Reliance Jio launch adds to volatility risks for telecom investors
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The flock of frightened pigeons that calls itself India’s telecom industry had a violent reaction recently when their regulator set a cat among them.
The impending entry of a new fourth-generation operator would anyway mean a trip to the slaughterhouse for a few of the dozen existing players, some of whom are already making a run for the coop door. But that’s a known risk. It’s the threat of having to cede market share to billionaire Mukesh Ambani’s Reliance Jio faster than imagined that’s causing nervousness.
That latter possibility has been raised by the Telecom Regulatory Authority of India’s (Trai) consultation paper on scrapping the compensation one wireless service receives for calls routed to it by another.
That proposal to do away with the calling-party-pays system, the incumbents allege, smacks of bias. It would give a pricing advantage to a new network like Jio, which would be more likely to originate calls than terminate them. Meanwhile, Jio has complained that existing operators are sabotaging its ongoing beta trials by not offering adequate interconnection, leading to call drops.
Incumbents have denied the allegation, and accused Ambani of running a service in the garb of testing. The dispute is fast turning into just the kind of melee the government, looking to hold its biggest-ever auction of spectrum a little more than a month from now, can ill afford.
To the extent the fracas is the harbinger of a bruising price war, it’s also bad news for shareholders of Bharti Airtel and Idea Cellular, which together with Vodafone control more than three-fifths of the market. The quest to expand data usage on their networks ahead of Jio’s long-delayed entry has already caused prices to head south:
While data usage is indeed picking up, capital expenditure is accelerating. Idea’s net debt is almost 5.7 times annual earnings before interest and taxes (Ebit); it’s 3.3 times Ebit for Bharti. With Reliance boasting to the regulator that its $20 billion investment in Jio is already more than any of its competitors’, incumbents have little breathing room.
When Kumar Mangalam Birla, Idea Cellular’s controlling shareholder, sought to streamline his fiber-to-finance empire, minority shareholders balked at the prospect of being asked to fund his money-guzzling telecom venture. Ambani, on the other hand, has been lucky. His petroleum-refining business is minting cash, so creditors are giving him the chips to spin the roulette wheel and grab those 100 million Reliance Jio subscribers he craves.
The stakes are high, and so are anxiety levels. With the regulator adding to the uncertainty about future market share, investors can expect more volatility. Idea Cellular’s shares jumped as much as 7.9% on Tuesday before the company said media speculation about a sale to Vodafone is untrue and “preposterous.”
The fluttering has begun. Tempers are flying and soon feathers will, too. Bloomberg