Consolidation in the industry is going to play the most important role in shaping the future of the industry.
Indian telecommunication sector has undergone a lot of disruption in the past one year primarily due to the new kid on the block, Reliance Jio (Jio). Incumbents were already struggling to pare their mammoth debt and the entry of RJio added fuel to the fire as it started doling out various freebies that forced incumbents to slash their tariffs. Things started to stabilise after RJio started charging its customers and incumbents matched RJio’s pricing but RJio ensured that the price difference exists.
As per 3QFY18 results of the companies, the performance vectors seem to be deteriorating as Jio continues to aggressively capture market share with price-centric strategy. This, however, has led to reshuffling in industry dynamics and has led to consolidation. We believe accelerated consolidation would result in three-player oligopoly and industry consolidation should bring in pricing power to the players. With high-speed 4G technology and huge data demand, we believe that the industry would witness an uptick in ARPUs (Average Revenue Per User) and improvement in the financial performance of the companies.
Moreover, recent relief measures announced by the government: increase the tenor of spectrum payment from ten to sixteen years, increase the spectrum cap from to 25% to 35% of the available spectrum, would also provide some relief to the otherwise ailing sector.
3QFY2018 quarter snapshot
RJio: In the driver’s seat
In terms of financial performance, Jio reported revenue from operations of Rs6879 crores (up 11.9 percent qoq) and added 21.5 million subscribers over the last quarter brining the subscriber base to 160.1 million at the end of December 2017. This gets translated into average revenue per user (ARPU) of Rs154 per month (down 1.5 percent qoq), much better than its peers.
In terms of operating margin, Jio reported a significant expansion of 1472.5bps in its EBITDA margin, which came at 38.2 percent. The expansion was primarily due to reduction in access charges (net), which fell from 34.8 percent of revenues from operations to 15.7 percent in this quarter (Telecom Regulatory Authority of India (TRAI) cut interconnection usage charge (IUC) by 57 percent effective 1 October 2017). Additionally, the management attributes this performance to use of efficient 4G technology and significant addition of the paying customers for the quarter.
We believe that Jio would continue its mojo, going forward, on the back of right business strategy, latest 4G technology and huge unmet potential available in India.Bharti Airtel – continue to be the leader
With consolidation in the industry, improvement in the performance of Africa operations, data usage surge and Jio reducing discounts, Airtel, the leader, is set to maintain its leadership in the industry.
In terms of 3QFY18 performance, the company posted consolidated revenue of Rs203 billion, down 5.3 percent sequentially, whereas its EBITDA margin remained largely flat (q-o-q) and came at around 36.8 percent.
In terms of geography-wise performance, Indian operations witnessed a decline of 16.6 percent in EBITDA on a sequential basis and margin also contracted by 173bps and came at 32.6 percent. What surprised us is the performance of Africa operations, which posted the highest ever EBITDA margin of 35.2 percent on the back of continuous cost control efforts.
In terms of operating parameters, despite Jio’s aggressive tariff plans, Airtel continued to add customers, up 9.1 percent on a y-o-y basis. However, the company continues to witness a downward trend in its ARPU which declined 28.1 percent (y-o-y) and 15.7 percent (q-o-q). We believe that ARPUs would witness uptick once the industry consolidation is complete.Vodafone + Idea: Pain continues
Vodafone, after merging with Idea, is set to become the leader in terms of the number of subscribers but their dismal performance may put them back to their original position, behind Airtel. The financials of both the companies continue to weaken owing to the pricing pressure and falling subscriber base.
For Idea, total wireless subscriber base increased 3.3 percent sequentially whereas ARPU declined 13.6 percent, leading to 130bps contraction in EBITDA margin that came at around 18.8 percent, lowest since FY07.
For Vodafone India Ltd, total wireless subscriber base increased by 2.5 percent sequentially and ARPU declined 13.1 percent leading to 180bps contraction in EBITDA margin that came at around 20.1 percent.
The relief measures announced by the Cabinet recently would provide the most benefit to the merged (Idea+Vodafone) highly leveraged entity as extension of tenor would lead to 30 percent lower annual payment and the merged entity was crossing the spectrum cap limit in various key markets and increased cap limit would help it to retain full spectrum in those markets.Valuations:Amid recent weakness in the market, the upside potential from the companies has increased.
Bharti Airtel: In terms of valuation, the Sum-of-the-Parts (SOTP) valuation gives upside potential of 28 percent based on EV/EBITDA multiples of 9 and 6 times to India and Africa businesses respectively.
Idea: Based on 12 times EV/EBITDA multiple, the share price offers an upside potential of 7 percent.
Jio: Based on DCF valuation, RJio’s value is Rs 245, which will get added when valuing Reliance Industries.
Thus, consolidation in the industry is going to play the most important role in shaping the future of the industry. The price war has already eliminated the marginal players. With the stronger entities left in the fray, industry can look forward to relatively more rational competition that would give them the pricing power. Additionally, data boom offers many opportunities to these companies. These structural changes in the industry will catch investors’ fancy, although not before couple of years of turbulence.
For more research articles, visit our Moneycontrol Research Page.(Disclosure: Reliance Industries Ltd. is the sole beneficiary of Independent Media Trust, which controls Network18 Media & Investments Ltd and publishes Moneycontrol.com)