Since Reliance Jio’s September 2016 commercial launch, Industry revenue has declined over 30% with industry participants now reduced to three plus one telco.
Even as Reliance Jio’s entry into the telecom sector prompted a major round of price-cutting by the existing operators — much to the delight of customers — any scope of further discounts is limited as billionaire Mukesh Ambani-led telco may soon look towards boosting returns on its more than $40 billion investment, says Fitch Ratings.
Once it achieves more than 30 percent market share, RJio — which added over 1.3 crore mobile subscribers taking its total customer base to 25.2 crore in September 2018 — will change its approach from a ‘hunter’ to a ‘farmer’ in 2019, Nitin Soni, Director, Asia-Pacific Corporate Ratings, Fitch, told FE Online in an interview.
The telecom firms that invest more on data and content quality and fix call drop issues at the earliest will retain customers when tariffs begin to rise next year, Nitin Soni further told Ashish Pandey of FE Online.
Here are the edited excerpts from the interview:
Telecom sector is currently struggling amid escalating price war, high levies, and weak earnings. What are your views?
Since Reliance Jio’s September 2016 commercial launch, Industry revenue has declined over 30% with industry participants now reduced to three plus one telco. Cheaper data tariffs offered by Jio along with voice cannibalisation by data has resulted in steep decline in operating profits for incumbents.
However, Fitch Ratings has a stable outlook on the industry for 2019 as we believe that blended tariff will improve from existing unsustainable levels by a 3%-5%, as Reliance Jio would discontinue discounts gradually to boost returns on its over-USD 40 billion investment. We expect incumbents to raise equity and monetise their tower assets to strengthen their stretched balance sheets.
There are reports that the debt-laden telecom sector is seeking a relief package from the government. What do you have to say on this?
We can’t comment on telcos seeking relief from government. However, we understand that Indian telcos suffer from unsustainable situation of one of the most expensive spectrum assets and lowest blended tariffs in the industry, relative to other Asian telco markets. Telco industry is also one of the heavily taxed market with a number of layers of taxes, revenue sharing on top of the expensive spectrum. Indian telcos are also one of the most spectrum starved telcos globally. Operator-wise allocation is also amongst the lowest, so much so that the largest operator in India, Idea Vodafone Ltd., formed recently after the merger, has about 40% lower spectrum as compared to global average of about 70 MHz.
Bharti Airtel, a major player in the country’s telecom sector, is currently seen as struggling financially. Does it hint towards more bad news for the sector?
Fitch rates Bharti Airtel at BBB-/Stable. However, Bharti has low ratings headroom due to decline in EBITDA in its Indian mobile segment which would likely keep its FFO-adjusted net leverage to around 2.4x-2.5x – very close to negative guidance of 2.5x. We believe that management is committed for an investment grade rating and would raise equity through stake sale in non-core assets to strengthen its balance sheet.
Do you find the current tariff levels sustainable for the industry?
Indian blended tariff of USD 1.3-1.4 are one of the lowest globally. We believe that telcos will unlikely to make reasonable return on their investments at such low tariff levels. Industry revenue has declined to around USD 20 billion – lower than 1% of India’s GDP, which is extremely low compared to other telco market globally.
How long can RJio afford to keep reducing prices and sustain the same? Will it be able to retain customers once it raises rates?
We believe that Reliance Jio will change its approach from a ‘hunter’ to a ‘farmer’ in 2019 once it has achieved over 30% of revenue market share. We expect it to start discontinuing promotions and discount and increase effective blended tariffs in 2019. Going forward, quality of data experience, lower call drops and content availability will drive the customer’s acquisition for telcos.