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Jio: Was the risk as risky as being said?

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Ajeet Panigrahihttp://ajeetpanigrahi.blogspot.in
Analyst, Engineer, NITian, MovieHolic & Reviewer, Political Observer, Foodie

It was 1 September 2016 when Mr Sunil Mittal had a handful of laugh for the last time, as Mr Mukesh Ambani, was gearing up for a big fat announcement. Anticipations were high, and so were the expectations from him, as whenever they (Reliance) did something, they did it too big and always in a way overturned the market. Even that day the markets of their potentials competitors shattered, went down by almost 6-8% on an average, wiping out approximately INR 500 Cr (figure arrived as per average drop in share value and total equity capital) from their equity value in just one day which was not seen earlier, even during 2008 crisis.

On its launch, Mr Ambani made an announcement of investing INR 85,000 Cr into this new telecom branch of Reliance Industries, backed by its deep pockets (2,20,000+ Cr deep) that it has from its Oil business. However as per multiple reports, the investment has already crossed INR 1,50,000 Cr. And still Mr Ambani is pouring in money into Jio and doing some shopping, Saavn was bought recently and merged with Jio Music. With such huge investment, with competitors like Airtel, Idea & Vodafone and without such high potential of revenue per user (INR 120-150 per user) is was junked out by many as analysts as a suicidal investment.

However, in its 15th months of operation, Jio posted its first profit of INR 504 Cr. This shocked many as how is an investment of around 2 Lakh Crores make profit so early, in spite of starting its revenue collection only in 7-8th month of operation as for initial few months they gave away SIM and unlimited data and voice calls, all for free.

When seen preliminary in the beginning, it seems really tough to figure out the strategy. However when the links are studies and connected, all the dots seem to join and opens up the strategy being used and the best part is that, it could have been thought by others too. Simply put, the answer is Optical Fiber cables. Yes, this is their major part of strategy, combined with their ability to take bigger risk, backed by deeper pockets. Now lets see how this charts out their plan.

If one sees deeply, them one can notice that most of the investment done by Reliance Jio is towards laying optical cable fiber only. With initial investment alone it has almost covered all the major parts of the country. As Optical Fibers offer high speed (theoretically the speed of light) and very low maintenance, it explains why Reliance Jio invested big, only in 4G and not in 2G and 3G. Further, the Optical Fibers ensure minimum loss of data, thus there is minimum wastage of energy and maximum efficiency. As a result of this, it has the capacity to transmit heavy traffic at a cheaper cost and maximum efficiency, with a single time investment alone with low maintenance.

The most important question comes to mind is that with all that huge investment and optical fiber technology being used, will Jio be able to compete and make profit? As known, as on date Mr Ambani has invested almost INR 1,50,000 Cr and is still adding investment. With its current database of 15.2 Cr users, assuming a depreciation period of 15 years alone and a maintenance & operation cost of INR 3,300 Cr. per year (Low as optical fibers are low on maintenance and high on operational efficiency needing very less intermittent energy supply), it gives a cost of only INR 73.1 per user per month as the cost (inflation not considered to keep it simple).

However when the same is seen for Airtel, with a user base of 29.2 Cr, whose operational cost was INR 38,583 Cr for year 2016-17 and a depreciation cost of INR 12,203 Cr as per the P&L statement, it come around INR 145.2 per month. Further when the same is analysed for Idea, with a user base of 19.76 Cr, whose operational cost was INR 25,183 Cr for year 2016-17 and a depreciation cost of INR 7,700 Cr as per the P&L statement, it come around INR 138.7 per month. So it is clear that the investment done by JIO is competitive and is definitely going to make profit.

Further if we see the trends in ARPU (Average revenue per user per month) as released by Cellular Operator Association of India for last 8 Quarters, it can be seen that it has been dropping continuously, almost dropping by 50%. This steady drop explains the fierce competition between various operators to offer services at lower charges, and in such competitions, only the one who can sustain long term and ensure profitability can go long. This clearly explains the recent trends of loss by operators in recent past and profitability by Jio too.

Thus, with above analysed and detailed, it can clearly be said that the huge sum of investment that Mr Ambani did in Reliance Jio was a well thought out plan and wasn’t as risky as being thought out to be. Further to add, the revenue of Jio will only increase as the optical fiber network has a higher capacity and can be used for other services too in parallel (like music sharing, movie streaming, etc). Thus its clear that Jio is here to stay and turnaround the market as expected. The only way for others to compete is to improve their own efficiency, lower operational energy demand, diversify services, and may be switch to optical fiber network or a better alternative.

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Ajeet Panigrahihttp://ajeetpanigrahi.blogspot.in
Analyst, Engineer, NITian, MovieHolic & Reviewer, Political Observer, Foodie

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