We expect the move will result in a transfer of USD500 million-600 million per year from incumbents to Jio. Operators pay the MTR when one of their customers makes a voice call to a user on another network, with the fee going to the operator on which a call terminates. Operators with large subscriber bases tend to be net recipients of these interconnection fees. Bharti alone received about USD75 million in interconnection revenue from Jio in April-June 2017.
We expect the MTR cut to reduce the EBITDA of the main incumbents - Bharti Airtel, Idea Cellular and Vodafone India - by 3%-6% in the financial year ending March 2018 (FY18). This will place further pressure on these companies, which are already facing unprecedented competition from Jio. Industry average revenue per user declined by 20%-22% yoy in 1QFY18, reflecting Jio's offer of free voice, text and data services for six months from September 2016 and its subsequent discounts and promotions to win subscribers. Most incumbents have lost subscriber market share to Jio during the last two quarters, with Bharti the exception.
The removal of the MTR in 2020 is likely to have a much smaller impact. Jio's net payment of interconnections fees to incumbents will fall as its subscriber base grows, and we believe asymmetry will be minimal by 2020. Indeed, Jio already had 98 million active subscribers at end-July 2017 - a 9.6% share. Moreover, overall voice revenue will continue to drop as a result of Jio free voice call offerings and the rising popularity of data-led 'over the top' (OTT) operators.
Bharti's 'BBB-' ratings have low headroom, as we expect its FFO-adjusted net leverage to rise from 1.9x in FY17 to 2.0x-2.2x in FY18 - pushing it closer to the threshold of 2.5x above which we would consider negative rating action. We forecast Bharti's revenue and EBITDA to decline by at least 5% in FY18 amid intense competition and lower MTRs.
We maintain a negative outlook on the Indian telecoms sector, which reflects the broader pressures created by Jio's entry last year. Jio is likely to roll out other offers to increase its subscriber base over the next two years, and the incumbents are likely to continue to respond with price cuts, discounts and promotions of their own. As a result, industry-wide mobile blended average revenue per user is likely to fall to around INR150 (USD2.2) by March 2018, down 5% from March 2017.
Competitive pressures have encouraged consolidation, and three strong telcos have emerged from the shake-out - Bharti, Jio and the combined entity of Vodafone India and Idea Cellular, which are due to merge. Jio's revenue market share is still low - around 4%-5% - as it has so far competed on an aggressive pricing strategy, but we expect this to rise to more than 10% by 2018.
Powered by Capital Market - Live News
Disclaimer: No Business Standard Journalist was involved in creation of this content
