According to the credit rating agency Moody?s, Reliance Industries Limited (RIL) is expected to invest Rs 300 billion, of the total planned investments worth Rs 700 billion, in its telecom arm Reliance Jio Infocomm Limited (RJIL) over the next two years.
Further, Moody?s underlines that the investment in the telecom business is a credit negative for RIL because RJIL will not generate any earnings before interest, taxes, depreciation, and amortisation for at least next 12 months. However, RJIL will be a formidable competitor in the telecom sector making it a credit negative for leading telecom operators in the country.
Based on RIL?s March 2014 annual report, credit rating agency estimates that RIL has already invested about Rs 400 billion in RJIL and RIL is expected to invest another Rs 300 billion in the company over the next two years.
Earlier, speaking at RIL?s 40th Annual General Meeting, the company?s chairman and managing director, Mukesh Ambani stated that the company which was looking at introducing 4G services in 2014 will now commercially launch the service in 2015, entailing investments of Rs 700 billion. Further, in a phased rollout of services, the company?s 4G network will cover all states, including 5,000 towns and cities, accounting for over 90 per cent of urban India and over 215,000 villages. Eventually, the network will encompass each of over 600,000 villages.
Despite RIL revising the timeline for the launch of 4G services, Moody?s has stated that RJIL will be a formidable competitor in India?s telecom sector as the company will enter the business with a strong financial backing. Further, it states that RJIL?s entry into highly competitive telecom sector is also credit negative for incumbent mobile operators and market leaders such as Bharti Airtel and Vodafone India because it will undoubtedly result in intensified competition that will lead to decline in average revenue per user and margins.
Meanwhile, the credit rating agency also underlines that strong spectrum holding of incumbents, existing large subscriber-bases, well-established brand equity, existing 2G and 3G service offering (apart from 4G services being launched) as well as marketing and distribution architecture will all contribute to mitigate much of the near-term competitive threat from RJIL. Furthermore, given issues of language and literacy, large parts of rural India remain a substantially voice-based market where near-term demand for 4G services may be muted.
