What Reliance Jio InvIT Offers Investors
What Reliance Jio InvIT holds for investors...
Mukesh Ambani’s Reliance Industries Ltd. hived off most of its fibre assets and towers into an infrastructure investment trust to reduce debt, hoping that investors seeking a piece of its telecom bet will find it lucrative.
It retained some strategically important assets, such as last mile-fibre and electronic items. Together, these assets were part of its 100 percent subsidiary Reliance Jio Infocomm Ltd., - the disruptor that unleashed the cheap data boom in the world’s second-largest telecom market.
And while Jio’s explosive growth presents a revenue opportunity for the InvIT, it may be the only opportunity the trust has.
Does the infrastructure investment trust (InvIT) present an attractive investment opportunity for investors? BloombergQuint takes a look:
First up - here are the assets and liabilities of the InvIT.
Reliance invested close to Rs 1,25,200 crore in towers and fibre, and values them at Rs 2,03,300 crore. The higher valuation was based on studies done by an internationally reputed expert firm, said the company in its presentation. However, it did not provide any details on computation or reasons.
The trust issued preference shares worth Rs 78,100 crore to parent Reliance Industries to make up for the gap. As of now, the preference shares carry no coupon and are last in the pecking order for debt servicing.
Reliance Jio transferred liabilities worth Rs 1,07,300 crore to the InvIT. Together with the preference shares, the total debt adds up to Rs 1,85,400 crore.
High Interest Liability
Reliance Jio is currently the only user of all the towers and 50 percent of the fibre for the next 20 years, but it’s open to sharing these assets with other customers. That’s crucial because the trust is not likely to generate enough revenue through Reliance Jio alone.
Here’s why: the InvIT will pay 8.5-9.5 percent interest on its debt worth Rs 1,07,300 crore. The average yearly interest cost works out to about Rs 9,657 crore or about 64 percent of Reliance Jio’s FY19 operating income.
And that doesn’t include any potential payouts on preference shares.
Limited Revenue Potential
While Reliance Jio hasn’t disclosed the rental it will pay the InvIT for use of towers/fibre, in 2018-19 tower company Bharti Infratel earned a monthly average of Rs 36,886 per tower per operator. Assuming that Reliance Jio pays a similar rental for using the towers, the investment trust would earn an annual revenue of Rs 7,700 crore. The fibre-related income is tough to compute due to lack of benchmarks.
The combined rental income will have to cover interest costs as well as costs towards maintenance, administration and additional capital expenditure.
The trust has two routes to enhance revenue - by adding new infrastructure to support Jio’s explosive growth, but that will require additional capex.
And, by adding new customers.
Except, the chances of other operators using the InvIT’s infrastructure are slim.
Bharti Airtel Ltd. and Vodafone Idea Ltd. already have tower contracts with Bharti Infratel Ltd. According to their agreement, operators will have to approach Bharti Infratel first for any new tower requirement in the next five years and renew at least a third of their tenancies in the expiring year on current terms.
In addition, there are government-owned entities like Bharat Sanchar Nigam Ltd. and Mahanagar Telephone Nigam Ltd. with captive towers, which they are looking to share. Besides, there is another private player -- American Tower Corp that also owns towers in India.
Also, both Bharti Airtel and Vodafone Idea have 4.3 lakh kilometres of fibre assets of their own.
As other telecom operators have their own fiber assets and tower contracts, it is unlikely that the Reliance Jio InvIT will get external tenancies any time soon, Rajiv Sharma, co-head of institutional research equities at SBICAP Securities, said. “Also, other users might not find much value in using these fibre assets as Jio has not transferred the last-mile fibre to the InvIT.”
Investors invest in InvITs to earn a stable yield income. But the lack of more customers would curtail the Reliance Jio’s investment trust’s profits and, as a result, yield for investors.
The problem of fewer tenants is already playing out at Bharti Infratel, among the largest tower operators in India. It has lost tenancies in the last one year, pushing rental fees higher for its customers, namely Bharti Airtel and Vodafone Idea.
The company, in its earnings call after the fourth-quarter earnings, said it’s not economical for an operator to run a single-tenant site for perpetuity.
Impact On Reliance Jio
While exact rental costs have not been disclosed, the transfer of assets will increase Reliance Jio’s costs in financial year 2019-20 as it will now have to pay to use towers and fiber.
- JM Financial and HDFC Securities expect Reliance Jio’s costs to increase by Rs 8,500 crore and Rs 5,000 crore, respectively, in FY20. That’s versus Rs 34,000 crore in total costs in FY19.
- HSBC and Motilal Oswal cut their FY20 Ebitda estimates for Jio by 28 percent and 11 percent, respectively, to factor in higher costs.
- SBICAP Securities and Centrum expects the operator’s Ebitda margin to contract by 950 basis points and 336 basis points, respectively, in FY20.
The lack of new customers will hurt the InvIT as well as keep rental costs high for its only customer - Reliance Jio.