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Lack of brotherly love leaves RCom circling the drain

Death

It’s a tale of two billionaire brothers having very different experiences in the telco space. Reliance Jio is flying high, its quarterly report implies Reliance Communications is dying a slow and painful death.

The numbers are not pretty at all. Total revenues for the quarter stood at roughly $407 million, compared to $768 million in the same period for 2016. Reliance Communications also lost $431 million this quarter, compared to a profit of roughly $9 million in 2016. The only number which increased was the one you didn’t want to, expenses; up to $839 million from $804 million.

This makes for a company which is in a lot of trouble; when the loss column is larger than the total revenue column, you have to start wondering what the point is. That said, doing some simple maths, this should come as little surprise. During this quarter in 2016, expenses exceeded total revenues, though the company made a profit. Some might argue the profit didn’t come from a solid market performance, but creative accountants, therefore there was no foundation for the company to mount a defence against an aggressive disruptor.

The Indian furnace is starting to get burn, and it starting to look like Reliance Communications can’t handle the heat. And just to add fuel to the flames, the team has also said it has missed two bond repayments in recent weeks. Things are not looking healthy.

Reliance Communications will blame Mukesh Ambani, the brother of its own CEO Anil Ambani, and his Jio army, but it has been quite clear for some time this is not a telco which is in a healthy position. Perhaps all big bro did was to highlight the quite glaring inadequacies in the Reliance Communications business. This could be confirmed by a number of different factors.

While there has been a steady decline in share price over the last three months, as the Reliance Jio business continues to tear up the Indian rule book, this is only the tip of the iceberg. Share price in Reliance Communications has been heading towards for more than four years. It is 92.59% lower than September 2013, the highest point in the last five years.

Subscriptions have also been heading in the same direction. According to Ovum’s WCIS, total subscriptions stood at just over 100 million in December 2015, though this has steadily decreased to 77 million as of this September. Over the same period, market share has declined from just below 10% to 6.4%.

One of the reasons India was prime for pricing disruptive is customer stickiness. While mature markets have transferred many of their customers to the more reliable and secure postpaid tariffs, the majority of India’s population has remained in the prepaid space. It makes gaining customer subscriptions easier, as they are not tied into 12-18 month contracts, but also means a business is much more vulnerable to disruption.

Going back to September 2015 again, Reliance Communications proportion of postpaid stood at 6.63% which was above the country’s average (5.44%), but still left the business at risk. Moving forward to today, the country’s average has increased to 7.8%, as has the split for many of Reliance Communications’ rivals. However, its own proportion of postpaid customers has decreased to 3.95%, leaving it in an even more precarious position, susceptible to the risk of more customers being easily stolen.

Combining all these factors reveal a business which has not been in good shape for some time. Big bro might have started stealing the life jackets, but Reliance Communications has been circling the drain for a while.


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