Reliance Jio to gain higher share from exit of small telcos in FY19; likely to maintain subscriber addition pace
"This will keep competitive intensity high in FY19, despite the reduction in the number of players," Ind-Ra said. It also projects an increase in revenue market share (RMS) for Jio with a possibility of lower RMS for Vodafone-Idea (merged).
Mukesh Ambani-led Reliance Jio is expected to gain a higher share from the exit of small telcosand also from first-time data users in the country, and it is likely to maintain subscriber acquisition momentum by continuing with discounted pricing policy or bundling more services, India Ratings and Research said in a report.
The ratings firm said that the competitive intensity will extend from broadband segment (3G/4G) to feature phone segment (2G) with Jio’s aggressive marketing plan, and it may lead to shifting of 2G subscribers directly to the 4G platform, thus making 3G offerings from existing telcos irrelevant for Indian markets.
"This will keep competitive intensity high in FY19, despite the reduction in the number of players," Ind-Ra said. It also projects an increase in revenue market share (RMS) for Jio with a possibility of lower RMS for Vodafone-Idea (merged).
According to the agency top Indian telcos would focus on increasing their subscriber market share rather than revenue share during FY19, and the dual sim phenomenon would continue for longer-than-expected, given low customer loyalty and high price sensitivity. "The tariff-based customer acquisition will spread to the lower ARPU segment using feature phones; Reliance Jio has cut down pricing significantly to increase its market share," it added.
Ind-Ra said that ARPUs will be capped at the higher end but remain at risk at the lower-end post Jio’s feature phones.
"While, the industry pricing trend will continue to move towards competitive pricing on medium validity plans (70-90 days) to retain the market share, competitive play could from pricing shift to pure play services such as handset bundling, device protection and buyback," the agency said, adding that the return of pricing power is uncertain and would be dependent upon complex factors such as RJio’s pricing strategy and consumer reaction to tariff increases. Return of pricing power, although crucial, appears difficult in FY19.
The growth in data consumption is likely to remain high in FY19, given the sharp decline in prices and a favourable ecosystem. Broadband subscriber growth mainly stems from conversion of narrowband subscribers and growing adoption of data in the wake of digitalisation.
During the new fiscal year, telecom capex in FY19 will be towards network augmentation, technology investments and innovative offerings to capitalise on the rising trend of convergence of telecom and media in line with developed markets.
On the network side, the investment will be towards fibre backhaul network and site upgradation and decongestion, whereas technology capex would revolve around voice over long term evolution (VoLTE) and early capex into 5G ecosystem (internet of things). "We expect telcos to invest in content partnerships and vertical integration with handset providers as ability to provide bundled offerings (handsets, broadband, cable TV, over the top) could emerge as a key differentiator. Telecommunications, media and technology are overlapping/merging, thereby necessitating agility in business models," it said.
ALSO READ: Reliance Jio may launch its JioFiber broadband service by March-end
Consolidation has led to sufficient spectrum availability and top telcos have strengthened their business model via acquisition of spectrum at attractive prices. "FY19 may not witness active participation in spectrum auctions," Ind-Ra said.
The industry’s gross revenue adjusted for interconnect usage charges (IUC) declined 13.3% yoy to Rs 1.3 trillion in first nine months of the ongoing fiscal or 9MFY18, indicating exit of small players as well as lower ARPUs.
However, the agency expects industry revenue to remain stable in FY19, although revenue growth would be uneven across telcos. EBITDA margins for extant telcos (excluding RJio) will remain subdued as IUC could be reduced further in line with the government of India’s decision to move to zero IUC by 2020.
Ind-Ra expects Jio’s ARPU and EBITDA margins to remain higher than the industry average because of customer mix --100% broadband customers versus 25%-30% with other telcos -- and lowering of IUC. The agency expects revenue upside to remain challenging in FY19 for extant telcos (excluding Jio), who would face double whammy of declining data tariff and voice revenue. "However, faster data penetration and consumption could support revenue over the medium term if the ecosystem remains favourable," it added.
ALSO READ: Reliance Jio's Rs 49 plan to drive user growth in rural areas: India Ratings
Large telcos have prepared themselves for the continued challenging environment via asset monetisation, which emerged as a key credit theme in FY18 besides industry consolidation. Ind-Ra expects asset monetisation to continue in FY19, which could help deleverage balance sheets. However, valuations of assets available for monetisation could be subdued.
India Ratings and Research has revised the outlook on telecommunications services sector to negative-to-stable for FY19 from negative in FY18
.
The ratings firm said that the competitive intensity will extend from broadband segment (3G/4G) to feature phone segment (2G) with Jio’s aggressive marketing plan, and it may lead to shifting of 2G subscribers directly to the 4G platform, thus making 3G offerings from existing telcos irrelevant for Indian markets.
"This will keep competitive intensity high in FY19, despite the reduction in the number of players," Ind-Ra said. It also projects an increase in revenue market share (RMS) for Jio with a possibility of lower RMS for Vodafone-Idea (merged).
According to the agency top Indian telcos would focus on increasing their subscriber market share rather than revenue share during FY19, and the dual sim phenomenon would continue for longer-than-expected, given low customer loyalty and high price sensitivity. "The tariff-based customer acquisition will spread to the lower ARPU segment using feature phones; Reliance Jio has cut down pricing significantly to increase its market share," it added.
Ind-Ra said that ARPUs will be capped at the higher end but remain at risk at the lower-end post Jio’s feature phones.
"While, the industry pricing trend will continue to move towards competitive pricing on medium validity plans (70-90 days) to retain the market share, competitive play could from pricing shift to pure play services such as handset bundling, device protection and buyback," the agency said, adding that the return of pricing power is uncertain and would be dependent upon complex factors such as RJio’s pricing strategy and consumer reaction to tariff increases. Return of pricing power, although crucial, appears difficult in FY19.
The growth in data consumption is likely to remain high in FY19, given the sharp decline in prices and a favourable ecosystem. Broadband subscriber growth mainly stems from conversion of narrowband subscribers and growing adoption of data in the wake of digitalisation.
During the new fiscal year, telecom capex in FY19 will be towards network augmentation, technology investments and innovative offerings to capitalise on the rising trend of convergence of telecom and media in line with developed markets.
On the network side, the investment will be towards fibre backhaul network and site upgradation and decongestion, whereas technology capex would revolve around voice over long term evolution (VoLTE) and early capex into 5G ecosystem (internet of things). "We expect telcos to invest in content partnerships and vertical integration with handset providers as ability to provide bundled offerings (handsets, broadband, cable TV, over the top) could emerge as a key differentiator. Telecommunications, media and technology are overlapping/merging, thereby necessitating agility in business models," it said.
ALSO READ: Reliance Jio may launch its JioFiber broadband service by March-end
Consolidation has led to sufficient spectrum availability and top telcos have strengthened their business model via acquisition of spectrum at attractive prices. "FY19 may not witness active participation in spectrum auctions," Ind-Ra said.
The industry’s gross revenue adjusted for interconnect usage charges (IUC) declined 13.3% yoy to Rs 1.3 trillion in first nine months of the ongoing fiscal or 9MFY18, indicating exit of small players as well as lower ARPUs.
However, the agency expects industry revenue to remain stable in FY19, although revenue growth would be uneven across telcos. EBITDA margins for extant telcos (excluding RJio) will remain subdued as IUC could be reduced further in line with the government of India’s decision to move to zero IUC by 2020.
Ind-Ra expects Jio’s ARPU and EBITDA margins to remain higher than the industry average because of customer mix --100% broadband customers versus 25%-30% with other telcos -- and lowering of IUC. The agency expects revenue upside to remain challenging in FY19 for extant telcos (excluding Jio), who would face double whammy of declining data tariff and voice revenue. "However, faster data penetration and consumption could support revenue over the medium term if the ecosystem remains favourable," it added.
ALSO READ: Reliance Jio's Rs 49 plan to drive user growth in rural areas: India Ratings
Large telcos have prepared themselves for the continued challenging environment via asset monetisation, which emerged as a key credit theme in FY18 besides industry consolidation. Ind-Ra expects asset monetisation to continue in FY19, which could help deleverage balance sheets. However, valuations of assets available for monetisation could be subdued.
India Ratings and Research has revised the outlook on telecommunications services sector to negative-to-stable for FY19 from negative in FY18
.
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