Reliance Jio launch to squeeze data revenue of Bharti Airtel, Idea

India Ratings and Research has revised its outlook for the telecommunication services sector from stable to stable-to-negative for fiscal year 2017. The agency expects the launch of Reliance Jio Infocomm to intensify competition, which will squeeze the market share, operating margins and credit metrics of incumbents. The agency expects voice revenue to moderate in FY17 on stagnant minutes of usage (MoU) and further competition in call realisations.

Additionally, the agency expects data revenue to remain stagnant on a 30 -40 per cent decline in data realisations/megabyte in FY17 driven by RJio's launch, while support from data consumption growth to data average revenue per user will be gradual. The operators' debt profile will deteriorate in FY17 as the agency expects them to incur high capital expenditure on network expansion and acquisition of additional spectrum through trading, largely to compete with RJio.

Ind-Ra expects competitive intensity to increase as RJio contends for market share out of the existing pie of subscribers which are being serviced by incumbent operators. Data market will be first to face the impact of increased competition resulting in a decline in data average revenue per users.

Ind-Ra expects data tariffs to see a major correction due to the launch of RJio, while the benefits from higher data volumes as well as subscriber growth will be back-ended. The agency says: "Data realisations/megabyte declined by 4.5-5.5 per cent q-o-q in 3QFY16 for the top two listed entities Bharti Airtel Limited and Idea Cellular Limited. Ind-Ra believes this price decline was in anticipation of the RJio launch, and therefore expects a further softening of data tariffs in FY17. 8-10 per cent q-o-q growth in data volumes consumption shall not be sufficient to support data average revenue per users which shall therefore moderate in FY17."

Ind-Ra expects voice revenue to decline in FY17 due to market maturity and competitive pricing. MoU and voice revenue are flattish as the voice market has matured. Airtel and Idea reduced voice tariffs by 8%-10% over 2015 to arrest declining MoU and to counter competition.

Ind-Ra expects the credit metrics of operators to stretch in FY17. They are likely to increase investments in FY17 to upgrade, install and augment network capability, sensing a long-term opportunity in broadband and threat from RJio. While the operators would upgrade their infrastructure to meet data requirement, they would also be required to install new infrastructure to roll-out newer technologies. They shall also follow debt-driven acquisitions of further spectra to augment their holdings.