Is Jio Really Profitable? Audit To Answer Doubts And Controversies
Jio spent billions during rollout period without the costs showing up Its depreciation and amortization costs also surprised analysts Jio's entry nipped profits of Airtel, Idea and Vodafone
A smartphone in India cost more than $200 just two years ago. Now you can get a decent phone for nothing but a refundable deposit of $23. Data packages are cheap, and a startup company even throws in free voice calls for life. For this, consumers can thank Mukesh Ambani, a 61-year-old petrochemicals titan who is the country's richest man. From his perch overseeing Reliance Industries Ltd., one of India's largest conglomerates, Ambani has plowed more than $38 billion into his wireless entry, Reliance Jio Infocomm Ltd. It's a classic business disruption. Jio has quickly garnered 14 per cent of a market that is expanding rapidly, putting pressure on other mobile phone providers.
Along the way, virtually every promise Ambani made about the company's performance in the marketplace has held up, from inexpensive Jio handsets to state-of-the-art wireless connections.
But one claim merits a closer look: that Jio has been profitable virtually from its commercial launch. And it's a worthwhile exercise, given talk of a possible initial public offering for the unit or even an acquisition.
Unusual Accounting
A review of Jio's unaudited results for the last year shows that the wireless venture and its parent relied on a series of accounting decisions that wound up portraying Jio's financial performance in the best possible light.
Analysts have previously noted some anomalies in Jio's accounting, like the inclusion of six months of revenues in a three-month reporting period.
Another accounting decision reveals even more. Jio took advantage of a rule that allowed it to burn through billions of dollars in expenses during its rollout period without the costs showing up on its income statements.
Jio's auditor, Deloitte Haskins & Sells LLP, an Indian affiliate of Deloitte LLP, is conducting its annual review of Reliance's numbers. Audited results for the year ended March 31 are expected to be disclosed this week, for Jio as well. It will be the first time Deloitte has audited Jio's sales.
Jio will either get Deloitte's blessing or be pushed closer to norms in international financial reporting. A wholesale change is not expected, but any shift in approach could puncture the profitability story that Reliance has been trumpeting in India.
"I'm curious to see if Deloitte pushes back on some of management's aggressive estimates," said James Cox, a professor at Duke University School of Law and an adviser to the US regulator that oversees auditors.
Deloitte officials declined to comment.
'No Ambiguity'
A Jio spokesman said in a written statement: "The accounting statements of Jio are based on the applicable Indian Accounting Standards. The accounting treatment has been reviewed and approved by the audit committee of the company and also reviewed by the auditors. Significant accounting policies of the company are described in detail, along with the financial statements issued by the company, and there is no ambiguity involved in the manner that the accounts are prepared."
The vast majority of stock analysts who follow the conglomerate consider it a good investment. Reliance's shares, having languished for several years, took off in early 2017 after it said Jio would emerge from its trial period and begin charging for service. The shares have almost doubled since then.
