Reliance Jio’s network capacity edge gives room for tariff cuts: Credit Suisse

Credit Suisse in a note says Reliance Jio will require revenue close to that of Bharti Airtel and Arpu of Rs210 to achieve its targeted return on capital of 18-19%


Credit Suisse capped Reliance Jio’s investments at Rs1.5 trillion and calculated returns on this initial capital. Photo: Aniruddha Chowdhury/Mint
Credit Suisse capped Reliance Jio’s investments at Rs1.5 trillion and calculated returns on this initial capital. Photo: Aniruddha Chowdhury/Mint

Mumbai/New Delhi: Mukesh Ambani-controlled Reliance Jio Infocomm Ltd (RJIL) will require revenue close to that of market leader Bharti Airtel Ltd and average monthly revenue per user of Rs 210 to achieve its targeted return on capital of 18-19%, Credit Suisse Securities said in a note to clients.

“Given the scale of Jio’s investments, and benchmarking costs to incumbent telecom operators, we estimate the company would require a revenue base as large as $9.5-10 billion to achieve high-teens returns,” said Credit Suisse in a report dated 19 September. Reliance Jio also has room to cut tariffs further than already announced given its network capacity advantage, said Credit Suisse.

“We note capacity is not a constraint; even for 250 million users, Jio’s network can support both free voice and 1.8 GB per month. This capacity advantage allows Jio sufficient room for further tariff cuts,” said Credit Suisse, adding that Jio is targeting a revenue scale similar to Bharti’s in order to get these returns.

“In our analysis, we believe a Rs190 per 1.7GB per free unlimited voice plan from Jio should be attractive enough to build a market-leading scale and still allow Jio to meet its return target,” it added.

Credit Suisse capped Jio’s investments at Rs1.5 trillion and calculated returns on this initial capital, it said. Reliance Jio will have to spend more to increase coverage from 70% of population to 90% and Rs7,000-10,000 crore every year on maintenance, the report said.

Reliance Jio’s tariff rates are primarily focussed on data and are loaded with freebies which include free voice calls. This is expected to make the sector move towards data-only plans, making voice and text messages cheaper or almost free.

“This could be particularly disruptive for the incumbents, as most of the leading operators still derive majority of their revenues and profits from voice and text messages (70%) leading to a weakening of their operating performance, slowdown in revenue growth and a decline in the profitability margins,” said Care Ratings in a note dated 19 September.

In a separate report, rating company ICRA Ltd said the telecom sector is expected to continue to contribute strongly to the government’s revenue. The sector contributed Rs84,000 crore as licence fees and Rs38,000 crore towards spectrum usage charge over seven years. Despite spectrum auctions not being a regular feature in the industry, the contribution nonetheless has been Rs1.59 trillion, ICRA said.

“Overall, the communication sector has contributed at the least 14% to non-tax revenues of the GoI (government of India) each year, and we expect the contribution to remain healthy going forward,” Harsh Jagnani, vice president of corporate ratings at ICRA, said.

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Though revenue from the telecom sector may be lower than the government’s budgeted estimate of Rs98,995 crore in financial year 2017, ICRA estimates the earnings for the exchequer to be sizeable and highest in five years.

“Over the longer term, the telecom industry would contribute at least Rs55,000- 60,000 crore to the non-tax revenue receipts of GoI for each of the next 10 years, excluding any cash-flows from other levies and assuming no change in SUC (spectrum usage charge) calculations,” Jagnani said.

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