Reliance Jio’s Next 100 Million Subscribers Won’t Be So Easy

Well done, Mukesh Ambani. In just 170 days, India’s richest man signed up 100 million customers to his fourth-generation mobile service. This growth, hurting rivals and setting off a wave of industry consolidation, was explosive but predictable – Reliance Industries Ltd. d’Ambani offered Jio for free.

Time taken to reach 100 million Jio subscribers? 170 days. Progress will be more difficult now.

The existing median revenue per user of major Indian telecom operators such as Bharti Airtel is around $4.50 per month, according to Credit Suisse Group AG, very close to Ambani’s announced launch price. This median is set to drop as rivals try to prevent their highest-paying customers from switching to Jio.

If Ambani can double the number of subscribers and get at least $4 from each one, investors who have endured seven lean years will get a decent harvest. Anything less, and Wednesday’s market euphoria on Reliance could be short-lived.

Reliance Jio Prime Subscription Plan: Everything You Need to Know

The cost of Jio was a drag on Reliance’s valuation. Five years after leaving the original mobile business to his younger brother as part of a family settlement, the oil mogul returned to the field in June 2010. At the time, analysts expected spend $5 billion. But the next-generation Internet data network he built cost five times as much, and Ambani isn’t done yet.

By 2019, Jio could account for around $30 billion (around Rs 2,00,464 crore), or 40% of the total capital employed at Reliance, with energy and petrochemicals making up the rest.

A dollar of capital in Indian telecom operators produced about half a dollar of sales, according to Saira Ansari of IDFC Securities in Mumbai. This may no longer be possible because of the price war. Suppose Jio aims to generate $10 billion in revenue from $30 billion in capital. With each subscriber earning $4 a month, or about $50 a year, it would take 200 million subscribers to reach that goal.

And this doubling of the subscriber base may still not delight investors. Ansari’s rating assumes a pre-tax (pre-interest) margin of 28%, above the industry average. This $2.8 billion Ebit will result in a return of more than 9% on $30 billion of capital, compared to the double-digit returns the company was seeing before embarking on the Jio investment.

Jio Prime Plan may retain users, but it’s not the right strategy, analysts say

Yet, as Ambani says, data is the new oil. Extending this analogy, the “refining margin” the tycoon can earn from a customer who uses the service to watch Facebook videos can be low, while it can be high for those who dip into their Jio accounts who will be launched soon. Payments Bank to fill their JioMoney mobile wallets to pay for Uber rides.

To win in fintech, Ambani may need to invest even beyond his current plans. However, that conversation with investors has to wait. For now, shareholders are just happy that the lean years are over – even if the big guys aren’t here yet.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

© 2017 Bloomberg L.P.


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