Rel Jio's entry to bring in affordable data pricing: UBS AG

There is a fear that the grand launch of Reliance Jio could potentially disrupt the hierarchy of the telecom industry and put pressure on data tariffs. However, Suresh Mahadevan, MD & Head of Asia Telecom & Media Research, UBS AG believes market seems to be overestimating the disruptive nature of Reliance Jio and in fact the launch could act as a key catalyst for mass mobile internet adoption.In fact entry of Reliance Jio would lead to affordable data pricing and lower priced handsets.He says there is a large potential for the data market to grow in India, which could benefit all the players. The data market size in India is only USD 4 billion and has the potential of growth 9-10 times in ten years.UBS Evidence Lab had conducted a survey of 1250 wireless subscribers aged between 18 and 75, residing in five major cities and six out of ten customers indicated a lack of interest in Jio. Talking about the survey Mahadevan says that subscribers of market leaders like Bharti Airtel, Vodafone, Idea Cellular would not be very inclined towards Reliane Jio because 73 percent of subscribers were satisfied with their telecom providers. However subscribers of   Rel Comm, Tata DoCoMo & BSNL could be more inclined to try Jio's services, he adds.Currently, the house has a marginal preference for Bharti Airtel over the others.

Below is the transcript of Suresh Mahadevan\\'s interview with Reema Tendulkar & Sumaira Abidi on CNBC-TV18. Reema: Tell us what is your survey throughout?A: We did a survey – I know Reliance Jio has been like a really hyped up big movie which is going to release at some point this year, so we thought it will be appropriate to go and do a survey to find how people are inclined to approach this.

What we found was that six out of ten people probably said they won’t try. Four out of ten said they will try and only a quarter or so will use it as their primary sim card. That means the other three-fourths will use it as a secondary sim card. What we also found very interesting was, the current operators, at least the market leaders Bhati Airtel, Vodafone, Idea Cellular, seem to have a very high level of satisfaction, with close to 90 percent of the people saying that they are quite satisfied with their services. And nine out of ten people are willing to recommend to their friends, relatives their current service provider which we thought is an interesting finding because we always hear about call drops, then the poor networks etc and this was an interesting find. We conducted the survey in the five metropolitan cities in India. However, there is one another thing I want to mention since we talk about Jio so much, the  India data market is hardly getting started – for a country of close to 1.3 billion people our data market size in the last financial year was only USD four billion.This number is going to go up nine-ten times in the next ten years; that is the big lever which will cost us some of these stocks to do well and that is why perhaps R Jio is interested in playing that game. So, my sense is even with R Jio coming in on a grand scale and we assume R Jio will take around 17. 5 percent market share, there is enough room for Bharti, Idea to definitely benefit from this explosive data growth.Sumaira: If the call is that the strong are going to get stronger and that Rel Jio will not actually be as disruptive as the market had so far been anticipating. What kind of a re-rating could it mean for the existing top three at least?A: Currently we have close to Rs 550 price target for Bharti Airtel and Rs 250 for Idea but clearly it is based on not very aggressive assumptions because we have assumed that pricing goes down by over the next ten years; price of data which is around 27 paisa currently per megabyte goes down to almost 9 paisa, so that is like a two-third fall. We are assuming that Rel Jio will come with lower prices. So over a period of time we will get to lower prices but the other interesting thing I would like to mention here is while everybody is focused on the disruptive nature of R Jio, I actually think this could be the biggest positive catalyst because R Jio will bring in lower priced handsets, they will basically ensure data pricing remains affordable which will actually kick start the whole data revolution. Just to draw a parallel, in 2003 when Reliance Communications or Reliance Infocom as it was called then came in, everybody was worried about the disruptive nature but look at what happened in terms of voice, and if you go back in history then that period of 2003-2008 was perhaps the best time to own Bharti Airtel.So, I do think that that the bigger picture is that the market is going to expand significantly.Reema: Your call is the Reliance Jio will get market share but it will be at the expense of smaller players like Reliance Communication, Tata Docomo and the likes and not at the expense of the three incumbents? A: Market share is a minor point, the major point is the pie itself is going to grow 9-10 times. Even if Bharti Airtel’s share let us say drops from 31 to 25, for sake of argument, in a a scenario of 9 times that would still be a good outcome. That is the point when data is going to explode. Reema: 9-10 times growth in the data market in how many years according to you? A: In next 10 years; so 10x in 10 years. Reema: Between Bharti and Idea Cellular if someone wants to buy one telecom stock, which one would you recommend for the next 10 years? A: We have a marginal preference for Bharti which has worked out for us.I think right now I would say you can pick what you want because Bharti has the Africa business, I know there are some press reports that they may consider selling some countries which will be a big positive catalyst if that happens. However, if I look at both, you can buy either. In fact what I would also say is if you are holding Bharti Infratel you should perhaps think about switching to either Bharti Airtel or Idea because although that stock has done extremely well, these stocks will have a lot more room to grow. Sumaira: While the pie itself you say is going to get larger, there is going to be an explosion in data, but eventually what will it mean for the smaller companies? Are they going to get wiped out entirely, are they going to be forced to consolidate with the larger players, how will the scenario itself evolve over the next 10 years? A: Two, three things are happening – first is if you see the top three, their revenue market share has steadily improved. So I think that is consolidation happening in the minds of the consumer. Two, we saw in the 900 MHz auctions when there were renewals, Reliance Communication chose not to renew five of the seven service areas. So, that is another consolidation is happening. Three, we need a little bit better M&A policy because currently the M&A policy is there in paper but I don’t think it has any practical value otherwise M&A would have happened. I assume that at some stage you will see a better M&A policy which will basically allow some of the weaker players to be absorbed by the stronger players.

All these three things will happen over the period of the next two to three years I assume.