RJIO may unleash 4G pricing strategy to face competition

The pricing war for offering 4th generation (4G) services could be a really interesting one.  While Airtel has taken the first step by announcing a pan-India launch of its 4G services, Reliance Jio (RJIO) could prove to be a real spoilsport to Airtel, by offering real cheap prices for its 4G offering.

“With only 1.1-1.3 GB 3G capacity per subscriber available for Bharti Airtel and Idea, RJIO can offer 2.5-3x data caps at the same price. We expect RJIO to offer 2.5-3 GB data at Rs 250-Rs 300 price points,” brokerage firm Edelweiss said in a recent note.

“Incumbents will find it difficult to match this proposition, given the capacity constraint of their network. Also, incumbents will not be able to aggressively expand their LTE network, due to the inability to commit large capex towards LTE, as they are in the process of migrating existing subscribers from 2G to 3G,” Edelweiss added.

An email questionnaire sent to Reliance Industries regarding the pricing by RJIO remained unanswered till the time of going to press.

According to Edelweiss, the scale of its sites will help RJIO to offer such kind of competitive rates. “RJIO has announced its launch with around 75,000 long-term evolution (LTE) base transceiver station (BTS), compared with Bharti’s and Idea’s expected footprint of 77,027 and 46,291 3G sites by FY16, respectively.

“Bharti and Idea are also expected to have 18,000 and 1,000 LTE sites, respectively. However, RJIO’s capacity will still be way ahead of the incumbents due to sheer scale of LTE sites, enabling it to offer competitive rates and accommodate increased volumes,” Edelweiss said.

Edelweiss also believes that RJIO could turn EBITDA positive by FY19 if its implementation plan is successful.

“If RJIO manages to scale rapidly, it will turn EBITDA positive by FY19, and EBIT positive by FY20. Our estimates indicate that the company will have to incur EBITDA loss of Rs 13,000 crore before turning EBITDA positive,” Edelweiss said. “Our workings indicate that RJIO can achieve return on capital employed (RoCE) of 10-13 per cent on a steady state basis, without considering startup losses. RoCE will rise if the company manages to enhance coverage by deploying more sites while keeping utilisation levels high,” Edelweiss added.