After disrupting the industry with its free services, Reliance Jio has kept up the pressure with its competitive data tariff plans, starting 1 April 2017. Jio has also made all voice calls—local, STD and roaming—free. The stock market has rewarded Reliance for its aggressive entry into the telecom sector, and the RIL counter has jumped more than 13% in a week.
Reliance Jio’s subscriber base has crossed 10 crore. The question now is: How many of these subscribers will become paying customers? Most analysts put the number around five crore. “Our base case scenario is that 50% of subscribers will stay,” says Mayuresh Joshi, Fund Manager, Angel Broking. Some experts say the number could be higher. “Since Jio is offering much higher data, retention rates could be more than 50%,” says Amar Ambani, Head of Research, IIFL.
Reliance Jio’s average revenue per user (ARPU) may be higher than the industry average of around Rs 150. “We are factoring in an average APRU of Rs 227 for 2018-19, assuming around 53% of Reliance JIO’s subscribers will be on the Rs 303 Jio Prime plan, while the rest will be on the lowest-priced plan of Rs 149 per month,” says Jal Irani, Analyst, Edelweiss Financial Services. At an ARPU of Rs 227, Jio will need 11.1 crore customers to break even in 2018-19. If the competition intensifies, Jio will be forced to reduce prices further which will eat into its ARPU. In such a scenario, it will require a much larger customer base to break even (see: How Jio may impact RIL’s profits in 2018-19).
Jio’s successful launch has removedthe capital requirement pressure on RIL. In fact, capital expenditure (capex) on Jio as a percentage of RIL’s overall capex, has come down drastically and will continue to fall. While Jio accounted for 96% of RIL’s capex in 2014-15, for 2016-17, this will be just 11%. With several refining and petrochemical projects nearing completion, RIL’s capex on its core business will also fall. The company is also benefitting from the recent surge in crude oil prices and it should help RIL increase its gross refining and petrochemical margins.
Given the positives, should you consider investing in RIL, despite the recent rally? Experts say existing investors can hold the RIL stock because there’s a possibility of a further upside. “Since RIL is emerging from a multi-year under-performance, the upside movement may continue for some more time. Expect another 12-15% upside from the current level, which will help Reliance overtake TCS in terms of market cap in the medium term,” says Ambani.
Impact on the competition
If more than 50% of the existing subscribers choose to stick with Jio, it will have serious repercussions for other telecom players. “Even Jio customers who retain plans from other companies may reduce usage, impacting their ARPU,” says Ambani. It will become difficult for Airtel, Vodafone, Idea, etc. to grow their user base as Jio aggressively adds customers at their expense. Fall in subscribers is just one of the problems staring the other telecom players. Another key challenge is fall in pricing power. “Due to aggressive pricing by Jio, pricing power in the telecom sector has gone. Other telecom players have no option but to match, follow what Reliance Jio is doing,” says Daljeet Kohli, Director and Head of Research, India Nivesh Securities. If others don’t match Jio’s offers, their market share will go and, if they cut prices, revenue will be hit. The fall in net profits will be more than the fall in revenues.
Despite the dangers, stock prices of other companies have not been negatively impacted because of long-term prospects of a more consolidated telecom sector. “Since data consumption is going to increase exponentially, everyone will benefit in the next 3-5 year period,” say Joshi. Investors, however, should be cautious. “Since we don’t know how long this madness will continue, it is better not to get into it now,” adds Kohli.
Airtel, however, is likely to survive this phase and can be a good buy for the long term. “Airtel possesses the leanest cost structure and is improving its capital efficiency,” says Pankaj Pandey, Head of Research, ICICI Direct. Its subscriber market share is expected to 29.1% and revenue market share to 33.3% due to its acquisition of Telenor.
Reliance Jio’s subscriber base has crossed 10 crore. The question now is: How many of these subscribers will become paying customers? Most analysts put the number around five crore. “Our base case scenario is that 50% of subscribers will stay,” says Mayuresh Joshi, Fund Manager, Angel Broking. Some experts say the number could be higher. “Since Jio is offering much higher data, retention rates could be more than 50%,” says Amar Ambani, Head of Research, IIFL.
Reliance Jio’s average revenue per user (ARPU) may be higher than the industry average of around Rs 150. “We are factoring in an average APRU of Rs 227 for 2018-19, assuming around 53% of Reliance JIO’s subscribers will be on the Rs 303 Jio Prime plan, while the rest will be on the lowest-priced plan of Rs 149 per month,” says Jal Irani, Analyst, Edelweiss Financial Services. At an ARPU of Rs 227, Jio will need 11.1 crore customers to break even in 2018-19. If the competition intensifies, Jio will be forced to reduce prices further which will eat into its ARPU. In such a scenario, it will require a much larger customer base to break even (see: How Jio may impact RIL’s profits in 2018-19).
Jio’s successful launch has removedthe capital requirement pressure on RIL. In fact, capital expenditure (capex) on Jio as a percentage of RIL’s overall capex, has come down drastically and will continue to fall. While Jio accounted for 96% of RIL’s capex in 2014-15, for 2016-17, this will be just 11%. With several refining and petrochemical projects nearing completion, RIL’s capex on its core business will also fall. The company is also benefitting from the recent surge in crude oil prices and it should help RIL increase its gross refining and petrochemical margins.
Given the positives, should you consider investing in RIL, despite the recent rally? Experts say existing investors can hold the RIL stock because there’s a possibility of a further upside. “Since RIL is emerging from a multi-year under-performance, the upside movement may continue for some more time. Expect another 12-15% upside from the current level, which will help Reliance overtake TCS in terms of market cap in the medium term,” says Ambani.
Impact on the competition
If more than 50% of the existing subscribers choose to stick with Jio, it will have serious repercussions for other telecom players. “Even Jio customers who retain plans from other companies may reduce usage, impacting their ARPU,” says Ambani. It will become difficult for Airtel, Vodafone, Idea, etc. to grow their user base as Jio aggressively adds customers at their expense. Fall in subscribers is just one of the problems staring the other telecom players. Another key challenge is fall in pricing power. “Due to aggressive pricing by Jio, pricing power in the telecom sector has gone. Other telecom players have no option but to match, follow what Reliance Jio is doing,” says Daljeet Kohli, Director and Head of Research, India Nivesh Securities. If others don’t match Jio’s offers, their market share will go and, if they cut prices, revenue will be hit. The fall in net profits will be more than the fall in revenues.
Despite the dangers, stock prices of other companies have not been negatively impacted because of long-term prospects of a more consolidated telecom sector. “Since data consumption is going to increase exponentially, everyone will benefit in the next 3-5 year period,” say Joshi. Investors, however, should be cautious. “Since we don’t know how long this madness will continue, it is better not to get into it now,” adds Kohli.
Airtel, however, is likely to survive this phase and can be a good buy for the long term. “Airtel possesses the leanest cost structure and is improving its capital efficiency,” says Pankaj Pandey, Head of Research, ICICI Direct. Its subscriber market share is expected to 29.1% and revenue market share to 33.3% due to its acquisition of Telenor.
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