Jio 4G data plan to hit Airtel’s premium customer base

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Indian telecom network operators’ credit profiles are expected to weaken amid intense competition and high Capex requirements in 2017, says Fitch Ratings.

Fitch Ratings also said Reliance Jio Infocomm’s high data allocation plan could hit Bharti Airtel’s premium customer base. Reliance Jio has added 16 million 4G subscribers in the first month of launch.

Pricing power could be eroded as incumbents such as Bharti Airtel, Idea Cellular, Vodafone India and Reliance Communications retaliate against new entrant Reliance Jio Infocomm’s cheaper data tariffs and free voice and text.

The top-four telecoms’ – Bharti Airtel, Vodafone India, Idea Cellular and Reliance Communications — revenue market share will rise to around 84 percent from 79 percent in 2016 as they gain market share from smaller telecoms. Fitch expects Reliance Jio to gain less than a 2 percent revenue market share in 2017 but to act a major price-disruptor to the sector.

Industry revenue growth could slow to the mid-single-digits against 7 percent-8 percent in 2016 due to lower data revenue growth, as data tariffs could decline by at least 15 percent-20 percent. The EBITDA margin of the top-four telecoms could decline by 150bp-200bp from 34 percent in 2016 due to lower tariffs and increased marketing spend as data competition rises. Most telecoms’ FCF will be negative, as cash generation is likely to fall short of Capex requirements.

Reliance Communications’ plan to demerge its wireless business is credit neutral – as the demerger will take away an equal proportion of debt and EBITDA from Rcom. Our Stable Outlook factors in our expectation that Reliance Communications will use the proceeds from the sale of tower assets to improve leverage, commensurate with a BB- rating.

Bharti Airtel’s BBB- IDR headroom may narrow as FFO-adjusted net leverage could deteriorate to over 2.0x (FY16: 1.8x, excluding USD5bn deferred spectrum costs) due to flat EBITDA as competition intensifies. Its 2017 operating EBITDAR margin could ease to 33 percent-34 percent (FY16: 35 percent) as Reliance Jio’s high-data-allocation plan could hit Bharti Airtel’s premium customer base, which accounts for the most profitability at its Indian mobile segment.

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