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Event update: Telecom - Key highlights from RJIO’s FY18 annual report

Reliance Jio’s (RJIO) FY18 annual report continues to reflect high capital intensity and continued expansion of capital employed to fund business expansion. Management remains committed towards its strategy of building a digital services play. We note that cash conversion has been about 53%, and capex of Rs357bn in FY18 was funded through preference shares and debt. We believe the company may need to expand its capital base to fund capex in FY19 and accommodate RCOM acquisition if the current cash conversion continues despite improved EBITDA.

Commentary indicates a push towards RJio becoming an integrated digital play

RJIO remains focused on building an integrated offering to create a digital services play, as seen from the company’s annual report commentary. As per RJio, India’s rural internet penetration is still low at 15% and the company believes there is enough room for growth, given its view that users usually surf the internet through mobiles. India’s smartphone penetration (35%) is skewed with top-30 cities accounting for 51% of the entire smartphones. RJIO is targeting 99% population coverage this year.

Capital intensity remains elevated

Capex intensity continued in FY18 with RJio reporting capital investments of Rs357bn versus Rs385bn in FY17. The gross block of RJIO stood at Rs2.25tn; 30% of this is still in CWIP, which stands at Rs700bn. CWIP include Rs137bn in capital goods inventory and Rs132.7bn was towards project development expenditure (Rs151bn and Rs381bn, respectively, in FY17).

Cash conversion (CFO/EBITDA) trails peers

RJIO generated Rs35.7bn of CFO , and cash conversion stood at 53% for FY18. This is slightly behind peers, especially given that telecom is largely a pre-paid market with negative working capital. The company met the funding gap of Rs323bn through Rs313bn of preference shares and the remaining through borrowings.

Capital employed expanded to Rs2.46trn

Total capital employed rose up from Rs1.98trn in FY17 to Rs2.46trn in FY18. We find RJIO’s source of capital unique in some sense, as capital expenditure creditors stood at Rs521bn or (21% of capital employed). The company funded Rs1trn through equity and the remaining through debt.

Contingent liabilities and related party transactions

The company reported Rs20.4bn of finance costs in its FY18 P&L statement, net of capitalised borrowing cost of Rs58bn (FY17 Rs70.6bn). Contingent liabilities stood at Rs33.6bn. However, commitments on contracts to be executed but not paid for stood at Rs344.5bn versus Rs175bn in FY17 – reflecting upcoming capex. Additionally, lease commitments, largely pertaining to cell sites, stood at Rs230bn versus Rs163bn in FY17 but interestingly, 62% of these minimum lease rentals payable are under five years. Related party transaction remains high as RJio sells all recharges through Reliance retail (Rs239bn- FY18) and paid Rs5.3bn as commissions.