Why Jio may now have to buy spectrum from the open market

While the company insisted it had enough spectrum across circles, analysts said the company might soon need to acquire some spectrum to ensure uninterrupted service.

Reliance Jio is open to buying spectrum from the open market to maintain uninterrupted services, it is learnt.

The telco has a subscriber base of 300 million.

It is adding subscribers at an average rate of 10 million a month.

Last quarter, Jio terminated its agreement with Reliance Communications (RCom) to acquire spectrum from it as the Department of Telecommunications (DoT) refused to approve the deal.

Also, Jio did not agree to bear RCom’s historical dues.

The two firms had entered into an agreement in December 2017.

At present, Jio shares RCom's 850 MHz spectrum in 21 circles, including Mumbai.

While the company insisted it had enough spectrum (across 850 MHz, 1,800 MHz and 2,300 MHz) across circles, analysts said the company might soon need to acquire some spectrum to ensure uninterrupted service.

“There are legal implications of sharing RCom's spectrum.

"It has missed payment deadlines for the Mumbai circle to the DoT, which has, in turn, sent show cause notices to the company.

"If dues are not met, the government can revoke the license for that spectrum. That would impact Jio’s services,” said an analyst.

Anshuman Thakur, head of strategy and planning at Jio, said during the fourth quarter results press conference that it was open to buying more spectrum if required.

“We have adequate spectrum to not be affected by the termination of any agreement with RCom. But, if we need more, we can buy more,” he said.

On the other hand, analysts said the demerger of the optic fiber and tower infrastructure into two separate companies (special purpose vehicle) was going to increase its operational expenses.

The move was aimed at creating an asset light model for Jio, which will help in deleveraging the balance sheet.

Credit Suisse analysts said although the InvIT structure was likely to be profit before tax neutral, the impact on reported profits could be high.

At present, $1-billion interest cost is being capitalised at Jio, which will go away after the InvIT.

Credit Suisse said the telco's Ebitda might be affected as well.

Jio reported a 6.8 per cent sequential growth in Ebitda for the fourth quarter of 2018-19 to Rs 4,329 crore.

On a year-on-year basis, it is up 60 per cent. The Ebitda margin, too, was healthy at 39 per cent.

Jio, however, said the monetisation of the infra assets would help to create value through external tenancies.

Jio will be the anchor tenant. It has a 20-year contractual agreement in place, along with first right of refusal and discount in tower rentals due to third party tenancies.

The company also said Jio Digital Fibre, which now holds the fibre assets, has been valued through a reputed international valuer.

The fair value of Jio Digital Fibre is Rs 1.65 trillion.

The difference between the fair value and cost price has been allocated as preference shares to Reliance Industries.

Therefore, the demerger helped to reduce liabilities of Jio to the tune of Rs 1.07 trillion.

In addition, preference shares worth Rs 78,000 crore have been issued to RIL.

Photograph: Shailesh Andrade/Reuters