India telecom companies in price war to woo customers

A man speaks on a mobile phone as he walks past a Reliance Communications mobile store in New Delhi. Indian mobile carriers, including Mukesh Ambani’s Reliance Jio Infocomm, are taking on ever-larger debt loads to help implement Prime Minister Narendra Modi’s $18bn Digital India initiative.

BloombergNew DelhiIt’s not easy to afford a phone business in India, even when you’re a billionaire.In the battle for mobile subscribers approaching the 1bn mark, customers are being promised smartphones for as little as $60 and packages as low as $4.70 a month. To fund promotions, bid for licences and keep pace with technology, telecommunications companies in Asia’s third-biggest economy raised a record Rs436.3bn ($6.9bn) via bonds and loans in the first half, more than triple all of 2014.Mobile carriers in the world’s second-biggest wireless market are taking on ever-larger debt loads to help implement Prime Minister Narendra Modi’s $18bn Digital India initiative, which seeks to provide Internet access to 1.1bn Indians now offline. The nation’s richest man, Mukesh Ambani, in June outlined plans for Reliance Jio Infocomm’s fourth-generation network due to start in December.Investor appetite for the debt is showing signs of strain.The yield on 2023 notes in billionaire Sunil Mittal’s Bharti Airtel touched 4.5% June 26, a 10-month high, while that on Tata Communications’ 2016 securities reached 3.6% on July 10, the most since December. Standard & Poor’s has said higher leverage may impact the industry’s finances.“Companies are borrowing because they need money to build infrastructure,” said Parthasarathi Mukherjee, group executive for international business at Axis Bank. “The coming of Jio is also a contributory factor. Telecommunications can play a vital role in connecting the nation’s numerous villages.” Modi has set goals including broadband Internet for 250,000 clusters of villages by 2016, at a cost of about $5.9bn.Ambani told shareholders last month Reliance Jio will form the “bedrock” of the programme because it already has wireless coverage in at least 100,000 villages. Earlier this month, he pledged to spend about Rs2.5tn on it.Mittal, chairman of Bharti Enterprises Pvt, vowed to spend Rs1tn over the next five years on Digital India, while Aditya Birla Group chairman Kumar Mangalam Birla promised $2bn. Ambani, who runs a refining-to-retail conglomerate, is valued at $22.8bn, Bloomberg billionaires’ index shows, while Birla is worth $6.3bn. Mittal is at $7.8bn, according to Forbes magazine.Incumbent operators such as Bharti and Vodafone Group have won a “precious six months” to extend their 4G footprint and narrow the data-speed gap with Reliance Jio, Sanford C Bernstein HK said in a June 12 report.Vodafone’s three Indian units sold a combined Rs75bn last month via a debut local-currency bond offering.Bharti also returned to the dollar bond market for first time since May 2014 to raise $1bn. Those 4.375% 2025 debentures, sold at a spread of 210 basis points over Treasuries, are trading at 204 basis points. Investors were demanding a 226.6 basis-point premium June 17.“Much of the borrowing could be for the 4G roll out,” said Raj Kothari, a bond trader at Sun Global Investments in London. “4G is the most important growth driver.” Incumbents most at risk from Reliance Jio’s entry are Bharti and Vodafone, Jefferies Group wrote in a June 15 note. Jio may roll out data services in big cities first to snare high-value subscribers, the brokerage said.Bharti was the first Indian operator to provide 4G services and has ramped up coverage to 38 cities, according to its website. Vodafone expects to roll out 4G coverage in some areas by the end of 2015, Sunil Sood, chief executive officer of the Indian unit, told reporters May 19.Bharti spokesman Prem Subedi declined to comment, while Reliance Jio spokesman Manish Bhatia didn’t respond to an e- mail.New borrowing is primarily to fund spectrum payments and refinance debt, said Mehul Sukkawala, a Singapore-based analyst at S&P. Bharti, along with Idea Cellular, were the top bidders at a mobile phone airwaves auction in March that helped India raise a record Rs1.1tn.“Higher leverage for the sector is somewhat of a concern,” Sukkawala said, adding credit profiles could face pressure should Reliance Jio unleash a price war. The growing market for data services may help existing operators, he said, while “positive free operating cash flows and potential strategic measures by companies like Bharti Airtel would help lower leverage over the next two to three years.” Established by Mukesh’s father Dhirubhai Ambani in the 1960s, Reliance Group has disrupted nearly every market it’s set foot in, starting from polyester to eventually building the world’s largest crude refining complex. The 4G rollout will mark Ambani junior’s return to the sector after he crashed prices back in 2003 by selling bundled handsets and services for less than $8.“Reliance has always been a disruptor whichever sector it enters,” Sun Global’s Kothari said. “It’s the big boy with deep pockets.”