Ambani's First Jio Profit Is ‘Too Good to Believe’ for Bernstein

Updated on
  • Unique approach to depreciation helps supress costs: Bernstein
  • Company says accounting based on applicable Indian standards
Photographer: Sanjit Das/Bloomberg

Reliance Jio Infocomm Ltd.’s first-ever net income is “a bit too good to believe” for Sanford C. Bernstein analysts, who examined how the phone carrier accounts for some costs.

Jio’s “unique approach” results in a slower pace of recognizing depreciation and amortization, which led to a 12 billion rupee ($187 million) charge in the December quarter, according to a Feb. 2 Bernstein report. Using a rate similar to local rivals would have quadrupled that number and turned Jio’s reported profit into a loss of 24.1 billion rupees, analysts led by Hong Kong-based Chris Lane estimated.

In its response, Jio said the accounting statements were based on the applicable Indian Accounting Standards.

“The accounting treatment has been reviewed and approved by the audit committee of the company and also specifically reviewed by the auditors,” the company said in an emailed statement.

The carrier, controlled by India’s richest man and a unit of Reliance Industries Ltd., posted a net income of 5.04 billion rupees last quarter, about 16 months after its debut sparked an industry price war that crashed revenues. The result was boosted by Jio’s policy, linking depreciation charges to “its own assessment” of usage and economic benefit, while other Indian carriers amortize telecom assets at a fixed rate over time, Morgan Stanley said in a Jan. 21 report.

“It’s part of accounts engineering. The assets will depreciate over time whether you use them or not, whether you use them partially or fully,” said Anil Singhvi, founder of Ican Investment Advisors Pvt Ltd. This approach is “just a way of saying I’m profitable sooner,” he said by phone, adding that the focus should instead be on cash flows.

Reliance shares traded 0.3 percent higher at 894.40 rupees in Mumbai on Wednesday, while the benchmark Sensex weakened 0.3 percent.

Billionaire Mukesh Ambani’s telecom unit launched with free services in 2016 and went paid 10 months ago. Morgan Stanley estimates Jio will turn cash-flow positive in the 12 months through March 2020.

To read Andy Mukherjee’s column on Jio’s Verizon strategy, click here

Bernstein analysts pinned Jio’s profit down to three factors: lower network costs possibly due to favorable tower-sharing deals, reduced interconnect fees and its method of accounting for depreciation which “stands out as an anomaly” when compared to global peers.

On The Rise

Jio has been adding subscribers every month and narrowing gap with larger rivals

Source: TRAI data compiled by Bloomberg

Jio, which had 152 million subscribers at the end of November, has elbowed aside rivals to become the nation’s No. 4 wireless carrier. Bharti Airtel Ltd. is in the top spot with soon-to-be-merged Vodafone India Ltd. and Idea Cellular Ltd. at No. 2 and No. 3 respectively.

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