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5 ways the Reliance Jio launch affects you
The latest news is all about Reliance’s 4G offering – Jio. The new launch has sent tremors in the Indian telecom industry. Already there are reports of people lining up to get their hands on a Jio Sim card.
This has financial repercussions too that you may be interested in.
Here’s a brief look at how Reliance Jio may affect you:
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Telecom customers:
The biggest benefactors of any competition are the customers. Reliance has come up with an initial offer of free voice calls and data plans starting from Rs.149 a month. Its charges are much lower than the current rates in the industry. Customers could easily enjoy such low tariffs.
Meaning, India can do much better. “The key weakness is in investment," the RBI said. Companies have not planned new investments because their existing factories are not being used fully. This is called capacity utilisation. All this resulted in a slow growth in industrial productivity too.
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From an investment point of view:
Things become interesting when you consider this from an investor’s point of view. For starters, Reliance’s pricing strategy is quite likely to lead to a price war in the industry. What used to be monopolistic industry has now become a competitive one. Every player is now likely to fight hard to hold onto market share while Reliance tries to increase its customer base. This could eat into profit margins across the board. “We believe the impact on the industry and incumbents would be negative for a couple of years and then gradually become neutral to positive depending on how fast this paradigm shift forces consolidation,” according to a Kotak Institutional Equities report.
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Should you invest in competitors?
Kotak Institutional Equities expects Bharti Airtel and Idea Cellular to report 7-25% lower operating profits in FY2017-19. It also cut the target prices for both stocks. It now has a target price of Rs 365 for Bharti Airtel instead of its earlier Rs 415 price target. Idea’s target price is down to Rs 105 from Rs 155 earlier. However, this does not mean you ought to sell these shares. Kotak continues its Buy rating on both shares. This, though, is for the medium term.
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How it affects Reliance Industries:
Jio has had an aggressive start. Its pricing can be considered negative because of the low pricing and free offers. However, the upside of such a tariff structure is that Reliance can reach out to a large number of customers using the low prices. Moreover, many experts suggest that current voice-only customers can upgrade to data plans in the future. “Our telecom team believes that Jio’s pricing strategy can lead to ARPU-accretion as well as consolidation in the industry over the medium term. Both may well be positive for Jio unless competition drives aggression within the industry,” the Kotak report said. ARPU stands for Average Revenue Per User. It is one of the most common metrics used to gauge telecom companies’ profitability.
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How are banks affected?
The telecom industry relies heavily on loans and debt. It needs a high amount of capital to build towers and offer services. So far, the telecom sector has seen few cases of bad loans. However, such loans could become riskier over the next few years because of Jio's entry, according to the Kotak report. So as an investor, you may want to keep an eye on banks with telecom sector exposure. Some names include Yes Bank and IndusInd Bank.
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$15 billion
Reliance has invested $15 billion or Rs 1.34 lakh crore in the 4G business in the last six years, according to a Livemint report. This ate up most of its $20 billion cash reserves. One of its major expenditure was buying a 95% stake in Infotel Broadband, which already bought a lot of 4G spectrum.
