Thanks to Reliance Jio, Airtel, Vodafone and Idea are squeezed from both ends

The general impression is that the woes of Indian telecom companies are largely because of Reliance Jio Infocomm Ltd’s cut-throat pricing. While Reliance Jio’s pricing strategy has played a big role in dragging all incumbents to losses in the December 2017 quarter, these companies are being squeezed at the other end as well.

Reliance Jio’s relentless aggression isn’t limited to its pricing strategy; there is no end in sight to its capacity for investments in the telecom sector.

Based on recent data presented in the Lower House of Parliament, analysts at Kotak Institutional Equities estimate that Reliance Jio has a 62% share of the combined data capacity of the country’s big four mobile companies. In other words, its capacity is about 1.6 times the capacity of Bharti Airtel Ltd, Vodafone India Ltd and Idea Cellular Ltd combined.

But according to an analyst at another institutional brokerage firm, Reliance Jio also carries about two times the data traffic these three companies manage between themselves.

As such, Reliance Jio too needs to augment capacity to support growth, which it indeed is busy doing. The company has told analysts it will increase the number of base stations to around 200,000 in the next few quarters, or by about 25% from current levels. The above-mentioned analyst says that channel checks with suppliers suggest the count will go up to as high as 250,000 eventually.

What all of this means is that incumbents need to step up investments to keep up pace.

“Even as we do not think incumbents need to match Jio on data capacity anytime soon, we do believe they need to accelerate their efforts in closing the gap. This may mean elevated levels of capex for the next two-three years, in our view, posing upside risks to capex forecasts,” Kotak’s analysts wrote in a note to clients.

This comes at a time when cash flows are drying up. Idea generated next to nothing in terms of cash last quarter, and that was before a series of tariff cuts by Reliance Jio in January. Needless to say, the increasing gap between cash flow and capital expenditure needs to be funded through other means.

So it isn’t surprising that all operators are busy with asset sales, equity/bond issuances or a combination of both. Airtel has periodically sold stakes in its tower infrastructure company and is even considering listing its Africa business to generate funds. Idea has diluted equity, while Reliance Jio is raising over $2 billion (Rs13,000 crore) in debt to fund capital expenditure.

From the looks of it, the need for funds will remain high, given where analysts’ estimates are with respect to capex needs. The fact that some telecom firms are being forced to raise funds at a time when their financials are at their worst and their stocks are beaten down just rubs salt into their wounds.livemint


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