Earlier in May'14, I had written about the stupendous pace of growth being experienced by all Mobile Operators in their Wireless Data Service business. (Click here for that article. It will open in a new window) As expected the Wireless Data business is the one that has been driving all the growth for Mobile service providers. This business has not just boosted revenues, but profitability too has improved sharply. This is especially evident in the quarterly results of Bharti Airtel and Idea Cellular. If one looks at the results, times have never been better for Idea Cellular on the profitability front. Even for Bharti Airtel the numbers have sharply perked up in the recent quarters. The demand for Wireless Data is growing at such a pace that all the players have confidently hiked the rates for all their 2G Data plans by as much as 50-70% in the last 1 year and none of the Top-3 have cut their 3G data tariffs until now. Smaller players like Tata Tele, Aircel & even RCom have started offering attractive 3G Data plans in the recent months.
But the demand is so high that customers have shown very high levels of elasticity in Data tariffs. It's quite obvious that Internet usage is very very addictive as well as infectious. Many people are upgrading their Smartphones almost every year and with newer Smartphones they need faster Internet speeds too. But despite all these positives for Telecom operators, almost all of them have seen their stock prices correct sharply soon after hitting new peaks sometime around September-end or early October this year. Both Bharti Airtel & Idea Cellular are down by about 20-22% from their peaks, while stocks of RCom & TTML have seen much sharper falls.
The reason for this correction, as the title of this article suggests, is the upcoming launch of RelJio's 4G services. As per expectations, RelJio's 4G tariffs are going to be atleast 50% cheaper than the 3G tariffs currently charged by the trio of Airtel-Vodafone-Idea. And the 4G speeds will be 5 to 10 times faster too. If these rumours/expectations do turn out to be true, then all these 3G operators will have no choice but to sharply cut their 3G Data tariffs to levels under RelJio's 4G plans. And RelJio is also expected to have a network coverage which is as good as that of the competition (all combined together!!!), if not wider than them. This means the existing 3G operators will have no major advantage over 4G service, except for maybe the fact that the Smartphones that people are currently using are not 4G compatible and the users will be forced to either replace their phones or invest in an additional device which will convert 4G signals into Wi-fi signals. I don't think this is a very big impediment and a huge portion of the user base can think of shifting to 4G in the first year itself.
As per the launch dates for RelJio, nothing has been finalised as yet. But there is a strong expectation that Mukesh Ambani will think of repeating the feat of launching his mega telecom venture on his father's birth anniversary on 28th December, just as he had done with Reliance Infocom about a decade ago. Even if it doesn't happen on 28th December, the rollout across the country has to happen before the end of May'2015. That means there is a window of only 5 more months within which RelJio has to start it's commercial services. As per the newsflow we have seen in the recent months, RelJio had started testing it's network for security & compliance as well as performance, over a month ago. RelJio also has tie-ups in place with all Telecom Tower companies. It has laid it's own fibre-optic cable network on all routes where the traffic is expected to be the maximum. And RelJio now has a Data Center capacity which can easily claim to be the highest in the country, even overtaking Tata Communications' capacity, which is a leader till now. All these indications are clear enough to suggest that RelJio's network coverage & capacity will be good enough to accommodate a huge number of subscriber base with very high usage levels. Not just that, RelJio is even expected to launch multiple services where it's network can act as a backbone. Television service as well as Movies on Demand is one such example. There will be many more in various different fields like Education, Security and various other Internet-of-Things applications. We will come to know about them in the near future.
The way Telecom stocks will behave after RelJio's launch will depend on how well they are able to compete against it in trying to protect their Revenue-Market share. We are certainly going to see some casualties in the Telecom sector in the next 1 or 2 years or some large M&A deals happening. Bharti Airtel is already preparing it's war-chest by building a strong Capital base by divesting it's tower assets in Africa and raising more resources in the form of ECBs. Idea Cellular & Vodafone too are currently in a very healthy financial state & have able promoters who can infuse more funds. But an M&A deal involving any one of these cannot be ruled out. The obvious potential casualties are RCom, Tata Tele, Aircel, and other fringe players like Telenor, MTS & Videocon. There is a possibility that RCom will be saved by RelJio. Tata Tele has already made it clear that it is not too interested in remaining in this business & will be happy to merge into another stronger player, possibly Telenor or MTS. But valuations will play spoilsport as Tata Tele's financial health isn't good currently and it could worsen rapidly once RelJio's launch happens. Aircel's future is equally uncertain & problems are quite similar to that of Tata Tele. Large Debt & Cash Flows are not strong enough to attract a buyer. MTS too has said that it can bring more capital & look at acquiring an existing operator, but the M&A rules need to be simplified. Videocon too might get acquired or shut down by selling off it's spectrum & license.
To summarise, the next 12 months are going to be very very exciting for the User base, but very very challenging for those who are Invested in Telecom stocks. I think Bharti Airtel, Vodafone and maybe Idea Cellular (either singly or by aligning with another player) will be able to face RelJio's challenge in the market place. But their businesses may not post any positive growth in the first year or two of RelJio's launch, until things stabilise and some of the smaller competitors shut down their operations or merge. The first 2 years will be a fight to protect their existing Revenue-base.
My expectation is that in 4 years time RelJio will be amongst the Top-3 service providers in terms of Revenues, either organically or inorganically.
But the demand is so high that customers have shown very high levels of elasticity in Data tariffs. It's quite obvious that Internet usage is very very addictive as well as infectious. Many people are upgrading their Smartphones almost every year and with newer Smartphones they need faster Internet speeds too. But despite all these positives for Telecom operators, almost all of them have seen their stock prices correct sharply soon after hitting new peaks sometime around September-end or early October this year. Both Bharti Airtel & Idea Cellular are down by about 20-22% from their peaks, while stocks of RCom & TTML have seen much sharper falls.
As per the launch dates for RelJio, nothing has been finalised as yet. But there is a strong expectation that Mukesh Ambani will think of repeating the feat of launching his mega telecom venture on his father's birth anniversary on 28th December, just as he had done with Reliance Infocom about a decade ago. Even if it doesn't happen on 28th December, the rollout across the country has to happen before the end of May'2015. That means there is a window of only 5 more months within which RelJio has to start it's commercial services. As per the newsflow we have seen in the recent months, RelJio had started testing it's network for security & compliance as well as performance, over a month ago. RelJio also has tie-ups in place with all Telecom Tower companies. It has laid it's own fibre-optic cable network on all routes where the traffic is expected to be the maximum. And RelJio now has a Data Center capacity which can easily claim to be the highest in the country, even overtaking Tata Communications' capacity, which is a leader till now. All these indications are clear enough to suggest that RelJio's network coverage & capacity will be good enough to accommodate a huge number of subscriber base with very high usage levels. Not just that, RelJio is even expected to launch multiple services where it's network can act as a backbone. Television service as well as Movies on Demand is one such example. There will be many more in various different fields like Education, Security and various other Internet-of-Things applications. We will come to know about them in the near future.
The way Telecom stocks will behave after RelJio's launch will depend on how well they are able to compete against it in trying to protect their Revenue-Market share. We are certainly going to see some casualties in the Telecom sector in the next 1 or 2 years or some large M&A deals happening. Bharti Airtel is already preparing it's war-chest by building a strong Capital base by divesting it's tower assets in Africa and raising more resources in the form of ECBs. Idea Cellular & Vodafone too are currently in a very healthy financial state & have able promoters who can infuse more funds. But an M&A deal involving any one of these cannot be ruled out. The obvious potential casualties are RCom, Tata Tele, Aircel, and other fringe players like Telenor, MTS & Videocon. There is a possibility that RCom will be saved by RelJio. Tata Tele has already made it clear that it is not too interested in remaining in this business & will be happy to merge into another stronger player, possibly Telenor or MTS. But valuations will play spoilsport as Tata Tele's financial health isn't good currently and it could worsen rapidly once RelJio's launch happens. Aircel's future is equally uncertain & problems are quite similar to that of Tata Tele. Large Debt & Cash Flows are not strong enough to attract a buyer. MTS too has said that it can bring more capital & look at acquiring an existing operator, but the M&A rules need to be simplified. Videocon too might get acquired or shut down by selling off it's spectrum & license.
To summarise, the next 12 months are going to be very very exciting for the User base, but very very challenging for those who are Invested in Telecom stocks. I think Bharti Airtel, Vodafone and maybe Idea Cellular (either singly or by aligning with another player) will be able to face RelJio's challenge in the market place. But their businesses may not post any positive growth in the first year or two of RelJio's launch, until things stabilise and some of the smaller competitors shut down their operations or merge. The first 2 years will be a fight to protect their existing Revenue-base.
My expectation is that in 4 years time RelJio will be amongst the Top-3 service providers in terms of Revenues, either organically or inorganically.
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