A closer analysis of Jio’s finances suggests the profits are largely a function of its unique depreciation policy and its low interest cost, rather than high greater revenues or operating profit. Even in February 2018, Chris Lane and Neil Beveridge of Bernstein had flagged it in their report. “Jio's reported profit is due to a unique approach to depreciation and amortisation (D&A), which results in a significantly lower D&A expense than seen elsewhere in the industry. Applying 'normal' depreciation metrics would imply Jio's net loss would have been Rs 2,770 crore in Q2 FY18 and Rs 2,410 crore in Q3 FY18. Instead, the company reported small loss in Q2 (Rs 270 crore) that improved to a profit of Rs 500 crore in Q3," they wrote.
Things haven't change in FY19. In the first half of FY19, Jio’s depreciation expenses were 60 per cent that of Vodafone Idea and a third that of Airtel, even though the three reported similar assets (in the range of 5 per cent of each other) on their books in September.
According to Kotak Institutional Equity, adopting Jio's accounting method would boost the operating margins and reported profits of Airtel’s India wireless business. “Our exercise yields a 31 per cent higher Ebitda and Ebitda margin of 45 per cent and nearly 2.8X segment profits (EBIT) versus what Airtel reported during the first quarter of FY18,” the report said.
"Jio's depreciation is only 3.3 per cent of the total fixed (implying an average of 30 years to fully depreciate) whereas Idea's is running at 10.8 per cent (implying 9.2 years). Airtel’s overall assets are roughly 60 per cent higher than Idea's and its reported D&A is similarly 56 per cent," the Bernstein report said. These are based on the respective companies’ financials for FY18.
Jio’s bottom line also got a boost from its abnormally low interest cost. In FY18, Jio's interest expenses were just 4 per cent of its average annual debt of around Rs 53,000 crore. The corresponding ratio was 8.5 per cent and 8.6 per cent for Airtel and Vodafone Idea, respectively. In the first half of the FY19, Jio's interest expenses were a third of Airtel even though Jio’s total gross debt at the end of September 2018 was 91 per cent that of the latter.
Analysts attribute this to the accounting policy followed by the company. “Jio
says that currently its depreciation and interest costs are calculated on the basis that it is only utilising 20 per cent of its assets. As utilisation level increases, so will the expenses,” a telecom analyst said. In comparison, others follow a policy where entire assets and debt are accounted for irrespective of their utilisation. The analyst said Jio’s policy is compatible with accounting standards but is deemed aggressive from financial perspective.
A combination of lower depreciation and interest expenses allows Jio to report higher profit before and after tax even though Airtel leads the league table in terms of operating profit. For example, Airtel reported operating profit (Ebitda) of Rs 12,849 crore during H1 of FY19 on consolidated basis against Jio's Rs 6,801 crore. However, Airtel reported a loss of Rs 2,646 crore during the period against Jio's PBT of Rs 1,987 crore during the period due to higher outgo on depreciation and interest. In the same period, Vodafone Idea reported operating profits of Rs 4,378 crore and PBT loss of Rs 4,412 crore.
Analyst say that higher reported profits do not translate in greater cash flows from operations and Jio continues to burn cash and make fresh capex largely funded through debt like its other telecom peers. At the end of September, Jio's gross debt to equity ratio at 1.7x was similar to that of Airtel and Vodafone Idea.