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.
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
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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.
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.
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
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:
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.
Consumption of online content
Free voice calls
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.
Seamless switching of services
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
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 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
The emergence of OTT players
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.
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.
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