Reliance Jio to Shake Up Indian Telecom Market

The entry of Reliance Jio into the Indian telecom market will not lead to a re-run of tariff wars in the voice sector as the upstart telco is likely to concentrate on data business, said Fitch, adding that data rates may decline by at least 20%.

And because the new entrant will not look to eat into the voice business of the incumbents on a larger scale, their credit profiles will also remain intact, the rating agency said.

"The likely entry of new telco Reliance Jio, which is part of Reliance Industries Ltd in 1H15 will intensify competition in the data segment, and may cause data tariffs to decline by at least 20%," Fitch said on Tuesday.

"Jio will focus largely on data and may have a limited impact on the incumbents' core voice business, given a weak "voice-over-LTE" technology ecosystem and lack of affordable 4G-compatible handsets in India."

"We do not foresee a re-run of the tariff wars of 2009-2013, which led to a severe decline in industry tariffs," the rating agency said.

The credit profiles of the top four Indian telcos - Bharti Airtel Limited, Vodafone India, Idea Cellular and Reliance Communications - will remain intact in 2015 thanks to a gradual rise in voice tariffs and improving regulatory environment that stem from industry consolidation, Fitch said.

Mixed Outlook

The outlook for nationally owned telcos and weaker unprofitable telcos is negative because their business models are seen as viable; high cost structure, weak spectrum assets and large capex requirements being the main obstacles.

At the same time, the top four telcos will increase their revenue market share to around 83% from 79% this year of the $30bn industry, Fitch said.

"Weaker, unprofitable operators will seek mergers amid EBITDA losses, lack of 3G/4G spectrum assets, and likely relaxation of M&A restrictions. Six operators are likely to emerge from the industry shake-out, as 10 12 operators are unsustainable" the rating agency said.

Revenue

Industry revenue will grow by at a mid-single-digit rate in 2015, driven by data services, Fitch said.

The top four telcos' 2015 average operating EBITDA margin will be mostly unchanged at 32%-33% as a decline in data tariffs will offset a gradual rise in voice tariffs.

They will generate a minimal free cash flow margin due to higher capex and flat EBITDA; the 2015 industry capex/revenue ratio could rise as fast-growing data traffic requires supporting investment.

The outlook for profitable private telcos could turn negative should price-based competition return in the voice segment, which would narrow profitability, Fitch has warned.

"The sector outlook could turn negative if the Indian government auctions a smaller-than-expected quantity of telecom spectrum in 2015, which could lead to aggressive bidding by incumbents whose licences expire during 2015-2016."