Launch of Reliance Jio will be a game-changer in Indian telecom: Moody’s

23 Jun 2014


Reliance Jio, an arm of Mukesh Ambani's Reliance Industries Ltd, is a potential game-changer in the Indian telecom sector, and the ratings of all telecom companies will be impacted by the launch of Reliance Jio services next year, according to credit rating agency Moody's.

''It will enter the Indian telecom space as a well-capitalized entity, supported by the financial muscle of RIL, India's largest conglomerate,'' Moody's said.

Reliance Jio acquired 78.8MHz of 1800MHz spectrum in 14 circles in February, and is the only player with a pan-India 4G licence.

''Its spectrum and financial wherewithal should give it firepower to offer aggressive pricing, particularly given its aspirations for offering services in rural areas,'' Moody's said.

Ambani said at the company's annual general meeting last week that Reliance Jio's voice and data services would initially cover about 5,000 towns and cities accounting for over 90 per cent of urban India, as well as over 215,000 villages in India. RIL's target is to expand this to over 600,000 villages.

Reliance Jio expects to roll out services in 2015, with trials in certain cities beginning as soon as August this year.

 ''The investment will increase RIL's net debt, and Reliance Jio will not generate any EBITDA for at least next 12 months, a credit negative for RIL,'' Moody's said.

''Based on RIL's March 2014 annual report, we estimate that it has already invested about Rs40,000 crore in Reliance Jio, and we expect RIL to invest the next Rs30,000 crore in Reliance Jio over the next two years. The additional investment will increase RIL's consolidated net debt by an equal amount, pushing its consolidated adjusted net debt/EBITDA to 2.1x from 1.4x at 31 March, an increase we already incorporated into the company's ratings.

''Further, the telecom investment is exposed to significant technological, operational and commercial risks, given India's nascent commercial rollout of 4G,'' Moody's said.

It also said Reliance Jio's entry into India's highly competitive telecom sector is also credit negative for incumbent mobile operators and market leaders Bharti Airtel Ltd. and Vodafone India (unrated) because it will undoubtedly result in intensified competition that will lead to declines in average revenue per user and margins.

''Competition in the Indian telecom sector has only just eased over the past four quarters, but we expect market stability to be challenged when Reliance Jio rolls out its service next year.

''However, the large incumbents have equally strong spectrum holdings and more importantly, existing large subscriber bases, well-established brand equity, 2G and 3G services apart from 4G services, and an existing operational set-up including towers, backhaul, marketing and distribution architecture, all of which mitigates much of the near-term competitive threat from Reliance Jio.

''Furthermore, given issues of language and literacy, large parts of rural India remain a substantially voice-based market where near-term demand for 4G services may be muted,'' Moody's said.

Bharti is currently India's largest operator, with over 208 million subscribers and a market share of approximately 28 per cent. Vodafone India is a close second with about 168 million subscribers and an approximately 23 per cent market share, according to the Cellular Operators Association of India.

Both companies have strong operating profiles and can offer full voice and data services across 2G and 3G technologies throughout India and 4G in selected cities.

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