Reliance Jio free offers crimp telecom sector’s growth

Revenue growth rate for the telecom sector, dominated by Airtel, Vodafone and Idea, dropped 2 percentage points in the September quarter

Reliance Jio’s free offers are likely to continue up to 31 March, largely due to demonetisation, which may severely impact revenue growth.
Reliance Jio’s free offers are likely to continue up to 31 March, largely due to demonetisation, which may severely impact revenue growth.

The country’s top three telcos, Bharti Airtel Ltd, Vodafone India Ltd and Idea Cellular Ltd continued their dominance during the September quarter, accounting for 75% of the revenue in the telecom sector, but revenue growth rate dropped 2 percentage points, indicating the impact of Reliance Jio Infocomm Ltd’s entry.

Revenue growth fell from 6.5% to 4.4% year-on-year in the second quarter, according to data from the Telecom Regulatory Authority of India or Trai. The crimping of growth was higher in data-heavy markets.

There’s little to indicate that things would get better soon. Top brokerages CLSA and Morgan Stanley have said that Jio will extend its free services up to 31 March, largely due to demonetisation and a slump in smartphone sales, which may severely impact revenue growth.

“On a circle category-wise basis, sector revenue growth in metro and A-circles was most impacted at 2.6% and 2.7% (54% of industry revenues). Given that these markets have higher share of data revenue, we believe that the two percentage point YoY slowdown in revenue growth was likely due to Reliance Jio’s free offers, which commenced in early September 2016,” CLSA analysts said in a report on Wednesday.

“Amongst the top 3, Bharti Airtel’s share gain was over 2x that of Vodafone and Idea Cellular combined and higher in data heavy markets,” CLSA said.

Bharti Airtel’s market share rose 155 basis points (bps) while Idea and Vodafone gained 40 bps and 30 bps respectively.

Even in the circles where the revenue growth was the lowest for operators, Bharti Airtel’s market share gains were the highest.

“The impact of Reliance Jio’s entry is more visible on QoQ market share changes, which indicate that only Bharti Airtel and BSNL (Bharat Sanchar Nigam Ltd) have gained share among operators,” CLSA said.

However, the revenue growth for telcos could soften further if the free services by Jio continue analysts estimate. “Post the free offer, RJio tariffs are at around 35% discount to incumbents. We would not be surprised if its free offer is extended to March 31, 2017,”a Morgan Stanley report said on 14 November.

Dharmesh Kant, vice president at Motilal Oswal believes that there is a limitation to free offerings by any company and therefore this is not a long-term strategy. “Even if Reliance Jio continues to offer lucratively, there is a limit to how much the company can do. Obviously free services will change the pricing in the sector and it is still to be seen what Reliance will do post 31 December.”

On the basis of market share data released by Trai, experts have a positive outlook only for Bharti Airtel. “The key gainers in the quarter were Bharti Airtel and BSNL, wherein market share increased by 20-50bp qoq. Amongst the key losers were Idea Cellular (-50bp) and RCOM (-25bp),” IDFC said a report.

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