Reliance Jio impact: Telecom sector's earning margins set to collapse?
Rajan Mathews, Director General, Cellular Operators Associations of India (COAI), in an interview with dna, said, "It’s the beginning scenario where all the operators are still trying to determine what is the optimal price point. Now they will recaliberate. But the important point is that if prices come down then the volume should pick up. Telcos will say, we may lose margin but we will make it up in volume."
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Get Reliance JioPhone priced at Rs 1,260 with this fancy freebie; offer details hereReliance Jio Infocomm is on a move to change the rules of telecom industry. It can be a new era under telecom where data tariffs are lower, free voice calling, higher data volumes and 4G service everywhere.
India Ratings believes that the launch of RJio will accelerate 4G adoption in India, backed by its attractive tariffs, low cost handset pricing and perceived superior quality of services driven by its huge investment in network.
RJio, which is officially launching services from 5 September 2016, will offer data services free for four months, after which it will offer 10 tariff plans, starting at INR19 a day for occasional users, INR149 a month for low data users and INR4,999 a month for heavy data users.
Care Rating said," Making voice calls free and pricing data well below existing tariffs will force incumbents to re-calibrate their tariffs lower. "
This aggressive price strategy of Reliance Jio was known and telecom companies like Bharti Airtel, Vodafone India and Idea Cellular have been reducing their data charges over the past few months.
Rajan Mathews, Director General, Cellular Operators Associations of India (COAI), in an interview with dna, said, "It’s the beginning scenario where all the operators are still trying to determine what is the optimal price point. Now they will recaliberate. But the important point is that if prices come down then the volume should pick up. Telcos will say, we may lose margin but we will make it up in volume."
However, in the near-term, telecom companies are likely to face the brunt of lower tariffs as they reprice their data plans.
In regards to data revenues, India Ratings (Ind-Ra) said, "It will remain stagnant on a 30%-40% decline in data realisations/megabyte (MB) in FY17 driven by RJio’s launch, while support from data consumption growth to data ARPU will be gradual."
Going ahead, Ind-Ra said, "The top telcos already have moderate-to-high leverage levels, which will weigh on their ability to reduce rates at a time when they are expected to invest in the spectrum auctions later in October 2016."
In financial year 2016, Idea registered a higher net debt/EBITDA ratio at 3.25x (FY15: 1.31x), which is the peak financial leverage of the last five years.
While Bharti’s financial leverage stood at 2.4x in FY16, for Ind-Ra expects it to go up in FY17 with the increase in capex and margin moderation due to the intensifying competition in the data segment.
On the other hand,Anil Ambani backed Reliance Communications Ltd (RCom) on the is highly leveraged with net debt/EBITDA at 5.6x in FY16.
Care Rating, too, said," We expect pure earnings margins for the industry to collapse by 250-300 basis points in 2016-17 and remain under pressure in the next fiscal as well. "
Ind-Ra added, "The incumbents’ debt profile will deteriorate in FY17 as the agency expects them to incur high capex on network expansion and acquisition of additional spectrum to compete with RJio."
Not only the Operators will to re-consider their data tariff and customer retention strategy but may also be forced to bid more aggressively in the forthcoming spectrum auctions, especially in high revenue-generating circles where they have limited “capacity and spectrum” to offer 4G services, added Care Ratings.
During the June quarter ended 2016 (Q1FY17), Bharti Airtel reported 11% rise in net profit to Rs 1462 crore. However, Q1 was not a good quarter for Idea Cellular, as it recorded a disappointing net profit with a decline of 74% to Rs 220.4 crore against Rs 854.8 crore in June 2015.
