In this article, we will discuss how ARPU -- a key metric to analyze the telecom sector -- is calculated and why Jio's "comparable" ARPU is higher than reported. The usual disclosure applies: This is not a stock advice.
ARPU, in telecom jargon, stands for average revenue per user. ARPU indicates the financial performance of telecom companies, and is therefore a key metric used by investors and analysts to compare companies in the telecom space.
In the September quarter results declared yesterday (Q2FY21), Jio reported the following:
1. ARPU of Rs 145 (source link: click here and go to page 4 of 19)
2. Total customers: 405.6 million or 40.56 crores (source link: click here and go to page 4 of 19)
3. Total revenue: Rs 17,678 crores (source link: click here)
First off, how is ARPU calculated?
Simply by dividing the total revenue by total customers.
In this case, for instance, if you divide Rs 17,678 crores of revenue by 40.56 crore customers, you get Rs 435.84. But this is a quarterly number as the results pertain to the three months from July to September 2020. In order to get monthly figure, you further divide Rs 435.84 by 3. This'd give you Rs 145.
To allow comparison, note that Airtel reported an ARPU of Rs 162, much higher than Jio's. This has led many investors to believe that Airtel has been able to squeeze greater revenue out of its users than Jio.
As analysts, our work is not to simply take the company's reported numbers as given, but instead dig deeper and find out how these numbers are calculated and reported by companies.
The fact is, the telecom space has two broad categories of subscribers: active and inactive.
In telecom jargon, the active customers are called 'Visitor Location Register', while both active + inactive customers grouped together are called 'Home Location Register'.
Jio reports its ARPU taking both active and inactive subscribers into calculation, while Airtel reports its ARPU only based on revenue paying or "active" subscribers. The fact is, if Jio were to calculate its ARPU only based on active customers -- which, as we will see below, are much fewer than Airtel's -- then Jio's ARPU would be approximately 186. This is much higher than Airtel.
Let's see how we arrive at Rs 186.
Take Jio's total reported revenue for September 2020 quarter: Rs 17,678 crore.
Take Jio's total subscribers as of September 30, 2020: 40.56 crores
Out of 40.56 crore subscribers, find out how many are active.
You can do this by referring to Telecom Regulatory Authority of India's subscription data as of 31st July 2020 (click here to view the file). As of the date of writing this article, we only have July's data (which TRAI released on 12th October), so this is what we will be using for our analysis.
On page 15 (a screenshot of which I'm posting below), you'd notice that Jio's active subscribers (what we call VLR) as a proportion of total subscribers are only about 78%.