BackImpact of the RIL, R-Com deal
Increased competition from Reliance will mean that its own operations may remain under pressure
Premium(Pradeep Gaur/Mint)
It had seemed like there was not much downside left to Bharti Airtel Ltd’s stock, given its rapid descent recently to the ₹ 290 levels. But the company’s shares were among the worst hit (down nearly 4%) within the large-cap space on Wednesday, after Reliance Industries Ltd’s (RIL’s) telecom subsidiary struck a deal with Reliance Communications Ltd (R-Com) to lease the latter’s optical fibre cable network, signalling an increase in competitive intensity in the sector. Shares of Idea Cellular Ltd declined by 2%.
As analysts at Nomura Research point out in a note to clients, “Having another viable/well-funded pan-India telecom operator is hardly good news." While RIL’s looming entry has worried investors for quite some time now, the company’s willingness to pay ₹ 1,200 crore upfront for the network-sharing deal with R-Com has just made the threat more real.
Of course, it will still be some time before the company commercially launches operations. And as pointed out earlier in this column, introducing voice services over the 2300 megahertz spectrum band, which RIL had received, has its challenges. Voice services on TD-LTE (time-division long-term evolution) technology, which RIL is reportedly using, haven’t been commercially launched anywhere in the world. In addition, there is a view that tariffs are already at rock-bottom levels, and with established companies operating at single-digit return ratios, there isn’t much scope for a viable strategy for a new entrant.
Without doubt, the deal is a boon for R-Com, which has risen by 13% in the past two trading sessions. While the upfront payment of ₹ 1,200 crore barely makes a dent in the company’s overall debt position of ₹ 37,360 crore, the deal has the potential to generate decent returns for its infrastructure. R-Com’s press release announcing the deal states that the optical fibre cable deal is the “first in an intended comprehensive framework of business cooperation" between the two firms, for the optimal utilization of existing and future infrastructure of both companies, including towers and related assets. But on the flip side, increased competition from RIL will mean that its own operations may remain under pressure.
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