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RJio’s FY21 ARA key takeaways:

1) Non-Reliance Retail revenue stable at 9.5% of total revenue despite sharp jump in mobile recharge revenue on tariff hike. It was Rs71bn in FY21, 2) cost inflation was high, but still rental cost was much below expectations on rise in payment to InvIT, therefore, high inflation in cost will continue for few more years until the entire payout to InvIT normalises; 3) relatedparty contribution in expenses rose sharply; 4) cash tax payout dipped 88%, while PBT rose 111%; 5) net debt to EBITDA rose to 2.9x if we include spectrum payment / debt committed in Mar’21; and 6) capex stable at Rs142bn, but capex intensity dipped to 20.4% of revenue. RIL AGM is on 24th June, 2021 and the key to watch will be 1) low-end smartphone launch; 2) update on 5G rollout; 3) enterprise services for large corporates and 4) plans for digital business.

* Non-Reliance Retail revenues jump.

RJio’s revenue grew 28.7% YoY to Rs699bn in FY21, while advanced received from Reliance Retail (adjusted for 18% GST) rose 28.6% YoY to Rs628bn. Revenues earned from non-Reliance Retail jumped 28.9% YoY to Rs71bn. Non-Reliance Retail revenue contributes 9.5% to total revenue; we have no clarity on the nature of this revenue. Non-Reliance Retail revenue contributed only 0.9% to total revenue in FY19; in the past two years, it has risen to ~9.5%.

* Costs had higher inflation; likely to sustain.

Expenses, excluding regulatory cost such as license fees and access charges, rose sharp 25% YoY to Rs266bn. This was driven by rise in network operating cost by 30% YoY to Rs221bn. Surprisingly, employee cost and selling & distribution (S&D) cost dipped 8.6% and 8.2% YoY, respectively. Network opex rose from rise in 1) rental cost (adjusted for Ind AS 116) by 10% YoY to Rs104bn; 2) power & fuel cost was up 15%, 3) repair & maintenance cost rose 57% YoY to Rs17bn; and 4) other expenses (including fibre usage) grew 178% YoY to Rs38bn.

It looks likely that some of the cost paid to tower and fibre InvIT is still getting capitalised; payment to InvIT is likely to rise sharply over the next 2-3 years at least, thus keeping pressure in incremental EBITDA margin. S&D cost, includes commissions paid to Reliance Retail, for FY21 is lower than the commission paid to Reliance Retail as per related-party transactions; commission to Reliance Retail has grown 72% YoY to Rs14bn.

* Rising related-party transactions.

1) Summit Digitel (tower InvIT) is not strictly a related party, but RJio is the largest customer (or sole customer). Revenue, which includes rental and pass-through (energy cost), for Summit Digitel rose 10.3% YoY to Rs82bn. This was lower compared to tower InvIT document disclosure which implied rental cost increase of Rs14bn in FY21 compared to Summit revenue rise of just Rs7.7bn. Summit Digitel net debt dipped by Rs36bn to Rs333bn in FY21, but net debt to EBITDA is still high at 10.9x.

Summit Digitel contributed 45% of rental and power & fuel cost of RJio in FY21; 2) fibre InvIT – though we don’t have much detail, but other expenses within network opex grew 178% YoY to Rs38bn; majority of it should be due to payment to fibre InvIT. Nonetheless, it is still significantly lower compared to the details provided in fibre InvIT document; 3) commissions paid to Reliance Retail are higher than the entire S&D cost; compared to average 64% of S&D in previous three years; 4) other expenses – related party contributed 67% of total cost (34% in FY20). Related-party cost rose 158% YoY to Rs13.6bn in FY21 while non-related party cost dipped 36% YoY to Rs6.6bn.

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