Jio shadow over Airtel, Idea stock price target

RIL suffers m-cap loss of over $2 bn in two days on concerns over profitability

Incumbent telecom players Bharti Airtel and Idea Cellular suffered huge cuts in their stock price targets, as analysts feared Jio’s launch would disrupt the $28-billion Indian telecom market.
 

Influential foreign brokerages Goldman Sachs, Credit Suisse and JP Morgan have cut their 12-month price targets for Airtel and Idea by as much as 19 per cent. Shares of London-listed Vodafone Plc, which derives over a tenth of its revenues from the Indian market, also fell 3 per cent on Thursday to their lowest level in more than a month.

Shares of Airtel and Idea recouped some of the losses on Friday, gaining 2.7 per cent and 0.4 per cent respectively. Despite that, Airtel and Idea were down 4 per cent and 10 per cent respectively and have lost market capitalisation of Rs 3,403 crore and Rs 5,157 crore since Reliance Industries (RIL) raised the curtains on its much-awaited 4G services on Thursday.
 

Meanwhile, shares of RIL extended their two-day loss to 4.3 per cent on concerns over profitability of the new venture, given Jio’s high capex spends of over $20 billion. On Friday, RIL briefly ceded its position as the country’s second-most valuable company to HDFC Bank before recovering again. The company has lost Rs 14,640 crore (over $2 billion) in market capitalisation in the last two trading sessions.
 

In a move seen as aggressive, Jio has announced free voice calls across network and data charges that are 30-50 per cent lower than that charged by incumbents, including Airtel and Vodafone.
 

“These disruptive changes would create pressure on incumbents on multiple fronts,” said analysts at Jefferies in a note. The brokerage says Jio’s launch has raised doubts over the future of the voice market, which currently accounts for 80 per cent of telecom revenues. It also forecast loss of subscriber and revenue share and high cost pressures for the incumbents.
 

“We think Jio’s plans are more disruptive than expected and retain our cautious sector stance. The risk of both lower topline growth and margin pressures have increased for the incumbent,” the note added.
 

Jio’s commercial launch will be on September 5 and it plans to offer unlimited voice, data and video until December as part of its “welcome offer”. The newest telecom player is targeting 100 million customers in ‘shortest possible time’.
 

“All bets are off on how industry financials shape up for the next couple of years,” said Kotak Institutional Equities, scaling back its operating profit (Ebitda) forecast for Airtel and Idea by up to 25 per cent. “Needless to say but say we must — we got this wrong; wrong in terms of the extent of disruption, both qualitative and quantitative, that Jio’s announced tariff plans can potentially cause,” it added.
 

Most analysts don’t have much coverage on the other two listed telecom stocks — Reliance Communications and Tata Tele (Maharashtra) — but they too are likely to feel the heat of Jio’s launch. Both stocks were down eight per cent and four per cent respectively in the last two sessions.
 

Among the listed players, Airtel is better placed in the new data-oriented telecom landscape, said CLSA. It has also cut its earnings forecast for Airtel and Idea. “With fresh risks from Jio’s planned tariffs and free offers until December 2016, we lower our FY17-18 Ebitda estimates by 3-5 per cent for Bharti Airtel and 2-4 per cent for Idea Cellular and earnings estimates by 9-16 per cent for Bharti Airtel and 13-19 per cent for Idea Cellular,” it said in a note.