RIL's Jio investment is a credit negative: Moody's

Reliance Industries Ltd is expected to invest Rs 30,000 crore (Rs 300 billion), of the total Rs 70,000 crore (Rs 700 billion) announced, in its telecom arm Reliance Jio Infocomm over the next two years, credit rating firm Moody's said on Monday.  

The investment in the telecom business is a credit negative for RIL because RJio will not generate any EBITDA (an indicator of cash flows) for at least next 12 months, it said.  

Moody's added however that RJio will be a formidable competitor in the sector making it a credit negative for top telecom operators already in the field.  

"Based on RIL's March 2014 annual report, we estimate that it has already invested about Rs 400 billion (Rs 40,000 crore) in Reliance Jio, and we expect RIL to invest the next Rs 300 billion in Reliance Jio over the next two years," Moody's Investors Service said in a statement.  

RIL recently announced that it will launch commercial 4G telecom service of RJio in 2015 entailing investment of Rs 70,000 crore.  

RIL has said that RJio will initially cover about 5,000 towns and cities accounting for over 90 per cent of urban India, as well as over 215,000 villages in India and the target is to expand this to over 600,000 villages.  

Moody's said RJio will be a "formidable competitor in India's telecom sector" as it will enter the business with financial muscle.  

RJio's entry into highly competitive telecom sector is also credit negative for incumbent mobile operators and market leaders Bharti Airtel and Vodafone India because "it will undoubtedly result in intensified competition that will lead to declines in average revenue per user and margins".  

But, it also said that strong spectrum holding of incumbents; existing large subscriber-bases and well- established brand equity; offering 2G and 3G services (apart from 4G services being launched) as well as marketing and distribution architecture mitigate much of the near-term competitive threat from Reliance Jio for them.  

"Furthermore, given issues of language and literacy, large parts of rural India remain a substantially voice-based market where near-term demand for 4G services may be muted," Moody's said.