Financial express writes “Thanks to the brutal price war unleashed by RJio, and the exceptionally high government levies – both the annual license fees as well as spectrum costs – the telecom sector has been slipping into a deeper morass with each passing quarter; RJio starting a bruising price war accelerated the problem, but the sector was in the ICU even before RJio started commercial services. As a result of the price war, for the industry as a whole, after rising from Rs 131,602 crore in 2011 to Rs 198,206 crore in 2016, the sector’s gross revenues are estimated at Rs 142,789 crore this year. And, as a result, revenues accruing to the government have fallen by around 37% in just the last two years, to a likely Rs 36,291 crore this year from Rs 57,673 crore in 2016. While around a third of this took place due to lower annual licence fees and spectrum charges due to the industry’s revenues falling, two-thirds was due to the fact that, with no auctions in 2017 and 2018, the government didn’t get any upfront money in those years – as per the terms of auctions, an upfront payment is made in the year of the auction, and the balance is spread out after a moratorium of a few years.”If this isn’t bad enough, a lot worse could lie ahead, not just for the telcos, but also for the government and the banks it owns. For one, with no auctions likely for another few years, annual revenues from the sector will continue to remain low. And, apart from the money these telcos owe banks – Rs 2.5 lakh crore from Credit Suisse reort – they are likely to face a problem in paying even the deferred auction amounts.
I discussed the following graphic again from Financial express with one of the savvy Indian telecom investor
and asked about the endgame and he said “Nope, No endgame in sight. All three telecom players (RJIO,Airtel, Vodafone-idea) are bleeding heavily. But all three will survive!!! Pricing uptick will give bounce every now and then. Earliest price uptick will be post elections, if any“.
He concluded “Endgame is that equity market shuts door to Reliance ( before that cash flows from oil and gas business slows), RJio cannot burn cash anymore. Vodafone-Idea is shut from equity and debt capital markets. Very soon Bharti will not be able to access debt markets ( junk) and equity is shut for good. Only Reliance has access to debt markets !!!! which will soon need equity given debt/EBIDTA at consolidated level crosses 4X this year“
Actually endgame would not be in hands of equity fund managers but debt fund managers. Was recently studying factsheets of a couple of mutual funds (looking for safe debt investments – there are not many, unfortunately, but that is a topic for another day). But plenty of RJio debt – including some innovative structures – search for rent-a-device trust icra credit rating on google. It is when debt markets started asking some serious questions on RJio that it will be forced to hike prices. And take the sector up with it. Voda-Idea and Bharti have strong backers (incl. Singtel) and non-serious players are already out of the market. Also take into account RJio is also committed to large GigaFibre investments which will also drive more cash burn going ahead.