Jio’s Deep Pockets Hurts Other Telecom Players

There has never been a dull moment in Indian telecom, be it the arrival of a new player or two of the three largest operators deciding to join hands. What’s constant through all of this is the tariff war and it’s not showing any signs of ebbing. The pace of growth at least for the three of the top four players have also started to take part. So, how does one assess the value of these companies and the telecom sector as a whole? Let’s ask Nitin Soni, Director at Fitch Ratings, who tracks this extremely closely.

Q: Thank you very much for taking out the time. You know..Let’s start with …you know…what’s happening within the industry, while we are talking about the pricing powers , you know, anticipating that it might actually start to come back in but at this point there are no signs of that. You would anticipate the story being more company-specific now within the telecom sector?

A: Yea, thanks for having me on the show. So, we have been saying that this is a sector which has corrected the industry structure in a long, intensive, competitive battle. We had come a long way, we had ten to twelve different telcos and now we are in a position where there are three large telecos which have emerged out of the shakeout in the industry. Jio is rapidly gaining market share. They already have about 280 million subscribers and I think, we do expect that by the mid of 2019 or the third quarter Jio would have a revenue market share would be very close to Bharti Airtel ‘s of 32 percent , while we expect the Voda-Idea to get a reduced market share of below 30 percent by that time and that we, in our opinion should be the timeframe where Jio would start changing its approach and would start monetizing its large investment of over 40 million dollars. Remember, they have invested and been operating in this industry for almost for 7-8 years now and they haven’t made any sufficient return on their investment in this sector. So, we do expect the tariff to rationalize in 2019, starting in the second, third quarters of this calendar year.

Q: Nitin, till pricing power gets restored, now what exactly is going to remain the focus? Is it going to be 4G that’s going to take center stage? Is it going to be, you know, how companies look at asset monetization? Is it going to be network capex and spectrum redeployment? What exactly according to you is going to take center stage?

A: I think all the telcos would be pretty much focused on providing a good internet experience to their consumers because that is going to be really a driving factor  for gaining a larger subscriber base and retaining the revenue market share in this industry. So, we are, you know, we have rapidly moved to a time where it’s a commoditized product and all telcos are focusing on providing a streamlined internet experience to their users. So, they would have to continuously invest on capex. So, capex investment will be sizeable for the incumbents and Jio as well. They have to penetrate further into the fixed broadband market where Jio is going to commercially launch its products and that market is going to become intense in terms of competition going forward, while we do expect…you know…that is a sticky market and underpenetrated with only 2 million customers with Bharti Airtel  and there’s long way to go. But I think as a market. The data consumption has grown from 1 GB to about 7 to 9 GB on each of the telcos. So data growth is really the driving factor for the revenue in 2019 and as the data tariff remains cheap at about 100 to 120-30 levels, the data growth. We will see a phenomenal data growth in 2019 and 2020.

Q: Would you say Bharti Airtel is a well-positioned to capitalize on this?

A: So, we have a rating of BBB- with the stable outlook on Bharti Airtel, and Airtel given its diversified revenue and a better position has been the only telco which has retained its market share since the onslaught of Jio and the industry. So, they have still retained about 30+ revenue market share, and we do expect them to monetize their assets and to strengthen their balance sheet going forward. Currently their ratings at the moment of Bharti Airtel is low as their, adjusted net leverage is close to 2.5 times, where, which we consider as a threshold for negative rating action. And that is the point where we could take a negative rating action as there is an intense competitive pressure and the management fails to monetize their assets. So, overall, you know, stable outlook for the industry and we do expect some rationalization on tariff should come back in 2019.

Q: Oh, that’s on Airtel. Uh, you know, what is it you are watching out for specific to Vodafone Idea? Now obviously..uh..you know..the executional..how well the management goes ahead with regards to capital raising plans, that will be a big impact for Vodafone Idea but in an environment that is so competitive and where now got very set parameters into …very set positions.. who leads and who comes second.?. How does Vodafone-Idea fit in and if it all have to come back into the forefront, what is it that they need to look at?

A: So. For Vodafone and Idea, they’re at the last leg of their integration of their massive operations. Uh, this is a big bang massive integration in which they’re still in the process of doing , the network optimization and combining different networks site, it is a huge headache for such big companies. I think, what they need to do right now is to raise more funds to strengthen their balance sheet, to put in  capex to streamline their network position in comparison to Jio and Bharti Airtel because once you lose, you start losing subscribers and once you start losing revenue market share  because of your poor quality of network then it becomes very difficult to gain back the subscriber market share. So, in our view, for them I think right now would be to put in more capex to improve the quality of the data network to remove congestion from their network to avoid any call drops on their network and be at par in terms of the network quality and data quality to Jio and Bharti Airtel, and try to retain their subscriber base.

Q: Ok, so, but with regards to, like you said, that they need to address their coverage issues as well as the capacity issues but. You know. for a stock which probably has not done much from a shareholder point of view as well..uh.. what is the key setback or the key drawback..? uh..that Vodafone-Idea faces in comparison to Bharti Airtel, aside from what you just mentioned, anything particularly concerning for you?

A: So, from a credit point of view..you know..they have a significant debt on their balance sheet..and..you know..as a credit analyst I think the first thing they need to do is to get down their debt to better numbers to a reasonable level  of three to four times as compared to existing number which is well ahead of 8, 9 times including the spectrum liabilities. And they have been raising debt, they have monetized their tower assets and they announced the equity injection into the company. Uh, both Vodafone PLC and Birla Group has, you know, sufficient funds at their disposal. They would need to continuously raise funds and putting equity into the company to invest more on the ground..,whether it’s in the 4G area or the upcoming 5 in the next 2-3 years or on the fiber broadband network. Remember, I mean, in India we have a very low amount of fiber network infrastructure available, and fiber network is really critical for the 5G technology going forward. So, if they are late in terms of investing on the capex and putting in fiber on the ground, they could also..you know..miss the 5G bus in the next 2 to 3 years. So, they will have to continuously invest on capex and at the same time strengthen their balance sheet to retain their large subscriber base.

Q: All right, that’s on Vodafone Idea. Just one last question with regards to Jio now. I mean, we are expecting Jio to continue to keep tariff rates in check but aside from that when the company has stated that its target is to acquire 50 percent revenue market share, perhaps as similar amount in the customer market share. What is that due to competitive intensity within the industry and they’re off the actions taken by the other players within the industry.

A: So, the one scenario which could play out is that if Jio keeps on insisting on getting a 50 percent revenue market share, that would mean that the Voda-Idea and Bharti Airtel at some point of time would have to lose a larger revenue market share. So, that could be a very negative scenario for the entire industry and you know, the tariff would remain would remain under pressure for a very long time. But that’s not our base case. Our base case is that once Jio achieves its 30 to 35 percent of revenue market share, it would have a limited incentive to remain aggressive in the market and to remain in the subscriber acquisition mode. Uh, given the fact that, you know, that current tariff structure is unsustainable, it’s very low, at a USD 2 hour per market which gives the revenue for the wireless industry in the vicinity of USD 20 billion dollars plus, which is only 1 percent of India’s GDP, which is a very unsustainable structure in the industry. So, you know, that scenario could be very negative. I think what we are expecting is our base case is that there would be some rationalization on the tariff structure in mid-2019 or the third quarter and we do expect Jio to rather than raising the headline prices but stop providing any discounts and promotions so that effective tariff realization would increase by 5 to 10 percent in 2019, which would be positive for incumbents because they would be happy to follow suit.―Nitin Soni, Fitch Ratings in a video interview (Bloomberg Quint)