Jio entry may spell exit for small players, hurt incumbents' margins

Reliance Jio will lead the charge in the 4G data space, according to reports by various analyst firms. Subscribers of 4G data - the staple of Reliance Jio - are expected to go up from around 4 per cent of the smartphone population to nearly 20 per cent by 2021-22. The growth will be led by the increasing penetration of low-cost 4G devices and rapidly growing eco-system of content, aided by falling data prices, according to an Economic Times report.

A report by Bank of America Merrill Lynch shows that Jio could corner around 22 per cent of the estimated 47 million 4G subscribers by the end of 2016-17, and its share could go up to 32 per cent by 2021-22 on a total subscriber base of 264 million.

In comparison, Bharti Airtel's share in 4G is estimated to go down to 24 per cent by 2021-22 from 29 per cent by the end of 2016-17, the report says. Vodafone is predicted to have a stable share of 21 per cent in 4G subscriber base over the same period, while Idea Cellular's share will be around 18 per cent.

The report by Bank of America Merrill Lynch added that the rivals of Jio, who have been rattled by the free voice calling announcement of Reliance Jio, may still have sufficient breathing space, considering that 2G and 3G will have a sizeable sway in the market.

A large base of subscribers may jump on to the networks of Airtel, Vodafone and Idea with nearly half of the market still not using any kind of data by 2021-22 (49 per cent against 64 per cent by 2016-17), the report said.

UBS said it does not expect high-end customers to switch to Jio immediately by abandoning their existing operators. However, its entry will put pressure on smaller players and will lead to consolidation in the industry. "In the medium term, Jio will ensure that marginal players such as Aircel, RCom, Tata DoCoMo, and Telenor exit."

A note by J P Morgan said the competitive environment for Jio would be "intense", despite the company offering free voice. However, it added that the company will have time to assess the number of subscribers as it gains momentum on the back of completely-free `welcome offer' till the end of this year. "The gap between full launch to commercial launch should allow Jio to build up a base of revenue-paying subscribers when Jio expenses finally hit the profit & loss," the report said.

Lenders might face the heat in the telecom war that has been unleashed with the launch of Reliance Jio. Telecom companies are expected to see a sharp dip in margins in FY17, which will reduce their cash flows and make it difficult for them to repay debt.

According to rating agency Crisil, incumbent operators will not only be forced to relook at their tariff structures and customer retention strategy but may also be forced to bid more aggressively in the forthcoming spectrum auctions to improve capacity to provide 4G services.

 "We expect ebitda margins for the industry to collapse by 250300 basis points in 2016-17 and remain under pressure in the next fiscal as well (100bps =1 percentage point)," the rating agency said. Crisil research expects that by opting for Reliance Jio, the monthly mobile bill for a mid-to high-end subscriber would come down by 50-60 per cent.

For banks, loans to the telecom sector account for around Rs91,000 crore as on July 2016, out of their total loans of Rs72 lakh crore. Bank exposure to telecom has come down steadily since 2011 as companies repaid some of the borrowing they had undertaken in 2010 in the wake of the 3G auctions.

"We got this wrong; wrong in terms of the extent of disruption, both qualitative and quantitative, that R-Jio's announced tariff plans can potentially cause," said Rohit Chordia of Kotak Research in a report. "This stress, if it occurs, would be quite chunky in nature and timing would be uncertain. We could see borrowers looking to elongate their repayment of loans under the various schemes, such as 5:25, introduced by the RBI," said the Kotak report.

In the private sector, Yes Bank and IndusInd .. Bank have the largest exposure to the sector with loans to telecom accounting for 4.5 per cent and 2.3 per cent of their respective books.