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.
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."