Telecom: Near-term consolidation for incumbents

Telenor India is the latest telecom provider to hit the exit button, with consolidation, hastened by Reliance Jio’s (RJio) aggressive pricing, leaving weaker players little other option.

Last month, Idea and Vodafone had announced they were in talks for a possible merger. Analysts believe the near term will see some pressure on realisations, though things could improve once the dust settles.

Manoj Behera of PhillipCapital says there will continue to be pricing pressure, as most players will be keen to grab data and subscriber market share by offering attractive packages. Once the customer is in the network, operators could look to increase the average revenue per user (Arpu) through higher value packages.

While there will be near-term pressures, consolidation would also, say Bhupendra Tiwary and Sneha Agarwal of ICICI Securities, gradually bring some pricing discipline. That would be after the subscriber base across the top four or five gets stabilised and would benefit all. As the unlimited plans have made voice calls free, and there is pressure on data realisations or pricing, the key to revenue growth would be higher volumes on the data front.

As the industry aligns to RJio’s offering, capacity will be key. Only those operators with sizable data coverage and capacity will be able to protect their market shares and benefit from the industry’s Arpu accretion. Motilal Oswal Securities' analysts believe Bharti Airtel is in a strong position, with about 170,000 broadband sites (4G+3G) as compared to RJio’s 115,000, and should be able to match the latter's capacity. A combined Vodafone and Idea with capacity of 170,000 sites will also have the necessary firepower to compete, provided the merger is completed over the coming quarters, they add.

The Street has given a thumbs-up to the latter merger. The reasoning is that once the consolidation frenzy settles, only three big players will remain to tap the Rs 2.03 lakh-crore market. These being RJio, Bharti Airtel (including Telenor) and Idea-Vodafone if the merger goes through. Currently, a little over 75 per cent of the revenues are generated by Bharti, Idea and Vodafone. The Street is discounting Reliance Communications and government-owned BSNL/MTNL; it does not believe these can fight the established and larger entities. India’s telecom market could then take the developed markets route, with three or four entities generating strong cash flow, unlike the current scenario where the sector is struggling to make money. What will make it tough for a new entrant is high entry barriers, especially on spectrum cost.

What has surprised the Street is that the pace of consolidation is faster than expected. The end of RJio’s free service and at a level (Rs 303) much higher than the Street’s anticipated Rs 100-sort of offerings, is expected to improve the sector's overall Arpu. The latter, say analysts, could move from the current Rs 158 to about Rs 250 levels. Excluding taxes, RJio’s unlimited data offer generates an Arpu of Rs 260. In addition to the revenue side, the merged and acquired entities would benefit from network cost savings (overlapping sites), sales and administration expenses, as well as marketing expenses.