Companies & Sectors
Reliance Jio launch: Ind-Ra cuts outlook on telecom sector
India Ratings and Research (Ind-Ra) has revised its outlook for FY17 the telecommunications services sector to stable-to-negative from stable. The agency expects launch of Reliance Jio Infocomm Ltd (RJio)'s service to intensify competition, which will squeeze the market share, earnings before interest, taxes, depreciation and amortisation (EBITDA) margins and credit metrics of incumbents. Ind-Ra expects voice revenue to moderate in FY17 on stagnant minutes of usage (MoU) and further competition in call realisations.
 
"A stable sector outlook could result from a lower-than-expected moderation in industry profitability after the RJio launch so that the financial profiles remain healthy to sustain capex requirements. Highly competitive biddings to acquire spectrum in upcoming auctions thereby impacting operators’ debt profiles could lead to revising the sector outlook to negative," Ind-Ra says in a research report.
 
The ratings agency says it sees voice realisation moderating and strong competition impacting data average revenue per user (ARPU) for telecom companies post RJio launch. Ind-Ra also expects data revenue to remain stagnant on a 30%-40% decline in data realisations per megabyte (MB) in FY17 driven by RJio’s launch, while support from data consumption growth to data ARPU will be gradual. "The operators’ debt profile will deteriorate in FY17 as we expect them to incur high capex on network expansion and acquisition of additional spectrum through trading largely to compete with RJio," it added.
 
According to Ind-Ra, RJio incurred aggregate pre-launch capex of around $15 billion or Rs98,000 crore signifying the magnitude of its potential reach and capabilities. It also expects RJio to contend for market share out of the existing pie of subscribers, which are being serviced by incumbent operators.
 
In effect, the announcements from Reliance Industries Ltd (RIL) Chairman Mukesh Ambani on Thursday point to a commercial launch from 1 January 2017 even though no specific mention was made in this regard. This was also keenly awaited since Reliance Industries has invested as much as $21 billion on Jio -- its largest ever capital expenditure on a single project.
 
Taking the current tariff war and competition in India's telecom space to a new level, the RIL Chairman announced that domestic voice calls on the Jio network will be free forever. "The era of paying for voice calls is ending," Ambani told the 39th Annual General Meeting of the company, post its listing. "No Jio customer will ever have to pay for voice calls again." he added, devoting around an hour of his 90 minute speech to Jio.
 
The announcements came against the backdrop of a series of discounts and freebies offered by existing layers like Airtel, Vodafone and Idea during the past month, ostensibly to ensure customers stay with them, even after the commercial launch of Jio.
 
 
Ind-Ra says it sees voice revenue to decline in FY17 due to market maturity and competitive pricing. "MoU and voice revenue are flattish as the voice market has matured. Airtel and Idea reduced voice tariffs by 8%-10% over 2015 in order to arrest declining MoU and to counter competition. Voice also faces threat from data cannibalization; however, we expect it to be a credible risk only in the medium term," it added.
 
Data tariffs to see a major correction
Following the launch of RJio, there will be a major correction in data tariff, while the benefits from higher data volumes as well as subscriber growth will be back-ended. 
 
 
During the third quarter of FY16, data realisations per MB for the top two listed entities Bharti Airtel Ltd (Airtel) and Idea Cellular Ltd (Idea) declined by 4.5%-5.5% quarter-on-quarter (qoq). Ind-Ra says it believes this price decline was in anticipation of the RJio launch, and therefore expects a further softening of data tariffs in FY17. "An 8%-10% qoq growth in data volumes consumption shall not be sufficient to support data ARPUs which shall therefore moderate in FY17," it added.
 
Higher Capex to Subdue Credit Metrics
Ind-Ra says it expects the credit metrics of incumbent operators to stretch in FY17. 
 
 
"They are likely to increase investments in FY17 to upgrade, install and augment network capability sensing a long-term opportunity in broadband and threat from RJio. While the operators would upgrade their infrastructure to meet data requirement, they would also be required to install infrastructure to roll out newer technologies. They shall also follow debt-driven acquisitions of further spectrum to augment their holdings," the ratings agency says.
 
Spectrum-Driven Consolidation
According to Ind-Ra, spectrum will drive consolidation in the sector in line with the long-term roll-out plans of these operators. It says, "The recent guidelines allowing spectrum sharing and trading transactions within industry participants is a positive move for the sector as smaller players will be able to monetise their spectrum assets while bigger players enhance their spectrum holdings. A few spectrum trading deals were reported in FY16 which will gain momentum in FY17."
 

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COMMENTS

ramprasath l.a

9 months ago

First I enjoy with gadgets

ramprasath l.a

9 months ago

First I enjoy with gadgets

Nanda Patel

9 months ago

moral of the story..

time to exit from all Telcom stocks if you have not already...

As savings continue to decline, does India need a rate hike?
India’s savings rate is declining. The private sector, including households and corporates are the main driver of total savings, while the public sector has been a drag. Within the private sector, households are the main source of savings. This component has, however, emerged as a key drain, with its share in total savings falling to 60% in FY2014-2015 from 70% four years earlier. 
 
In a report, DBS Bank Ltd, says, "The fall in savings needs to be arrested given India’s investment needs. Relying on foreign savings puts pressure on the current account and the returns from that investment go abroad as well. Corrective measures are underway to lift savings and investment, but a quick turnaround is unlikely."
 
There is a combination of factors are behind this slowdown, the report says adding, low incomes are one, which along with extended periods of high inflation, pushed households to set aside a bigger proportion of incomes for consumption, thus impinging on savings. Not surprisingly, household savings now make less than a quarter of their disposable incomes, from above 30% earlier, it added.
 
 
DBS says, besides incomes, interest rates, inflation and demographics also drive household savings. Even though India’s demographics are amongst the most favourable in the region, years of high inflation and negative real rates have dented savings.
 
While interest rates were raised in response to high inflation in 2011-13, real deposit rates were still negative (see chart below). Back then, wholesale price index (WPI) inflation was a policy target, rather than a much elevated consumer price index (CPI) inflation, which meant real deposit rates were deeper in red and for longer, than earlier understood.
 
 
In addition to falling households’ savings, DBS says, its composition is imbalanced. In 2012-13, two-thirds of household savings comprised of physical assets like gold and property. This was driven by a need to offset inflation, though it led to a ballooning current account deficit (CAD) driven by gold imports. Not only did this hurt the current account, it lowered investment into the real economy. 
 
"More recently, some of this imbalance has corrected, but physical assets continue to dominate the savings mix. The marginal increase in financial savings has also been concentrated in shares and debentures, insurance and retirement funds rather than bank deposits," the report says. (See chart below)
 
 
According to the research note, India's savings rate is caught in a cyclical rather than structural slowdown. It says, "Unlike much of Asia where rising incomes have been accompanied by a fall in savings, India’s per capita gross domestic product (GDP) is still amongst the lowest in the region. Despite this level of incomes, savings have been falling (See chart below).
 
 
"We reckon this is more a function of low incomes, tough economic conditions, falling real returns and high inflation, rather than structural impediments of a rising dependency ratio or a fall in working age population," DBS Bank says.
 
The report endorses demographics as one of India's key strengths. It says, "While Japan, China and many Western countries grapple with ageing populations, India’s dependency ratio is declining. The working age group (15-64 years) makes up close to two-thirds of the overall population. Growth in the working age population will exceed overall population growth for at least two more decades, pointing to a sustained fall in the dependency ratio. Although structural tailwinds are in place, the savings rate continues to stagnate, pointing to cyclical hurdles."
 
 
In the near-term, DBS says, Indian authorities need to continue encouraging households’ to shift from physical savings to financial avenues. "This is important not only to meet investment spending needs, but also ensure efficient savings for growth and limit external imbalances," it added.
 
On policy, the report says, further significant rate cuts are thereby unlikely in the interest of maintaining positive real and nominal deposit rates. IT says, "We look for 25 basis points (bps) cut in December, before rates plateau, contingent on sharp disinflation to or below 5% and dovish monetary policy committee."
 
"Further out, concerted efforts to lift incomes and job creation are crucial structural tailwinds to lift the savings rate. Work is in progress on this front, under the government’s ‘Make in India’ initiative, skills development, ensuring education access and improving the ease of doing business. Until the domestic private sector is able to pick the baton, we expect public sector and foreign direct investments to drive the initial part of the capex cycle," the report from DBS concluded.

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Radiologists on strike; ultrasound, MRI centres closed in Agra
More than 200 ultrasound, CT scan, MRI centres, alongwith over 50 X-ray clinics in the city are closed as members of the Indian Radiological and Imaging Association began their indefinite strike on Thursday to demand modifications in the Pre-Conception & Pre-Natal Diagnostic Techniques Act (PCPNDT).
 
The national president-elect of the association, Dr. Bhupendra Ahuja said the provisions under the act are draconian and arbitrary. For minor paper-work lapses, these centres are sealed and doctors booked. This situation has to change. 
 
The patients, meanwhile, were put to a lot of difficulty looking for ways out. "In particular, road accident victims who urgently need CT scan reports are in trouble due to the strike which could continue for long," said an employee of a diagnostic centre at Hari Parbat.
 
The strike is total with more than 12,000 doctors across India joining it, the association activists said.
 
Other organisations like the Federation of Gynaecologists and Obstetricians and the Indian Medical Association were also extending support to radiologists.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

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