Powering Digital India

In FY 2016–19, Jio’s impactful entry spread 4G pan-India, brought digital economy benefits, and led to a high consumer surplus. Accompanying price war and Supreme Court’s stance with respect to AGR dues dragged telecom spending down to 0.8 percent of GDP from 1.4 percent and caused bankruptcies. Now, only three private players are left. Whilst Airtel and Jio have 95 percent-plus pan-India 4G coverage, Vi continues to face funding constraints and is unable to match Airtel/Jio’s 4G population coverage and continues to lose subscribers. The government provided the sector liquidity relief (four years of deferment of spectrum/AGR payments) and royalty reduction, and conducted a blockbuster 5G auction, which raised a record ₹1.5 trillion from telcos. It is now goading the industry to improve the quality of services with a carrot of more telecom reforms.

Pan-India 5G coverage by Airtel and Jio
Airtel and Jio have raised USD 15 billion and USD 20 billion equity capital respectively since 2017. They have strong balance sheets and are committed to pan-India 5G rollouts by March 2024 and December 2023 respectively. This is unlike 4G, where Airtel lagged behind Jio. The later is rolling out a 5G-standalone (5G-SA) versus Airtel’s 5G non-standalone (5G-NSA) network. But we do not expect customer experience to differ as current 5G use cases mostly rely on enhanced mobile broadband (better 4G). 5G use cases requiring ultra-reliable low latency or massive machine-type communications are 3–5 years away and are largely industry oriented. Vi’s 5G rollout is predicated on fund-raising, which it has attempted unsuccessfully since September, 2020. VIL says that fund-raising is held back by delays in the government taking an equity stake in lieu of interest from deferment of spectrum/AGR payments. VIL’s fund raise and hence 5G rollout delays make its premium subscriber base vulnerable to poaching, especially by Airtel, which has a strong brand and leadership in the high-value postpaid market.

Network capacity and quality upgrades to super-serve users and premiumize
Whilst Jio is focused on 5G rollouts and expanding its FTTH reach by 2.5x to 50 million homes by 2025, Airtel is keen on expanding its 4G population coverage as well. Jio is already at 99 percent-plus 4G population coverage whilst Airtel is currently at 96.6 percent. Airtel hopes to close this gap. Additionally, as Airtel operates at a 20-percent premium pricing to Jio, it is investing in network enhancements to offer a commensurately better network experience to its consumers. Airtel too is focused on expanding its FTTH reach to 40 million by FY25 from the current 16 million. But unlike Jio, which expands FTTH reach on its own, Airtel is doubling down on its local cable operator-led Uber-like model. Both companies are gung-ho about super-serving users via connected homes with services like bundled digital content with their proprietary set-top boxes, home surveillance, and IoT solutions. We believe that Airtel’s premium positioning is a distinct advantage in grabbing high-value customers whilst Jio doubles down on its aspirational subaltern customers.

The race to build new revenue streams
Jio is powering the group’s digital commerce initiatives and has strung together several acquisitions in 2018-19. These are yet to bear fruit. But the telco’s efforts are in multiple areas like ed-tech, conversational commerce, drones, digital healthcare, etc. Airtel launched a host of new products in 2021, riding on its customer relationships/distribution and infrastructure. Whilst its product launches are both in B2B and B2C, it appears to have an edge in the former segment with services like communication-platforms-as-a-service (C-PAAS), ad tech, cloud, cyber security, and payments. Vi is building digital revenues via partnerships and is focused on B2B services like IoT, where Vodafone PLC is strong in global markets. Both Airtel and Vi have extensive Edge Cloud deployments that enable them tap specialized enterprise customers like media companies and hyperscalers. We expect non-mobile revenues to contribute to a one-fifth of the telecom industry’s incremental FY22–27 revenues.

What will the government do?
Whilst telcos were reeling from low tariffs, the government stepped in after the Supreme Court’s 2019 AGR verdict, which crippled the industry. After providing liquidity relief in 2021, the government rationalized spectrum prices, royalty, and made ample spectrum
available. The government is focusing on multiple areas like manufacturing (PLI schemes), services, and simplification of rules. It is also boldly pushing BSNL to deploy indigenous 4G/5G networks. The government is leveraging on India’s rich tech talent and academia to participate in standards-setting at International Telecom Union. As long as telcos focus on quality of service, we except that the government would not come in the way of tariff hikes, enabling industry participants to earn reasonable returns. The draft Telecom Bill provides a glimpse into the government’s thinking as it proposes several simplification measures for the telecom industry and seeks to bring regulatory parity with OTT communication services like e-mail, and instant messaging.

The million-dollar question: When will the industry earn returns exceeding the cost of money?
Telcos’ finances are on a state of repair, thanks to the 2019 and 2021 tariff hikes. But returns are still sub-par as evidenced by 8 percent and 10 percent FY22 pre-tax return on capital for Airtel India and Jio. VIL remains loss-making. Tariffs are still reasonable. But will the industry bite the bullet and raise prices to correct the abysmally low returns? We think so and believe that telecom industry spends will steadily recover to 1.4 percent of GDP by FY26 versus 0.93 percent presently. Telecom spends’ recovery will be driven by a combination of tariff hikes and better customer segmentation with 5G and home entertainment/productivity services. We think that telcos are deeply entrenched in the Indian economic landscape owing to the yeoman service that the sector provided in Covid.