2018 has proven to be a tumultuous year for the Indian telecom sector. The new entrant, Reliance Jio, consolidated their early gains in 2018 and started to gain steadily in market share. The market also saw the last of the sub-scale players, Aircel and Reliance Communications, exit the market, resulting in a 3+1 market scenario. That is three private players in Bharti Airtel, Vodafone-IDEA Ltd (VIL), and Reliance Jio; and one public sector player in BSNL. With fewer players, one would have expected the competitive intensity to decline and pricing levels to recover.
However, the competitive intensity has also increased tremendously, brought about by the aggressive pricing tactics of Jio and the struggle of the incumbents to respond adequately. 2018 did not see a significant easing of the competitive intensity, despite Jio starting to charge for their services.
As a result, the overall financial health of the Indian telecom sector is dire. India’s telecoms service providers are highly leveraged with over USD 100 billion in debt at the end of 2018. VIL, arguably the worst placed of the three private service providers, announced a whopping loss of USD 700 million in the fiscal third quarter. As the incumbents struggle with the competitive intensity and the declines in revenue, available cash flows are increasingly being used to service interest payments.
With the exception of Jio, the bulk of network assets are still servicing 2G customers, many of whom are poor contributors in terms of average revenue per user (ARPU). In a belated rear-guard action, both Airtel and VIL have taken the step of mandating a minimum spend on their prepaid accounts. This move was taken to drop non-revenue generating and shore up their reporting metrics prior to fund-raising efforts. Bottom line, the Indian industry is not currently financially geared to making the necessary investments that are required for nationwide 4G deployments, let alone 5G.
So, what can we expect in 2019?
The single biggest event to watch out for is the result of the General Elections and which party comes to power. While there has been general continuity in terms of policy decisions emanating from the Department of Telecommunications over the last two decades, a change in government may shift the focus areas if not reject existing policy platforms outright. The fate of the new National Digital Communications Policy (NDCP) and its execution, which has now moved from draft to an official policy document, will be determined after the elections.
The NDCP is an important marker to track as it will define the trajectory of India’s telecoms sector for the next decade. In the short term, it is the policy backdrop against which India’s 5G efforts will take place, making it the next major marker to track in 2019. The government’s inter-ministerial committee on spectrum announced draft recommendations on spectrum bands for 5G usage, whether for mobility or backhaul applications. After the elections are complete, we can expect the Telecoms Regulatory Authority of India (TRAI) to issue a consultation paper for a 5G spectrum auction by the last quarter of 2019. This will set the ball rolling for 5G auctions in mid-2020.
Finally, we should expect to see VIL and Airtel continue to focus on shoring up their balance sheets while investing more capEx in building out their 4G networks. For its part, we expect Jio to continue with its aggressive pricing strategy as they simply don’t have much incentive to ease the pressure currently, especially as they prepare to launch their JioFiber initiative in 2019.