With investments of Rs.1.35 trillion and counting, not many doubt Reliance Jio Infocomm Ltd’s ability to shake up the telecom business. To put the number into perspective, there are less than 20 companies in India with market capitalization in excess of Rs.1.35 trillion.
Shareholders of incumbent operators were clearly anxious as they dumped stocks on the day of Jio’s launch. This is despite their underperformance in recent months, partly in anticipation of the launch.
The incumbents are now reported to be reworking their tariff plans to retain customers, but it is likely to dent both revenues and profits, at least in the short run. According to Fitch Ratings, the average Ebitda (earnings before interest, taxes, depreciation and amortization) margin for the top four operators is likely to reduce by at least 200-250 basis points in the next year. (A basis point is one-hundredth of a percentage point.)
What has surprised the market—it will be a formidable challenge for the incumbents—is Jio’s free voice offer. The bulk of the revenue for the existing operators is still driven by voice. This will make life difficult for the incumbents and is likely to result in more consolidation as relatively smaller operators may not be able to face the firepower of Jio and other large firms.
However, it’s not only incumbents that will have to deal with uncertainty. The going is unlikely to be easy for Jio and the shareholders of Reliance Industries Ltd (RIL) either. Aggressive pricing means that break-even will get delayed. On the launch day, RIL’s share price also dropped by close to 3%. Clearly, shareholders of existing operators are not the only worried lot. Jio is a huge diversification bet and its success will be critical for RIL and its shareholders.
As reported earlier in this newspaper (see here), RIL’s stock price has not gone anywhere in the last seven years and has significantly underperformed the benchmark indices. In terms of financials, from being a zero debt company in 2012, RIL now has net debt in excess of Rs.95,000 crore on its books. It has made substantial investments in non-core businesses in recent years and developments in these areas will be important for the company. For instance, in a recent note to its clients, Motilal Oswal Securities said: “RIL’s recent capital allocation (CE) had been skewed toward non-core businesses to ring-fence its earnings from cyclical businesses. Now with non-core forming 40% of CE, successful consummation of core capex and telecom venture is critical.”
Financial markets work on difference of opinion. While most people on the street believe that Jio will negatively affect the incumbents, some analysts are of the view that it might actually benefit strong existing operators. It is possible that Jio will change the nature of the business and strong incumbents will also gain from this transition. Suresh Mahadevan of UBS argued in a recent interview to this newspaper that it is likely that Jio will increase data usage, which might have a network effect and benefit existing operators such as Bharti Airtel and Idea Cellular (see here).
Evidently, increased competition and pressure on pricing will benefit the consumer. As lower prices increase data consumption, businesses such as e-commerce, software and content development are also likely to gain. Increased penetration of data services will benefit the government as well—it will help dissemination of information and delivery of public service in a more transparent manner.
It will be interesting to see how the sector shapes up from here on. It is possible that Jio will affect incumbents in the short run, but a clearer picture will only emerge after it has been in operation for 6-8 quarters. Consumers will take their time to evaluate all options and decide. Meanwhile, it is important to note that some of the existing operators have built strong businesses and brands over the years—displacing them will not be easy for a newcomer. They have seen and survived cut-throat tariff wars before.
The entry of Jio has certainly induced uncertainty in the telecom market. And for now there seems to be only one clear winner—the consumer.
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