Stock Market

Reliance Jio’s rivals don’t factor in bloody data battle ahead

Madhuchanda Dey
Chillicious Research

The recent announcement that Reliance Jio would start charging its customers has got a thumbs-up from the Street. While it will undoubtedly have a positive rub off on RIL , what’s surprising is the market’s optimism about its competitors. The market appears to be reading this as an end of ‘price war’ and the beginning of a ‘golden era’ of pricing discipline, thereby benefitting all in an oligopolistic market place.

Since the Jio announcement, shares of Bharti Airtel have ticked up 1 percent, and Idea shares have risen 10 percent. Some of this is due to consolidation talk, and this may be valid reason, but crunching the numbers swiftly dispels happy thoughts about the end of the price war.

In terms of revenue, the size of the Indian telecom industry is roughly Rs 2,03,630 crore. Airtel with nearly 28 percent share followed by Vodafone at 21 percent and Idea at 18 percent lead the pack. While in the past couple of years, the cost of spectrum acquisition was the bone of contention, from the latter half of 2016, the industry woke up to the challenge of a competitor who had been creating significant capacity ahead of the launch.The key differentiator for the challenger is clearly the capacity it has put in place. Reliance Jio has the longest fibre optic network in the country, ranging over 2.5 lakh kilometres of fibre. Put this in perspective – this is more than two times the combined investment of Airtel, Idea and Vodafone in the 4G segment.

Once the fibre optic network is in place, the cost of operating it is not very huge. The network can be operated at minimal cost. The network is capable enough to handle amazing internet speeds. It therefore encourages the users to use internet, which is handy because the key is to get more internet users.

Given the capex headstart of Jio, if the industry has to benefit from RJio starting to charge for its offering, only those operators with sizeable data coverage and capacity will be able to protect their market shares and benefit from the industry’s ARPU (Average Revenue per User) accretion. For most incumbents it will come at higher incremental capex. Thus there appears to be a strong ‘economic rationale’ for consolidation in the industry, as the individual over-leveraged balance sheet may not be able to support the same.

Contrary to popular perception that higher paying customers will stick to their existing service providers, we feel once Jio starts charging, it might decongest the network and encourage more migration from incumbent operators. Jio’s network coverage appears significantly ahead of others and the company has just announced further capex investments in coming months to add capacity and coverage.

Reliance Jio has incurred a total capex of Rs 1,70, 000 crore in telecom and it has further announced capex to the tune of Rs 30,000 crore. If we conservatively assume that the company expects a return of a modest 15 percent in the next five years, our calculation suggests that it will have to hit an annual revenue number of at least Rs 1,24,000 crore by FY22.This figure will require at least 306 million subscribers – 3x of the present subscriber base and nearly 42 percent of the revenue market share. To put the figures in perspective, the current subscriber base of the industry is approximately 1,074 million and Airtel (currently the leader) has 266 million subscribers.

India being a well-penetrated voice market, the incremental growth in the market will come from data. So the price war may have temporarily abated, the battle in the ‘data market’ has just begun. The stock price of the incumbents may have factored in lot more optimism than what the hard facts suggest.

Disclosure: Reliance Industries, which owns Reliance Jio, also owns Network18, which publishes