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Home >Market >Mark-to-market >Reliance Jio sets the cat among the pigeons

In the past seven years, Reliance Industries Ltd’s (RIL’s) shares have gone nowhere, even while the CNX 500 index has nearly doubled. Among others, one reason was the long delay in the launch of its telecom operations.

Now, with Reliance Jio Infocomm Ltd finally announcing its tariff plans, it is increasingly clear that the value destruction this venture has unleashed isn’t limited to it alone. Shares of competitors Bharti Airtel Ltd and Idea Cellular Ltd fell sharply on Thursday; more importantly, since June last year, when Reliance Jio had said it will launch operations soon, Bharti Airtel and Idea shares have fallen by 25% and over 50%, respectively. Of course, there are other reasons as well for the fall in their shares; but the impending launch of Reliance Jio, hanging like a Damocles’ sword, was an important factor.

This column had said earlier that the delay in Reliance Jio’s launch gave incumbents ample time to tweak their tariffs, and that this might limit the former’s ability to disrupt the markets. But the company’s entry-level tariffs are considerably lower than the Street’s estimates. Analysts at Bank of America Merrill Lynch said in a note to clients, “For the incumbents, we expect some adverse impact in the lower tier segment, as the lowest Rs149 offer will appeal to the voice-only consumers who will be able to make free voice calls on Jio’s network. In our view, this is a surprise as the market was not expecting Jio to aggressively target the low-end market."

Those in the mid and high segments are likely to wait and see how Reliance Jio’s services deliver, especially with voice over LTE. As such, there may not be a sudden, huge migration of customers. Nevertheless, incumbents will be forced to cut tariffs more than they would have anticipated earlier.

It was clear that Reliance Jio would offer bundled packs, and incumbents had already worked out their own bundled plans, according to analysts. It now seems like they may have to offer more value for money, given where Reliance Jio’s tariffs are. And the fact that the company is offering free unlimited calls right from its Rs149 plan means that incumbents’ voice revenues will come under pressure as well. Earlier, the new entrant’s launch was expected to be largely disruptive in terms of data services. Note that over 70% of the industry’s revenues come from voice services.

The saving grace is that in the monthly packs, Reliance Jio has no plans between the entry-level Rs149 offer and the Rs499 offer. Since average revenue per user for most telcos is much below the Rs499 level, it remains to be seen how many customers would be tempted to upgrade. So although it’s clear that tariffs will be brought down by incumbents, it certainly can’t be assumed that Reliance Jio will garner a very high share of the market.

It’s interesting to note that RIL itself lost the most in terms of absolute market capitalization on Thursday. Some analysts such as those at Kotak Institutional Equities had already written off the company’s entire investment in the telecom venture. At the end of June, the total investment by Jio stood at Rs1.34 trillion, while RIL’s equity investment in the venture stood at around Rs45,000 crore.

Consider that the return on investment in the telecom sector has already been low, in single-digits, even before Reliance Jio’s launch. Now, with tariffs set to fall again, and investments set to rise (to beef up data capacity), things are likely to worsen.

Despite this gloomy scenario, a number of analysts have “buy" ratings on stocks of incumbents. After years of underperformance, they believe all of the negatives and more are already priced in. Investors clearly don’t agree.

The writers do not have positions in the companies mentioned above.

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