Consolidation in telecom space good but competition to remain severe: Experts

Sanjay Kapoor

Former Chairman | Micromax

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The Bharti Airtel stock has been a tear over the last few days, trading close to 10-year highs and has seen a serious re-rating. Meanwhile, Reliance Jio hiked tariffs by 12-15 parent on October 18, 2017.

To discuss what all this means for the telecom sector and the outlook for the incumbents, CNBC-TV18 spoke to Sanjay Kapoor, Former Chairman, Micromax and Rohit Chordia of Kotak Institutional Equities.

According to Kapoor, two set of things have happened which are positive for the space. One is there is clear consolidation in the space where an unsustainable perfect competition structure is dying down and a more sustainable structure is coming into shape, where three long-term players seem to be standing out.

Two, Jio which was causing lot of disruption in the market has reported numbers for the first time and that will drive change in behaviour.

However, competition will continue to be severe for the next few quarters because he does not think Reliance Jio will be satisfied at the number 3 position and surely have bigger plans. So expect more disruptions may be in the feature phone segment going ahead, says Kapoor.

Chordia agreeing with Kapoor on the consolidation front, says market basically likes visibility and therefore is quick to discount any visibility.

However, he does not think the sector has bottomed out in terms of earnings and it make take a few quarters for numbers to look good but hope is once they start looking good then we could be in for a sustainable growth in sector.

Below is the verbatim transcript of the interview.

Surabhi: Market is getting more and more excited, Jio's latest reworking of their flagship plan, they have raised tariffs by about 15 percent, is it fair to say that the bloodletting is probably sort of a thing of the past?

Kapoor: I will only begin by saying that I see that there are two sets of things that have happened in the market which seems to be like a positive news for the market. First, there is a clear consolidation of the market where an unsustainable perfect competition structure is dying down and a more sustainable oligopolistic structure is coming to shape and in that very clearly three players are standing out who seem to be the long-term players and therefore the market believes that there will be semblance when these three players are really transformed into data providers in this market over the long run and India is a big data market in everybody’s view.

The second is that Jio, which was causing a lot of disruption in the market, has for the first time reported its numbers and that obviously drives a change in behavior. The moment you begin to report numbers, then you have to show us sustenance of those numbers and you have to show an improvement on those numbers. So everybody believes that there will be semblance that will come in. However, for me to understand why does market begin to penalise the stock do early on news and why does market tend to celebrate so early depending on such news is beyond my comprehension. However, I think these two are the news that are leading this rally.

The fact is that, is Reliance Jio's aspirations already met, and is this what they had come into the market for? I don’t think so. I think they have bigger plans and I think the competition in the market will still be severe and for the numbers to really prop-up in terms of topline, bottomline, in this industry will take a few more quarters before it really settles down.

Anuj: You had come out with an interesting note, I think it was from Kotak, on how Bharti Airtel's numbers will look if we compare them with the way Reliance Jio has reported the numbers. What are your thoughts on the way we have seen the rerating of Bharti Airtel over the last one month?

Chordia: I could not agree more with what Sanjay said on the couple of factors that have perhaps driven the rerating. One, there is very clear path to consolidation in the industry that is visible and that consolidation is happening – you have to understand with the likes of Bharti picking up some of the 'distressed' assets in the sector for a very reasonable price. So that I think of course adds to the positive momentum that has been building up in the sector for the incumbents.

Secondly, on the market part, it is just that the market likes visibility at this point and it is very quick to discount any visibility that emerges which is what is happened with telecom at least as far as consolidation goes. Now from a perspective of whether the sector has bottomed out in terms of earnings, it may not have yet, again I could not agree more with what Sanjay said, it will perhaps take a few quarters for the numbers to start looking better.

However, the hope here is that once they start looking good, then we could be in for a few years of sustained growth in the sector which would return and that in a consolidated market would benefit then the players which remain disproportionately. So that is what I think is driving the positive momentum in the stocks.

Disclaimer: Reliance Industries Ltd. is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd.