Reliance Jio Infocomm Ltd decided last week to hive off its fibre and tower assets and house them in two separate companies. Such a move is typically associated with a plan to sell a stake to a strategic or financial investor at a later stage. According to an analyst at an institutional brokerage, the 4-5% rally in the shares of Vodafone Idea Ltd and Bharti Airtel Ltd late last week was partly linked to this news. After all, if Reliance Jio sees the need to raise funds by selling minority stakes in its fibre and tower assets, an end to its relentless “raise debt, burn cash" strategy may finally be in sight. At least, that’s how some investors see it.

But those hoping for an improvement in the industry’s fundamentals may be disappointed. “If anything, a strategy of raising funds through asset or stake sales points to a view that Reliance Jio isn’t particularly keen on raising cash flows by increasing tariffs," says the head of a multinational brokerage. “It would rather reduce leverage ratios by decreasing the numerator, that is, the quantum of debt on its books."

For now, Reliance Jio’s competitors and their investors will have to be content there is at least some constraint on how much Reliance Industries Ltd can spend. But this is a thin silver lining around a large, dark cloud. The deleveraging exercise, if any, would only help Reliance Jio create more room to borrow and continue with its aggressive expansion plans. An email sent to a Reliance Jio spokesperson about whether the hive-off is part of an eventual stake sale plan remained unanswered at the time of writing.

For backdrop, there is little doubt that Reliance Jio needs to deleverage. Its debt has been rising at a scorching pace. Analysts at Jefferies India Pvt. Ltd estimate that the telecom unit’s net liabilities will rise 50% this fiscal to 2.1 trillion. That would amount to an extremely high leverage ratio of 13.8 times trailing 12 months’ earnings before interest, taxes, depreciation and amortization (Ebitda).

Rating agencies typically start getting jittery when leverage ratios of top rated firms start inching above the 2.5-3 times Ebitda mark. Still, Reliance Jio enjoys a top-notch rating and is able to raise debt at highly competitive rates simply because, as the rating agency Crisil puts it, “(its ratings are) based on the strength of the irrevocable and unconditional guarantee from its parent, Reliance Industries Ltd".

Reliance Industries’ leverage ratios are far lower at around 3.5 times, though Jefferies estimates they will rise to 3.8 times by this fiscal-end, after adding the cash burn at Jio, besides digesting its acquisitions.

With leverage at the parent also inching up, creating breathing room through some asset sales makes sense, both to keep rating agencies at bay and continue enjoying competitive borrowing rates.

The worrying bit for investors in incumbent telcos is that there are no attempts to reduce leverage by raising tariffs and trying to increase profits and cash flows. As such, to assume that market repair will happen because current tariff levels are unsustainable is imprudent.

“Market repair has to happen because one, it is unsustainable; two, it is making India uncompetitive; three, even Reliance Jio is burning cash," Vodafone Idea chief executive officer Balesh Sharma said last month, after reporting large losses for the September quarter. Analysts say the firm’s leverage ratios, even after accounting for synergy benefits, could be in double digits.

While incumbents await market repair, Reliance Jio has been racing towards the pole position in terms of revenue market share. Some analysts say Reliance Jio will become number one by the end of this fiscal, if not this quarter. Still, it’s quite a distance away from its targeted 50% revenue market share. Till it gets there, market repair may well be a distant dream.

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