How RCom gets Free Ride on Reliance Jio’s 4G Network ?

RCom Gets Free 4G from RJioRCOM has entered into active infra sharing with 4G entrant Reliance Jio, which allows RCOM to offer 4G services without investing much capex. RCOM active sharing limits the upside for the buyer of RCOM towers assets as demand by RCOM (anchor tenant) for additional towers in the near to medium term may not be much.

In our view RCOM had the option to either ask for a premium from Jio for trading of 800 spectrum or leverage Jio’s 4G network and offer 4G services. Charging a premium may have allowed RCOM to pay down some debt and invest in 3G but may have prevented RCOM from participating in 4G.

RCOM has chosen to offer 4G by leveraging Jio’s 4G network. Given that in the medium to long run 4G is likely to be more popular than 3G, RCOM may have made the right move. Further the fact that some of the incumbent telcos are missing 4G spectrum footprints is an opportunity for the company to churn subscribers from competition over and above converting its existing CDMA subscribers, accounting for c24% of India revenues, to 4G.

In our view, it may not be very easy to migrate profitable CDMA subscribers to 4G unless that is supported by some form of device subsidy. This implies that to protect CDMA revenues, RCOM may have to spend subsidies and there may a possible drag on near term margins. Separately RCOM revenue market share has been on the decline and as such, a lot of 4G-driven upside will depend on execution, which may not be easy.

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