Even before consumers can avail 4G services from Reliance Jio, the telecom arm of Mukesh Ambani-led Reliance Industries is taking a toll on the incumbent telecom operators, with their stock prices plunging by nearly 30% over the past five months.
Analysts tracking the sector have now turned negative over the outlook for the sector, as the disruptive technology from Reliance Jio is expected to heighten the competition and weigh on the profits of the other operators.
"We have a cautious view on shares of telecom operators as they are likely to face a number of structural issues going ahead," said Viju KGeorge, analyst at JP Morgan.
Share price of India's top telecom operator Bharti Airtel has been under pressure for the past few months despite posting improved profit in the recent quarter. Similary, Idea Cellular shares have fallen sharply due to raising concerns over its profitability after Reliance Jio's launch.
While Bharti Airtel share prices tumbled by over 28%, Idea Cellular shares have fallen by more than 27% even though the BSE 100 index has declined by 10%.
Reliance Jio is expected to offer 4G services at cheaper prices to bring highly valued subscribers of other companies on its network. It is also expected to roll out handsets at very low prices, which could hurt the profit margins of existing operators such as Bharti Airtel and Idea Cellular, according to analysts.
"The market continues to underestimate the disruption from new entrant RJio," said Vinay Jaising, analyst at Morgan Stanley. "We are cautious on Bharti Airtel and Idea."
Analysts said that increased competition in the data services will likely lead to further increase in capital expenditure by the operators to keep growth intact. Telecom companies are also expected to purchase spectrum from others at a higher price, resulting in increased debt levels, The Economic Times reported.
Earlier this month, Bharti Airtel had said that it would spend Rs 60,000 crore ($8.98 billion) to upgrade its mobile voice and data network over the next three years in the face of the impending launch of Reliance Jio.
Last month, Idea Cellular had agreed to buy spectrum for two circles -- Gujarat and Uttar Pradesh (West) -- from Videocon for Rs 3,310 crore, which is double the amount paid to acquire spectrum for those circles in the March 2015 auction.
"Not knowing what Reliance Jio will do is perhaps worse than seeing an aggressive launch — at least Idea or others can act and react," said Nomura Research in a recent note.