India's three remaining telco majors battle for survival

Worst may be over but the remaining bruised companies are left to weed out low-paying customers in order to boost revenues

It was the launch of Reliance Jio in September 2016 by the oil-focused conglomerate Reliance Industries - controlled by India's richest man Mukesh Ambani – that most upended India's telecom sector. ReutersShow less

The worst may be over for India's debt-laden telecoms sector, but there is still a tough fight ahead for a full recovery, analysts say.
Three private telecom operators are left standing, compared to about a dozen companies a decade ago, after fierce competition triggered price wars, mergers and some calling it quits.
Now, the remaining bruised companies are striving to weed out low-paying customers in order to boost revenues as they continue to battle for survival.
"Early indicators are promising ... suggesting that the worst is over," says Ravi Menon, vice president, IT services, telecom, and Internet, at Elara Capital, a Mumbai-based investment banking firm. "It's still an uphill battle to revive industry revenue. But current tariffs are unsustainably low and are expected to increase significantly over the coming couple of years."

The stakes are high. India is the world's second-largest telecoms market after China, with about 1.19 billion subscribers as of October 2018, according to the India Brand Equity Foundation. Smartphone use, too, has massive growth potential. India is the world's fastest growing major economy, and its number of smartphone users is expected to double to 829 million by 2022, according to technology conglomerate Cisco.

“By 2022, smartphone data consumption will increase by five times in India, which proves the dominance of smartphones as the communications hub for social media, video consumption, communications and business applications, as well as traditional voice,” says Sanjay Kaul, Cisco’s Asia Pacific president.

It was the launch of operator Reliance Jio in September 2016 by the oil-focused conglomerate Reliance Industries - controlled by India's richest man Mukesh Ambani – that most upended India's telecom sector, and which still wields outsize influence today. Jio stormed the industry with cut-price data packages and promises to customers of ‘free calls for life’, angering rivals which hit back by raising concerns over unfair trade practices.

On Thursday, Jio posted a Valentine's Day rhyme on Twitter, taunting its competitors: "Roses are red, violets are blue, once a neighbour in SIM slot 2, where are you? Happy Valentine's Day.” The suggestion is that many of its subscribers are now only using Jio, whereas earlier they had been using two network operators in their dual SIM card phones. Jio is the third largest operator in India with 275 million subscribers.

The companies competing with Jio are Vodafone Idea, which was formed by the merger of Vodafone India and Idea Cellular, completed last year to form India's largest operator, New Delhi-based Bharti Airtel, and government-run BSNL and MNTL.

Tanu Sharma, the associate director at India Ratings and Research, which is part of Fitch Group, says that she expects Jio's “dominance to increase as it would continue to seize market share in terms of both subscribers and revenue from Bharti Airtel and Vodafone Idea in the financial year between April 2019 and March 2020” to the extent that Jio “could eventually emerge as the largest telecom player in the industry”.

While the competitive environment has been good news for customers, who are enjoying cheap data and call packages, the bargain prices have taken their toll on the remaining operators.

Highlighting the pain that the sector has been through, Reliance Communications this month filed for insolvency. It was once a major player in the telecom industry, led by Anil Ambani, the brother of Mukesh Ambani.

Vodafone Idea, despite being the market leader, this month reported a loss of 50 billion rupees for the quarter to the end of December.

Meanwhile, its number of subscribers fell to 387.2 million from 422.3 million in the previous quarter. But having fewer customers is in fact expected to boost the company's revenues. Vodafone Idea has started shedding low-paying users, who are recharging their phones with less than 35 rupees a month, in order to increase its average revenue per user.

Its management are upbeat that the new strategy will help.

“The initiatives taken during the quarter started showing encouraging trends by the end of the quarter,” Balesh Sharma, the chief executive at Vodafone Idea said in a statement when the earnings were released. “We remain focused on fortifying our position in key districts by expanding the coverage and capacity of our 4G network, and target a higher share of new 4G customers.”

In addition, Vodafone Idea is arming itself with a $3.5 billion war chest to help it fight off Mr Ambani's Jio. It plans to raise the money through a rights offering to existing shareholders.

Bharti Airtel is also remaining upbeat. It posted a profit of 862 million rupees in the quarter to December end – but this was due to a one-off gain. It has also been weeding out low-spending customers by raising the prices of its minimum plan which is helping to improve the average revenue per user.

“Our simplified product portfolio and premium content partnerships have played out well during the quarter, translating into one of our highest ever 4G customers additions of 11 million-plus,” Gopal Vittal, the managing director and chief executive for India and South Asia, said in an earnings statement. “Our mobile data volume continues to expand, with year-on-year growth of 190 per cent.”

But Ms Sharma of India Ratings remains sceptical about the near-term prospects of India's telecom sector. She explains that India Ratings and Research maintain a negative ratings outlook on the sector for the financial year to the end of March 2020.

“The pricing recovery is unlikely to be sufficient to compensate for the revenue loss witnessed in the preceding two years,” says Ms Sharma. “The earnings before interest, tax, depreciation and amortization, for the top two private telcos will improve but not to the extent that it would lead to any meaningful recovery in their standalone credit profiles.”

The debt of Bharti Airtel, Vodafone Idea and Jio at the end of this financial year to the end of March is estimated to be at about 3 trillion rupees, according to India Ratings.

Operators are taking a two-pronged approach to boost revenues, analysts explain.

“One, trying to migrate more customers to 4G where revenue per user is substantially higher, at 40 to 50 per cent higher and, two, the introduction of a minimum tariff that is linked to duration to remove subscribers who use their numbers only for incoming calls and avoid paying for usage,” says Mr Menon.

He thinks that all the operators left will be able to survive, but the landscape will look very different compared to a few years ago.

“Jio, the newest entrant, who is effectively the one setting prices due to their lower cost structure from being a 4G only player with new equipment, undoubtedly will survive,” he says.

Vodafone Idea “is likely to continue to require equity infusion unless industry health improves”.

Bharti Airtel is in a strong enough position to continue to weather the storm, Mr Menon adds. While “the government entities will limp along as they have in the past, but are unlikely to play a substantial role in the market”.