Overspend on spectrum to put RIL rating under pressure:Moody's

New Delhi: Higher-than-expected spending by Reliance Industries Ltd in the upcoming telecom spectrum auction will put pressure on its ratings, although the cash outgo on account of Jio launch can be accommodated, Moody's Investors Service said.

The capex for RIL's telecom business would be higher than previously estimated and the success of Jio hinges on increased penetration of 4G devices and change in data consumption patterns in India, the credit rating agency said.

On September 5, RIL launched its wireless mobile services through its subsidiary Reliance Jio Infocomm. As part of the promotional package, customers will not be charged for this new service until at least December 2016.

They will not be charged for voice services (except for international calls) even after that and the tariffs applied for data usage will be below those applied by the incumbent service providers.

"These tariff plans are more aggressive than we previously expected and imply higher cash outflows for this subsidiary than we had previously estimated... Higher cash outflow for Jio can just be accommodated in the ratings," Moody's said in its report on Mukesh Ambani-led RIL.

RIL's move to high speed internet combined with some of the lowest data tariffs in the world should see data consumption rise significantly, it said.

"This growth will also be supported by Jio's proprietary apps that, among others, provide entertainment and media content. Nonetheless, a change in consumer behaviour at this scale and in such a short period will be challenging," Moody's said.

It added however that higher-than-expected spending on telecom spectrum auction "would pressure RIL's ratings".

The government is scheduled to auction spectrum worth more than Rs 5 lakh crore in October. In one of the largest spectrum auctions in the world, nearly 80 per cent of the radiowaves (by value) being auctioned is for the 700 Mhz band, which is better suited for 4G data services.

"Although we expect Jio to bid for spectrum in the upcoming auctions, our rating only incorporates spending in line with its previous purchases as the company already has the spectrum it needs for its operations.

"Should its spending nevertheless exceed our expectation, such that its credit metrics will no longer be above our upgrade threshold by March 2018, we could change the outlook on its local currency ratings to stable from positive," Moody's said.

It further said that there could be negative pressure on the ratings if earnings fail to improve in the energy segment or earnings in the telecom segment fall below expectation or spending on telecom, either on spectrum or otherwise, is higher than our expectation; or the company undertakes large debt-funded acquisitions.

As the commercial launch of Reliance Jio will not take

place before January 2017, and in view of the announced tariff plans, we now expect the company to generate lower EBITDA from its telecom segment, Moody's said.

It added: "Our expectation is despite the fact that it may achieve a higher number of subscribers than our previous estimates. Specifically, we no longer expect the telecom business to generate any EBITDAR in the fiscal year ending March 2017, and for EBITDAR in fiscal 2018 to fall below our previous estimate.

"By fiscal 2019, however, we expect EBITDAR to be either in line or better than our previous estimate, as we expect the company will by then have built up a substantial subscriber base, although at a lower average revenue per user."

Moody's expect the capex for RIL's telecom business to be higher than its previous estimate, as fiscal 2017 capex also includes the expenses incurred prior to commercial launch of the service.

"Success of Jio hinges on increased penetration of 4G devices and change in data consumption patterns in India... In addition, data usage in India remains low. However, we see potential for significant growth in the next few years," Moody's said.

While we expect Jio will achieve its 100 million subscriber target by March 2018, it remains uncertain to what extent data consumption will increase, especially once customers are asked to pay for it, Moodys' said.

Even though Jio is offering voice services for free and data services at a fraction of the price being offered by competitors, these services are only available to subscribers with 4G devices or subscribers using a 4G interface device with their existing smartphones, it said.

Based on various estimates available, there were about 50-75 million 4G devices in India as of June 2016, and this number is increasing by at least 3-4 million a month. This implies that by March 2018, there will be about 110-150 million 4G devices in India.

Mobile data consumption per user in India is also low at below 300 MB per user per month, a result of high data tariffs and low connection speeds for mobile internet.

It said projects in energy segment will be largely complete in the next 6-9 months. As RIL completes the projects in its energy business, its annual EBITDA is expected to increase by Rs 150-200 billion while its capex for the segment will drop to about Rs 150 billion per year from the previous Rs 350 billion per year.

"Thus, the energy segment will generate additional cash flow of Rs 350-400 billion each year, which should be sufficient to cover the cash drain from its telecom segment and to reduce its net borrowings," Moody's said.