Reliance Jio onslaught has just begun, but some telcos are already bleeding
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India’s leading telecom companies are expected to report a sharp drop in operating profit margins in the December quarter, thanks to the twin impact of Reliance Jio launch as well as demonetization.
Reliance Jio Infocomm Ltd launched its free services in early September, making Q3 (third quarter) the first full quarter that incumbents have been affected.
Besides, the liquidity crunch since mid-November has had an impact on revenues as well.
Analysts at Kotak Institutional Equities are expecting a 7-18% drop in the operating profit of Bharti Airtel Ltd and Idea Cellular Ltd sequentially, despite the fact that Q3 is a seasonally strong quarter.
In the case of Idea Cellular, where leverage is high, a shrinking of operating margins will result in a large loss.
Kotak’s analysts said in a note to clients that it expects Idea Cellular to report a loss of Rs440 crore, after accounting for its share in the profit of Indus Towers Ltd. Analysts at ICICI Securities Ltd have estimated a loss of Rs547 crore for Idea Cellular and Rs320 crore for Reliance Communications Ltd.
Bharti Airtel, with a lower leverage, is expected to remain profitable, although net profit is expected to fall 35-40% sequentially.
Companies such as Idea Cellular have told analysts that revenues in the data segment have taken a hit because customers are using Reliance Jio’s free services for their data needs.
Kotak’s analysts say Reliance Jio’s free services will have an impact on three fronts: “Data volumes (as industry’s paid volumes take an expected knock), data pricing (as the incumbents try to hold on to data volumes) and voice pricing (initial impact of bundled offerings in line with Jio’s announced pricing construct + step-up in aggression on pure voice plans + shift in voice volume mix in favour of lower-realization incoming traffic).”
What’s more, things are likely to get worse in the March quarter, what with Reliance Jio extending its offer of free services till March. Things may ease a bit after that, when the company starts charging for its services. But again, much will depend on the proportion of customers that remain on Reliance Jio’s network after it starts charging and its pricing strategy post-March.
As things stand, Reliance Jio hasn’t merely made a splash with its launch. It has also caused a splash of red on the books of some Indian telcos.