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Telcoms to suffer poor profitability, continue to lose market share to Jio

India Ratings & Research (Ind-Ra) has downgraded the telecom services industry outlook to negative in FY18 on expectations that carriers will be hit harder and for longer spans by Reliance Jio Infocomm’s free services.
The rating company said telcos “would continue to lose market share to Jio and suffer from poor profitability in FY18” and their debt burden would continue to mount due to spectrum-linked payouts and network-related expenditure.
The negative outlook reflects expectations of “longer and deeperthan-expected deterioration in the credit profile of existing telcos following free services extended by Jio,” Ind-Ra said in a note, adding that the industry had already lost roughly 20% of revenue.
It anticipates that telcos will monetise non-core assets to mitigate the pressure on credit profiles emanating from high debt levels and a drop in earnings before interest, tax, depreciation and amortisation.
Jio started operating in September with promotional packages of free voice and data services. It notched up 72 million paying subscribers at the end of March. Jio’s rivals were forced to counter by cutting prices to retain subscribers.
Analysts at Ind-Ra expect “per capita data usage to increase 35-to-40% on-year in FY18 to 1250 MB, primarily propelled by Jio’s datacentric business strategy, proliferation of cheaper smartphones and accelerated 4G adoption.”
The Fitch Group company expects data services to generate 30% of telco revenues in FY18, up from 22% in FY16 and the projected 25% in FY17. However, it said higher data volumes would “not lead to a commensurate increase in revenue as data realisations would decline by 20-to-30%.”
The decline in data tariffs amid the ongoing price war would continue to pull down average revenue per user (ARPUs), 
regardless of higher volumes, while voice revenue of the older telcos would remain at risk due to Jio’s declared lifetime  free voice strategy.
“There is a structural shift in pricing plans, which will move towards bundled tariffs with free or discounted voice,” Ind-Ra said in its sector outlook note seen by ET.
Ind-Ra expects voice revenues to moderate in FY18 on stagnant minutes of usage and a further drop in call realisations per minute to 25-28 paise from 30-35 paise currently.
The rating agency said “pricing stabilisation would be the key driver” for it to revise the telecom services sector outlook to stable.
It added that return of pricing power and substantially higher data volumes would also be critical to generate the desired return on large investments made in the telecom services sector.

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