OREANDA-NEWS. Today's entry of Reliance Jio, part of Reliance Industries (BBB-/Stable), into the Indian telecoms market will be credit negative for the incumbents - especially smaller telcos - and should hasten industry consolidation, says Fitch Ratings. Rising competition will lead to downward pressure on data tariffs at a time when capital expenditure will have to increase to support rising data consumption as cheaper 4G handsets become available.

Fitch estimates that Jio's blended tariff rates are at least 20%-25% cheaper than those of the incumbent telcos, given that data charges are much lower and it does not charge at all for voice calls or text messages. Moreover, all of Jio's services will be free until the end of 2016 to kick-start its customer acquisition strategy. Until December 2017, its free offerings will also include 300 live TV stations and on-demand movies and music, along with proprietary chat, electronic payment capability and a range of other applications.

The incumbents are likely to respond by lowering their own tariffs to retain customers. We expect the industry blended tariff to fall by 10%-15% in the next year. The recent rise in data average revenue per user (ARPU) will soon start to reverse and cannibalisation by data services will continue to reduce voice ARPU. Jio's tariff plans may gradually push the market toward "data-only plans", under which customers are charged only for data, not for voice and text messages. Such a shift could be particularly disruptive, given that most incumbents still derive the bulk of their revenue and profit from voice and text messages. The top-four telcos' average operating EBITDA margin is likely to narrow by at least 200bp-250bp (2015: 35%) in the next year.

The rating headroom of Bharti Airtel (BBB-/Stable), the market leader, is likely to narrow as Jio's high data-allocation plan will hit its premium customer base, which accounts for most of the profitability at its Indian mobile segment. Reliance Communication (BB-/Stable), the fourth-largest telco, is already under pressure. Its management has committed to repay a part of its USD6.1bn of debt through the sale of towers and merging its mobile business with smaller telco, Aircel Limited. If this commitment does not result in debt reductions which bring its FFO-adjusted net leverage below 4.5x (FY16:5.5x) on a sustained basis, then negative rating action may result.

Jio is likely to be loss making at the EBITDA level for the first two years. It will face large initial costs, while its subscriber growth will be constrained by the lack of penetration of 4G-compatible handsets. Currently fewer than 5% of Indian consumers have such handsets. However, this is likely to change quickly, as over 70% of new handsets are now 4G, but it is unlikely that Jio will be able to win more than 20-30 million subscribers and 3%-4% revenue market share over the next year.

We reiterate our negative outlook on the Indian telco industry, which reflects not only tougher competition, but also large capital expenditure requirements to meet rising demand for data and the prospect of debt-funded M&A activity. The Indian telco industry should continue to consolidate and we expect five to six operators to emerge from the shake-out. Unprofitable telcos, such as Telenor and Tata, could exit, given that their businesses will struggle to compete and they are now able to monetise their most valuable assets - their under-utilised spectrum.