Reliance Communications (RCom) faces further challenges as India’s fourth largest mobile player due to increased competition in the data market as Reliance Jio prepares to enter the sector with cheaper tariff plans and faster data speeds.
Fitch Ratings expects the industry’s blended monthly ARPU to fall due to a decline in data tariffs, which will more than offset the rise in data usage. RCom’s FY17 blended ARPU, however, is likely to decline by just 1-2 per cent compared with a 5-6 percent drop for other operators because RCom’s ARPU of INR140 is already lower than the industry average of INR170.
With a revenue market share of about 8 per cent and a subscriber base comprising mostly low-revenue customers, it is vulnerable to competition from the top-three mobile players – Bharti Airtel, Vodafone India and Idea Cellular – which have been gradually gaining market share and now account for about 70 per cent of the country’s wireless revenue, Fitch said.
However, RCom’s ownership of pan-India spectrum in the 800-850MHz band and its ability to offer faster 4G data services could help it fend off the competition.
Sharing with Jio
In January 2016 RCom said that it would share its 800MHz spectrum with Reliance Jio in 17 regions. RCom also plans to share 800MHz spectrum in the remaining five circles. Spectrum sharing will give RCom access to a wider band of spectrum and Jio’s network to provide faster 4G data services and provide capex and operating costs savings.
The two firms also signed reciprocal infrastructure agreements in FY14-15 to share RCom’s 43,000 towers, 120,000km of inter-city fibre and a 70,000km intra-city fibre network for the next 17-20 years. Under the agreements, RCom also has access to existing and future towers and fibre assets of Reliance Jio.
RCom is taking steps to deleverage, including the sale of Reliance Infratel, its tower business. RCom has a non-binding arrangement to sell Infratel to Tillman Global Holdings and TPG Asia. Management has committed to repaying a part of its $6.1 billion of debt and to achieve a target debt/EBITDA of below 3.0x by end-March 2017. The ratio is currently at about 5.5x.
Apart from the sale of its tower business, RCom is also considering selling off non-core assets, including its under-sea cable subsidiary Global Cloud Xchange, real estate and its pay-TV business. However, progress on these asset sales has been slow to date.
Fitch said the company has insufficient liquidity to meet its obligations due in FY17 and will have to rely on banks to refinance facilities if it does not sell any assets.
RCom needs to invest about INR40 billion in FY17 (up from INR34 billion last year, excluding a one-off spectrum payment of INR11 billion) in capex to support its fast-growing data traffic and to improve the quality of voice services. However, its capex/revenue of around 17-18 per cent will still be below the top-three operators’ average of 19-20 per cent due to its infrastructure and spectrum-sharing arrangement with Reliance Jio.
Fitch believes RCom’s acquisition of Sistema Shyam Teleservices, the Indian mobile subsidiary of Russia’s Sistema, in an all-stock deal is credit neutral for RCom, at least in the short term. RCom will benefit from an additional nine million subscribers and INR15 billion revenue and also will be able to extend the life of its 800MHz spectrum in eight Indian circles.
However, the rating agency said that in FY17 incremental EBITDA from the acquisition will likely fall short of SSTL’s annual spectrum cost of INR3.9 billion – the cost of the spectrum SSTL acquired in the March 2013 auction will be paid annually over 10 years starting FY17.