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Posted On: 2017-03-04 23:57:51

Views of Mr. Mayuresh Joshi (Fund Manager, Angel Broking):

"The move by Reliance Jio to start charging their customers from April 1st, 2017 at a extremely competitive price of Rs 303/- plus Rs99/- as a fixed one-time cost for availing the Jio Prime membership has pleased most participants on Dalal street as it ushers in certainties on the revenue recognition front. Reliance Jio is presenting to its patrons (100 million have already subscribed to their service during the free offer period having validity till March 31, 2017) unlimited voice calls and 1GB of data every day, tantamounting to 30GB of data per month on the 4G network. The announcement has made existing telecom incumbents rework and revise their plan offerings and the latest offerings that Idea, Bharti and Vodafone have come out with are testimony to the fact. The possibility of pricing pressure continuing in order to retain both the Subscriber market share (SMS) and the Revenue Market Share (RMS) is the new realm of reality for the telecom industry and though there are is speculation about consolidation/mergers happening in the industry, predatory pricing can very well continue for next few quarters. Obviously, consolidation for the industry is good news as it should bring stability in pricing over the long run as more data gets rolled out and as consumers across the length and breadth of the country consume data in larger quantities thereby generating enormous data traffic and efficient usage of the spectrum bandwidth that the telecom players have bidded for. Again, the relevance of Voice revenues are dwindling by the hour as almost all telecom operators have rolled out schemes/plans that offer voice calling across networks at no additional cost. The effect of the aggressive stance adopted by the telecom operators has pulled down the Average Revenue per user on a blended basis (includes both data and voice, the average revenue per minute (which is inherently showing signs of consolidation) and data realizations per MB have come down drastically for most telecom companies. Now the bigger question is whether fall in data realizations have been compensated by an offsetting positive flow in relation to data volumes that an end user is consuming. Add to that the change in pricing plans by existing operators is bound to have existing subscribers on their networks shift to lesser value plans thereby pulling down their ARPU'S, ARPM'S and contraction in their operating margins which they used to enjoy earlier. What is not aiding them operationally either is the huge debt taken to fund both their capex plans as well as liabilities towards spectrum liability payouts and that is reflected in the huge amount of interest serving done on an annualized basis and the debt/EBIDTA Ratios. Telecom operators also need to spend continuously on upgrading their networks which creates a constant strain on their cash flow positions and there are certain contingent liabilities towards regulators which if mandated to be recognized on the profitability statements (as and when directed by the regulators as time lines for such decisions are not known) can cause additional strain on the cash flow position.

Now assuming that a large part of the subscriber base that Jio has acquired is retained, the revenue potential for JIO starts getting recognized in the coming fiscal and though the Rs 2 trillion spent in building capacities for the 4G network can have strain on JIO 's standalone balance sheet in terms of recognition of depreciation and interest, it is a matter of time that operational numbers start playing our meaningfully in the coming few years. Again the SMS and RMS share that existing telecom operators enjoy shall logically come down but to what extent and in which quantum the next few quarters shall decide. Also for JIO the large part of the capex done in the previous few years and the entailing work in progress of the telecom capital employed getting converted into productive assets is bound to improve the capital efficiency ratios of the telecom vertical and the combined entity as well. This exercise shall effectively push the return ratios of the combined entity as the core business capex is almost over and the Return on Equity (RoE) should improve over the next few years.

So, Jio's entry has been disruptive of the telecom space and the adjustment of existing telecom operators to readjust to aggressive plans and tariff policies is bound to take a toll on their key operational parameters from a medium term perspective though the long term story can be different in case we do have a DATA REVOLUTION playing out with end consumers consuming humongous data thereby giving the operating leverage on telecom companies balance sheets."

Source: Equity Bulls

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