Credit rating firm Moody's has said Reliance Industries (RIL) is expected to invest Rs 30,000 crore, of the total Rs 70,000 crore announced, in its telecom arm Reliance Jio Infocomm over the next two years.
"The investment in the telecom business is a credit negative for RIL because Reliance Jio will not generate any EBITDA (an indicator of cash flows) for at least next 12 months," the ratings agency said.
However, Moody's added that Reliance Jio will be a formidable competitor in the sector making it a credit negative for top telecom operators already in the field.
RIL recently announced that it will launch commercial 4G telecom service of Reliance Jio in 2015 entailing investment of Rs 70,000 crore.
"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 has said that Reliance Jio 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 Reliance Jio will be a formidable competitor in India's telecom sector as it will enter the business with financial muscle. "Reliance Jio'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.
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