Harsh Jagnani, Sector Head and Vice President, ICRA

It has been one year since Reliance Jio Infocomm Ltd. (RJio) launched its operations, and during this period the Indian telecom industry has witnessed a phase of severe turbulence. The period was characterized by heightened competitive intensity, pricing pressures, and decline in revenues and profitability, all at a time when the industry was already saddled with elevated debt levels.

However, challenges aside, the last one year has seen many transformations in the industry namely – initiation of consolidation, higher data usage, revamp of pricing plans, and greater focus on quality, technology, and content. Realization of any upside from these changes is some time away with a difficult transition period. The pricing pressure currently faced by the industry is expected to translate into decline in profitability levels for FY2018 after the already subdued H2FY2017, presenting high credit risk, with pockets of stressed debt which may require inorganic funding. At the same time, the telcos would have to consistently invest in networks to keep pace with the strong data growth – the CapEx intensity for the industry is expected to remain upwards of 50,000 crore per annum. This CapEx intensity along with the repayment obligations remain sizeable in comparison to the expectedly constrained cash flow generation, resulting in increase in total debt of the industry to 4.8 lakh crore by March 2018 as per ICRA estimates. With this, the gearing is estimated to cross 3, while the gross debt/EBITDA is estimated to cross 10.

In the ten months since RJio's launch, the market share of the three large incumbents, along with RJio, has been steadily improving. They together hold active subscriber market share (SMS) of 74.4 percent (up from 64.0 percent in June 2015 and 67.8 percent in June 2016) and revenue market share (RMS) of 76.9 percent (up from 69.9 percent in June 2015 and 73.3 percent in June 2016). This gradual strengthening of the market position of the larger players points toward likely marginalization/exit of some players over the next 1–2 years. It should drive the restoration of pricing power to the industry, but only in the long run. RJio, on its part, has been steadily calibrating its pricing upwards with each new plan (for instance, implied average revenue per SIM for JioPhone stands at 130). Success of JioPhone in adding a meaningful subscriber base may also decide the extent to which RJio utilizes the savings in IUC to continue with aggressive pricing.

At the same time, the stickiness of data usage is expected to continue to increase. Over the last few months, the data usage in the country has increased from less than 200 MB per month per subscriber to more than 1000 MB per month, with potential for further growth, on the back of increasing content. Another emerging trend for the industry is the move toward simplified and bundled tariff plans. Given the unlimited voice and sizeable data quantum now being offered by the operators for around 150 per month, the per month revenue from most of the subscribers in the industry is likely to migrate to 100–200, as compared to a much wider range earlier.

In conclusion, higher pricing power and sticky data usage would be the inflection point of recovery for the industry. Sufficient pricing power is critical for the industry given the sizeable investment requirements and high operating leverage. The industry can achieve these objectives over the next 12–18 months. On the regulatory front, measures finalized by the Inter Ministerial Group (IMG) to provide relief to the sector would be keenly watched. As per ICRA estimates, elongation of the payment period of deferred spectrum liabilities from existing 10 years to 16 years can translate into cash-flow savings for the industry to the tune of 7000 crore per year, for next six years.


 

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