This report has been created by members of the savart research team and is intended to compile a holistic view of the telecom sector as on 6/22/18. This is a draft report prepared by amateur analysts. We appreciate your comments, thoughts, and suggestions on the same.

INDUSTRY STRUCTURE & ANALYSIS

India’s telephone subscriber base has expanded at a CAGR of 19.16 %, reaching 1188.5 million during the FY07-17. According to research firms IDC, a Compound Annual Growth Rate (CAGR) of 5.2% b/w 2014-2017 & 7.3% over the last decade was recorded. Jio gained 100 million users in less than six months after its launch.

Jio recorded the highest growth rate of wireless subscribers which is 5.27%, amongst all Telco’s in the month of December. This shows the country’s massive appetite for consuming data and broadband services. Contrarily, the leading company at this time was Bharti with about 290 million subscribers in total. As of December 2016, there were over 1.19 billion mobile wireless subscribers in India.

Top Industry players

Vodafone – Idea merger

Idea Cellular has called an EGM on June 26, 2018, to approve changing the name of ‘Idea Cellular Limited’ to ‘Vodafone Idea Limited’ & the merger when it comes through, will create India’s largest telecom firm worth over $23 billion and has a 35 percent market share. Consolidation will be something that the players will resort to, in light of plunging margins and soaring costs.

Factors Disrupting Telecom Industry

Integration – ‘The content contest’

Being connected continues to become cheaper and cheaper, adhering rather slavishly to Moore’s law of diminishing cost. Moore’s Law is just as responsible for “smaller, cheaper and more efficient” as it is for “bigger, faster and more power hungry.”

Internet of Things – ‘The traffic explosion’

Internet of things (Explosion of connected devices) will impact telecommunication & is opening up cheaper and seamless options like VOIP (Skype, Messenger), Online Chat & Email.

Risk Analysis

Competitive Rivalry

• The difference in product quality

Reliance Jio and Airtel are relatively better in terms of network and quality.

Sources:  Ookla statistics show Airtel fastest in India Vodafone next, while Jio shows improvement 

Source – Google Images

Technology Risk

Using fiber technology Reliance Jio is using Reliance communications’ nationwide fiber-optic network for 4G.

• Fiber optic offers a lot of advantages over the traditional cables. Fiber provides a faster Internet connection.  The incumbents including Airtel are still using conventional cable networks.
• Fiber networks are not required to be changed post installation as the companies upgrade them with the latest technology that creates the electronic light pulses and not by replacing the fiber cables
• Fiber’s ultra-fast download and upload speeds enable UHD, Video conferencing and variety of camera application usage and experience seamlessly.

“Fiber optic offers a lot of advantages over the traditional cables:

• Jio-Fiber provides faster Internet connections.
• Fiber networks are not required to be changed post installation as the companies upgrade them with the latest technology that creates the electronic light pulses and not by replacing the fiber cables.
• Jio-Fiber’s ultra-fast download and upload speeds enable UHD, Video conferencing and variety of camera application usage and experience seamlessly.” – Jio website

Financial Risk

• Risk tolerance
• Cash flow (Average cash flow of –233.7 from 2014-17)
• Debt/capital ratio (0.72 for Bharti Airtel)
• Debt/Equity ratio (Average is 0.47 and should not be above 2)

Cyber-Security Risk

Security issues: protection against malicious attacks such as denial of service, eavesdropping, spoofing, tampering with messages (modification, delay, deletion, insertion, replay, re-routing, misrouting, or re-ordering of messages), repudiation or forgery.

ARPU – Average Revenue Per User

This is calculated by dividing the total revenue by the no of subscribers, Monthly ARPU based on AGR increased from Rs 83.41 in June quarter to Rs 88.09 in September quarter of 2017.

External  And  Internal Factors

Economic factors

• Inflation and taxes (GST)
• Prices depending on location. It’s expensive to build towers and resources in rural areas. Customers who don’t live in big cities are affected.

Regulatory factors

• Indian government unveiled the new telecom policy the National Digital Communications Policy 2018 in May, which lays out plans to attract investments of $100 billion by 2022, create 4 million additional jobs and enhance the sector’s contribution to 8% of Indias GDP from about 6% in 2017.
• The Telecom Regulatory Authority of India’s (TRAI) move to cut interconnect usage charges by 57% is likely to negatively impact on some telecom operators such as Bharti Airtel and Idea Cellular.
• TRAI has announced a cut in the ITR to 30 paise/min from 53 paise/min would result in loss of about Rs 20 bn in revenues of telecom, effective on February 1, 2018.
• PROHIBITION OF DISCRIMINATORY TARIFFS FOR DATA SERVICES REGULATIONS 2016 – No service provider shall offer or charge discriminatory tariffs for data services on the basis of content.
• TRAI is likely to seek more powers to regulate the flow of data from users to app makers
• The National Digital Communications Policy 2018 in May, which lays out plans to attract investments of $100 billion by 2022, create 4 million additional jobs and enhance the sector’s contribution to 8% of India’s GDP from about 6% in 2017.

Social factors

• It is difficult to expand in rural areas. Customers who don’t live in big cities are affected.

Environment factors

• Climate changes and global warming can affect the telecommunication products to reach customers.

THE ‘JIO EFFECT’

Cheap-data

• Before the entry of Jio, Data was expensive like 450 RS for 1GB of data, but after the Jio launch, it offered free data to consumers, with 4G of high-speed of 4GB data per day, followed by continued data at 128kbps speed.

Consumption of online content

• It was an exponential rise in the consumption of online content, Jio claim’s India’s data consumption went from 20 crores GB to 120 crore GB in six months.

Free voice calls

• Voice calls became free for all the networks when jio launched operations. Both local and STD calls are free on this network to all networks. This is the change it brought along. It, however, remains to be seen how sustainable this is.

MOAT Analysis

Competition

Reliance Jio is the existing competition in the telecom sector. Jio occupies the current ‘mind-space’ of all the telecom users due to its aggressive, low-cost pricing, mass appeal & performance related marketing. This assigns a significant moat to the company over its rivals. The company has also been at the forefront of content-based innovation.  Its partnership with Balaji Telefilms and other entities to generate home-grown, local content will only drive further traffic towards its services. The management has also recognized that data is going to be the driver for the next set of revolutions and is taking steps to achieve the same.

This has led to price-wars, declining margins, revenues and attrition of customers for the incumbents.

Capital Expenditure

• Requires extremely high capital expenditure investments, at a level that would be very difficult for any new company to manage.

Seamless switching of services

• No cancellation fees for switching from one carrier to another (porting from one telecom operator to another).
• In case of post-paid users, customers exercise the certain degree of loyalty because of high switching costs. For household customers, TRAI’S recommendation on MNP (Mobile Number Portability) has made it all the more important for the companies to charge lower tariffs besides providing better services to retain subscribers.

Price Sensitivity

• The entire Jio effect is partly owed to the predatory pricing and hence it may be comfortable assumed that the users are very price conscious & expect better services too.
• However, on-ground data shows that most service providers are more or less now matching the rates of Reliance and cutting the outflow of subscribers.
• The fact that most smartphones now have dual sims also means that customers now switch between more than 1 service provider in most cases.

The 5g Analysis

5G is expected to become available to the public by 2020 and maybe as early as the end of this year from Jio as quoted by some sources. It is expected to improve not just the speed of the spectrum, but the capacity and latency as well. Ultimately, 5G will provide a browsing experience for users with less delay and unlimited connections. The potential of 5G will also facilitate the development of IoT, meaning 5G will be not just an upgrade, but a complete revolution of mobile technology. However, there are many industry sectors and companies who could profit from 5G – including technology giants such as Apple, who are investing in 5G to support their smartphones, and IoT companies in need of a platform from which they can launch their products. The Finnish giant Nokia has also started field trials in India for rolling out 5G In the near future.

Advantages of 5G

Integration of all networks to a unified platform Ability to provide seamless connectivity across the world.

Disadvantages of 5G

Many old devices would be rendered incompatible with 5G. Costly infrastructure to facilitate 5G

Financial Analysis

There is very little scope to capture any growth from an investor perspective within this industry as the gross revenues are declining on a YoY basis by ~9 % as in 2017 and expected to fall by another 6% this fiscal year. These declines are also marked by plunging margins and EBITDA.

Plunging Operating Profit Margin (OPM)

Source: Bloomberg Quint

The Subscription Bussiness Model

The rise of Internet technology and the success of over-the-top (OTT) players continue to have an enormous impact on traditional players in the telecoms ecosystem.

The decrease in voice service demand

• Voice services have become commoditized, while demand for access to the internet on the move has grown rapidly
• Access to the network (data connectivity) is now the primary product, and voice is no more a standalone billed item, instead, it is embedded as a feature of any gaming/messaging application.

The emergence of OTT players

• Over-the-top (OTT) applications like WhatsApp and Skype are changing the traditional ecosystem. The performance, (free) availability and the marketing campaigns behind these players will make sure they succeed in this competitive market.

The most beneficial consequence of this change towards this ‘bundled’ offering for telecom companies is the loyalty that this subscription model would create and the consistency of the cash flows that this will generate. As the competition fades and consolidates, there will be ample opportunity to increase these prices and thus generate higher revenues, until then, the pressure will persist.

Investment Outlook

Our opinion would be to AVOID investing in any of the listed telecom companies. The entire industry is on the cusp of a transformation and the best time to enter it would be when the dust settles. However, as always, it is better not to time the market. So, if you still see something great here, don’t hesitate to post it in the comments below.