The imminent entry of Reliance Jio has led domestic rating agencies Crisil and India Ratings to cut their outlook on the telecom sector by a notch, saying the Mukesh Ambani-led company will squeeze the market shares and margins of existing players.
"We have revised the telecom sector outlook for FY17 to stable-to-negative from stable. Launch of Reliance Jio will intensify competition which will squeeze the market share, margins and credit metrics of the incumbents," India Ratings said in a note.
Its competitor Crisil has given a negative outlook on the sector, citing heating up of rivalries as one of the factors for its view.
India Ratings said the launch of RJio will lead to data revenues remaining stagnant for the existing players. It added that data realisations for a megabyte are likely to correct by 30-40 per cent.
Apart from this, the need to keep the network in good shape to compete against RJio will lead to higher investments on spectrum by existing operators, especially through the newly-opened route of radio wave trading, it said.
"The competitive intensity will increase as RJio readies for a launch backed by a cash-rich parent. We expect RJio to contend for market share out of the existing pie of subscribers which are being serviced by incumbent operators," India Ratings warned, adding that Ambani is launching his offering after investing over Rs 98,000 crore.
"We expect to witness a high-intensity battle for grabbing high usage, service-focused data subscribers once Jio enters the fray, which will also spawn a shift in focus from pure-play services to content differentiation," Crisil said.
On other key parameters, India Ratings said it expects a decline in voice revenues and moderation in average revenue per user in the next fiscal.
Both the agencies said the sector is set for greater consolidation, as the incumbents, especially the top three -- Airtel, Vodafone and Idea -- cement their positions.
"In the last two rounds of spectrum auctions, these operators, along with Jio, obtained about 85 per cent of the spectrum sold. Their sheer dominance, in terms of both revenue and spectrum share, makes further consolidation inevitable," Crisil said.
India Ratings expects spectrum to drive consolidation. It described the recent guidelines allowing spectrum sharing and trading transactions as a positive move which will enable smaller players to monetise their assets and allow bigger players to enhance their spectrum holdings.
(Reopens DCM 62)
While requesting the government to reconsider tax
proposal impacting the industry, the COAI has also sought clarification on proposed income tax provisions.
The Finance Bill, 2016 proposes to insert Section 35 ABA in the Income tax Act, 1961 (the Act). The said section prescribes that a deduction from income would be granted of an appropriate fraction of the expenditure incurred on acquiring the right to use spectrum and for which payment has actually been made.
A telecom operator bidding for spectrum can upfront pay for the spectrum acquired. The government also has a facility whereby the acquisition bid amount can be paid in installments over a prescribed period along with prescribed interest. This installment facility is given primarily to mitigate the financial burden on telecom operators who are already reeling under a huge debt burden.
"Section 35 ABA of the Act can be mis-interpreted that deduction is to be allowed (from taxable income) only of an appropriate fraction of installments paid and not of the actual bid amount incurred while acquisition of the spectrum.
"Such an interpretation will lead to penalising telecom operators who opt for installment schemes by deferring deduction vis a vis where bid amounts are paid upfront to the government," the COAI said.
The industry body said the government should clarify on the income tax deduction proposals to mitigate ambiguity that could result in fruitless litigation and increased uncertainty.