prices over the last couple of quarters, we are yet to see a noticeable uptick in RIL's T-T-M numbers, mainly because there has not been any significant change in Y-o-Y prices of Crude Oil. Jan-Mar'16 was the quarter when Crude Oil prices had hit the lowest levels in recent years of less than $30 per barrel (though for a short duration only). Hence if Crude Oil prices stay at current levels of $50+ levels during this current quarter, we could see RIL post healthy Y-o-Y growth in Revenues from it's Refining business.
The Petrochemicals business of RIL has done far better than it's Refining business. The T-T-M revenues from RIL's Petrochemicals business dropped just about 20% from it's peak values, bottomed out by the end of June'16 quarter and has already started posting healthy Y-o-Y growth, which is clearly noticeable in the charts. With completion of major CAPEX investments into the Petrochemicals business and it's commissioning, we could see momentum building up further in RIL's Petrochemicals revenues and even bigger momentum in it's profits from these units.
The Oil & Gas production business has faced an even bigger brunt of the fall in Crude Oil prices as it suffered from not just price crash, but even the production at several of the units had to be curtailed temporarily as it because economically unviable to produce when prices were under $45 per barrel. Over the last few months, the Crude Oil price has remained above the $45 levels quite consistently with not much of wild swings as before. Hence many of the Shale Gas units, which had shut production last year, could start producing again now. Any recovery in Revenue levels for RIL from this business will depend on Crude price stability above a certain level and the way the production is ramped up at producing fields.
The Retail business of RIL was growing it's T-T-M Revenues at a steady pace of around 4% Q-o-Q until March'16. This was a healthy growth rate given the extensive competition in this field from not just other Retail chains and standalone stores, but also from the e-commerce biggies. Over the last 3 quarters RIL's Retail business has been posting much faster growth in Revenues, thanks to increased footfalls in it's stores, especially the Reliance Digital stores for Jio Sim cards and LYF devices. Reliance Retail has also started supplying it's devices to other standalone mobile stores in thousands of smaller towns since about June-July'16. RIL's Retail business is now very close to hitting the Rs.30,000 crores T-T-M turnover mark and going by the healthy expected growth pace, we could very well see it hitting the Rs.40,000 crores turnover mark anytime over the next 3 to 5 quarters.

Segment-wise Profit (EBIT) Performance: The charts representing T-T-M Profit (Earnings Before Interest & Tax) for RIL's different segments

show quite different patterns, especially for Refining & Petrochemicals businesses. RIL's Refining business has seen a sharp improvement in it's T-T-M Profits from levels of about Rs.15,000 crores in December'14 to levels of just over Rs.25,000 crores since the last couple of quarters. The trend of increasing profits seems to have come to a halt now as we can see a plateau formation since the last 3 quarters, which has somewhat coincided with trend reversal in Crude Prices. I think it will be an achievement even if RIL manages to keep it's T-T-M Profits from Refining business steady at current levels even during the period when Crude prices are rising. The Refining business is the main Cash Generator for RIL and hence even if it manages to keep the figure steady at around current levels, it will be a very big positive for the company overall.
The T-T-M Profits from Petrochemicals business of RIL started reporting smart growth from the June'15 quarter onwards. The Profit number has already seen a near 50% increase over the last 7 quarters. The trend of increasing Profits from Petrochemicals business is expected to continue at a healthy pace, given the fact that the CAPEX commissioning is underway. I am expecting RIL's profits from Petrochemicals business to grow atleast another 50% from current levels over the next 3 to 5 quarters.
The T-T-M Profit figures for RIL's Oil & Gas Production business only reflect the disastrous period it has faced over the last 6 to 8 quarters due to falling Crude Prices. In fact curtailment of Production has helped limit the losses to not-so-significant levels. I think we will a trend reversal in these figures after another one or two quarters, provided that the Crude Prices remain steady at current levels of improve further.
RIL's Retail business is doing pretty well on the Profit front too, especially over the last 3 quarters. The T-T-M Profit figure from the Retail business currently stands at about Rs.670 crores. Given the strong growth momentum, I think it will hit the Rs.1000 crores mark in the next 3 quarters for sure. And there is scope for continued long term double-digit Y-o-Y Growth in this business even after that.


Telecom Venture: Reliance Jio Infocom Ltd ( RJIL )has been in the news on a regular basis and it's 'Jio' branded 4G services have been in limelight since Aug-Sept'16. As per latest reports, RJIL has already enrolled over 72 million users for it's 4G services across the country and the number is expected to be around 90 to 100 million by the end of March'17. The primary reason for such a large number of users enrolling for Jio 4G services within a span of just a few months is that it is currently offered FREE. As per latest announcement, the service is expected to remain FREE till 31st March'17. This means that during this period, eventhough RJIL incurs all the operational costs of keeping the network online and continue expanding the coverage & capacity, it will not earn any revenue till the end of the FREE period. Starting from 1st January'17, users of Jio 4G service are entitled to 1 GB of Data at 4G speed per day, after which the speed is restricted to 128 kbps. The users have the option to unlock 4G speed again by recharging their account with Rs.51 (for 1 GB data) or Rs.301 (for 6 GB data). The revenues from these recharge options is expected to be negligible till 31st March'17.

As per my estimate, RJIL's Operating Costs (including Interconnect Cost) to keep the Network online must be easily in the region of Rs.1500 to 2000 crores per month, if not more. That means a sum of around Rs.4500 to 6000 crores per quarter is being spent, without earning any revenue from the 4G service being offered. Remember that the expenditure amount mentioned above excludes the Interest Cost on the Debt raised for this venture. All these Expenditures & Interest Costs are currently being Capitalised and will start getting amortised once RJIL's numbers start getting Consolidated into RIL's Profit & Loss account. All this is expected to hurt RIL's Consolidated numbers very badly once it starts recognising RJIL's numbers. The first couple of quarters will be the worst when RJIL's Net Loss could potentially wipe out RIL's Net Profit from other business segments. Things are expected to steadily improve after that, but the pace of improvement will certainly depend on competitive pressures in the industry. The telecom competitors will also react to whatever tariff plans RJIL finally comes up with and hence it will take not just aggressive tariff plans, but also aggressive marketing to get the revenue momentum going. As per my rough estimates, RJIL needs a minimum Average Revenue Per User (ARPU) per month of Rs.300 from about 100 million Paying-Customers to be able to close to covering all it's Operating Costs and Interest Costs.

In the mean time, this extended FREE service period of RJIL is forcing consolidation within the Industry at a rapid pace. Some smaller operators have sold off their auction-purchased 4G-capable spectrum to larger operators. A few other smaller operators are trying to merge together & form a larger force in the market. A couple of other smaller players are still confused on what to do, but their weak financial position will also force them to either merge themselves with a larger operator or shut-down operations in loss making circles & focus on select strong circles. All this consolidation or shut-downs are expected to benefit all the larger operators over the medium to long term, including RJIL. Even though rumours are currently flying that RJIL is likely to extend it's existing offer in slightly altered form beyond 31st March'17, I believe that the more RJIL delays charging it's customers for service, the more damage it is causing to it's image as well as finances. It is quite obvious that RJIL is currently pushing for certain 'Records' in terms of customer enrollments and Network Usage statistics, etc. At the same time it is trying to cause maximum damage to competition. RJIL is able to do all this only because of it's Cash-rich parent's backing. But Regulatory & Financial sense will ultimately prevail and hopefully we should see Fair competition soon.