Billionaire Mukesh Ambani's Reliance Jio would post a loss of Rs 15,000 crore in the current fiscal year ending March 31 if the cost of subsidised mobile phones it sells is included and accounts are prepared using standard depreciation metrics, brokerage Bernstein said Tuesday.
The loss would be larger than rivals Bharti Airtel and Vodafone Idea, it said.
"Jio's disclosed income statements show a positive, albeit small, return on invested capital (about 3.1 per cent), but as we have pointed out in the past this relies on 'non-standard' depreciation metrics and all the handset subsidies being booked through Reliance Retail," Bernstein said in a report.
After considering these factors, Jio may see "a potential loss of Rs 15,000 crore in FY 2019. Far worse than Bharti's or Vodafone Idea's," it said.
Jio uses a 'unit of production' method for its wireless network costs that includes spectrum and capex causing costs to scale up with higher utilisation of network capacity. Bharti Airtel and Idea Cellular use the more prevalent straight-line method, where costs decrease over the life of the asset.
Jio had previously defended its D&A policy saying "the expected pattern of consumption of the expected future economic benefits of the relevant assets is monitored periodically, and depreciation amount computed accordingly in line with the Accounting Standards."
Regulators too had not found anything amiss with the accounting policy.
Jio had reported a net profit of Rs 830 crore in the third quarter of 2018-19 fiscal year. After considering depreciation normalisation impact and subsidy expenses, the normalised net earnings should have been a loss of Rs 3,800 crore, it said.
This net loss would have been bigger than Rs 630 crore loss incurred by Bharti Airtel in October-December quarter but smaller than Rs 4,430 crore loss of Vodafone-Idea in the same period.
Subsidies on JioPhone, which the company gives for almost free by taking just a refundable deposit, are carried by a separate unit, Reliance Retail Ltd, and so are not visible on Jio's profit and loss statement, Bernstein said.
"As we have written about previously, Jio has been using a 'non-standard' approach to depreciation and amortization (using 'unit of production' accounting). If we attempt to normalize D&A based on total fixed assets, the quarterly charges would jump by Rs 4,700 crore and would result in a quarterly net loss of Rs 2,250 crore," it said adding Rs 7,200 crore is borne by Reliance Retail by way of subsidising JioPhone.
Had they been fully expensed upfront on Jio's profit and loss account, there would have been further costs in the order of Rs 1,780 crore for the quarter.
"Taken together, Jio's reported profit of Rs 830 crore could actually reflect a loss of Rs 3,800 crore for the quarter. This is much worse than Bharti but still slightly better than Vodafone Idea," it said.