Reliances launch of mobile telecom services is credit negative for it and competitors: Moodys

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

June 23, 2014 8:48 IST | India Infoline News Service
Last Wednesday, Reliance Industries Limited (RIL, Baa2 stable) said it would launch a phased nationwide rollout of its mobile telecoms service Reliance Jio (unrated) next year and invest a total of Rs. 700 billion ($11.6 billion) into the unit. The investment will increase RILs net debt, and Reliance Jio will not generate any EBITDA for at least next 12 months, a credit negative for RIL.
Based on RILs March 2014 annual report, we estimate that it has already invested about Rs. 400 billion in Reliance Jio, and we expect RIL to invest the next Rs. 300 billion in Reliance Jio over the next two years. The additional investment will increase RILs 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 companys ratings. Further, the telecom investment is exposed to significant technological, operational and commercial risks, given Indias nascent commercial rollout of 4G.
Nonetheless, Reliance Jio is potentially a formidable competitor in Indias telecom sector. It will enter the Indian telecom space as a well-capitalized entity, supported by the financial muscle of RIL, Indias largest conglomerate. Reliance Jio acquired 78.8MHz of 1800MHz spectrum in 14 circles in February, and it is also the only player with a pan-India 4G spectrum, although it has yet to deploy its network. Its spectrum and financial wherewithal should give it firepower to offer aggressive pricing, particularly given its aspirations for offering services in rural areas. RIL Chairman Mukesh Ambani said at the companys annual general meeting that Reliance Jios voice and data services would initially cover about 5,000 towns and cities accounting for over 90% of urban India, as well as over 215,000 villages in India. The target is to expand this to over 600,000 villages. Reliance expects to roll out Reliance Jio in 2015, with trials in certain cities as soon as August this year.
Reliance Jios entry into Indias highly competitive telecom sector is also credit negative for incumbent mobile operators and market leaders Bharti Airtel Ltd. (Baa3 stable) 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.
Bharti is currently Indias largest operator, with over 208 million subscribers and a market share of approximately 28%. Vodafone India is a close second with about 168 million subscribers and an approximately 23% 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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