Indian Telecom Market Shares - status check before RelJio's Tsunami arrives.

We all know that the Indian Telecom sector is at the cusp of a major reshuffle in the coming months/quarters as RelJio is slated to start offering it's 4G services very soon. So I thought it fit to do a status check of market shares of all the existing Telecom operators in the country. And while doing this data collation & analysis, I did find many interesting findings.

We have a total of 12 active telecom operators in the country with the 13th one to start operations very soon. Out of the existing 12, 5 operators are regional ones with operations in less than 7 circles each. I have collated data on the Quarterly Adjusted Gross Revenues (AGR) and Quarter-ending Wireless Subscribers market shares of all the operators. Please do note that the AGR includes both Wireless & Wireline operations of operators active in both segments.

BSNL&MTNL, Bharti Airtel, Reliance Communications and Tata Teleservices have some notable Wireline operations in various circles across the country. Amongst these BSNL&MTNL are the biggest ones controlling around 75 to 78% marketshare, but they have been losing it with every passing month bit-by-bit. Bharti Airtel is the next largest with about 13-14% market share, followed by Tata Teleservices with about 6% and most of the rest with Reliance Communications. Please do remember that the subscriber numbers in the Wireline segment are less than 3% of the Wireless subscriber base across the country. But at the same time, the ARPU (Average Revenue Per User) from the Wireline segment is 3 to 4 times that of the Wireless segment, atleast in case of the Private sector operators.

Coming to Wireless Subscribers market shares, the Top-3 operators, (i.e. Airtel, Vodafone & Idea) have strengthened their position with their combined market share improving from 56.1% to 59.2% (310 bps improvement) over the last 6 quarters. Amongst them, Idea Cellular alone has improved it's share by 170 bps. Apart from the Top-3, the operators that have managed an improvement in subscribers market share over last 6 quarters are: Aircel (67 bps), Telenor (85 bps), Videocon (24 bps) and Quadrant (6 bps). Amongst the market share losers, the 3 biggest losers are: BSNL (246 bps), Reliance Comm. (118 bps) and Tata Tele (75 bps).

After losing subscribers market share quarter-after-quarter and also losing it's No.5 position to Aircel, BSNL has finally managed to stop this trend with a minor market share improvement in Sept'15 quarter. As per various media reports, BSNL is said to be back in the game & is looking to ensure it's operational improvement in the coming quarters. BSNL's resurgence and RelJio's entry are 2 big things to worry for all the operators, including the Top-3 trio of Airtel, Vodafone & Idea.

Now let's discuss the AGR market shares as there are quite a few interesting findings here. Here the Top-3 operators have an even stronger hold with almost 70% market share. Airtel has a huge lead with a 30.1% market share and 850 bps lead over the No.2 operator Vodafone. Not just that, Airtel's AGR market share is 650 bps higher than it's own Subscribers market share. In fact, each of the Top-3 operators have an AGR market share higher than their respective Subscribers market shares. Vodafone's AGR share is about 270 bps higher, while Idea's share is about 140 bps higher than it's Subscribers share. This statistic clearly suggests that the quality of subscribers of the Top-3 operators is very good and each of them must be enjoying near Industry-best ARPUs in most of their circles of strength.

The weakest amongst the larger operators is definitely Reliance Communications. It's Subscribers share is a respectable figure of 11.1%, making it the No.4 operator, but it's AGR share is a lowly 4.3%, making it the No.7 operator here. This fact clearly reflects the quality of RCom's subscriber base. RCom certainly must be having the lowest ARPUs in the industry and that too by a huge margin. An AGR share of 680 bps lower than it's own Subscribers share is too massive to ignore. I sometimes do wonder, how did RCom manage this feat even after being in this business for so long. All this despite the fact that RCom has 3G license for the 2 prime Metro circles of Mumbai & Delhi and also has nearly 12 lakh Wireline subscribers, just about 30% less than Tata Tele's Wireline number. Something must be terribly wrong with RCom network & quality of service, which has brought it to this situation.

Other than RCom, operators who have an AGR share lower than their respective Subscribers share are: Aircel (320 bps), Telenor (260 bps) and Videocon (70 bps).

Now coming to those operators who have an AGR share higher than their respective Subscribers share are: BSNL (120 bps), MTNL (120 bps) and Tata Tele (50 bps). The thing that is common between these 3 operators is their healthy Wireline business. BSNL&MTNL together have over 20 million Wireline subscribers, but majority of them must be Residential users still and spread out across several cities. On the other hand, the private sector operators have Wireline business only in a handful of cities and cater mainly to Corporate & SME clients or large Housing complexes. Tata Tele's Wireline subscriber base of about 1.7 million is less than 3% of it's Total Subscribers base, but it's contribution to it's AGR must be easily in the range of 8 to 10%.

On a Trailing-Twelve-Months basis, the Indian Telecom Industry's Total AGR has posted a growth of about 3% Q-o-Q in the recent quarters. Airtel & Vodafone are also growing at a similar pace of between 3% to 3.5% Q-o-Q. Idea Cellular has managed to grow a little faster at rates between 5% to 6% and hence has seen the biggest improvement in Quarterly AGR market share of 210 bps over the last 6 quarters. BSNL's AGR numbers are clearly suggesting the start of it's turnaround. BSNL Quarterly AGR share had fallen from 10.6% in March'14 to a low of 8% in Dec'14, but has smartly bounced back to 9.2% in Sept'15 quarter. And there is also the possibility of operational consolidation between BSNL & MTNL, which could give further impetus to BSNL's resurgence.

RCom again is probably the only major operator who has seen it's T-T-M AGR fall consistently over the recent quarters, from Rs.7885 crores in Dec'14 to Rs.7188 crores in Sept'15. RCom's quarterly AGR share is down from 6.4% in Mar'14 to just 4.3% in Sept'15. And things could worsen further in Dec'15 quarter as RCom is slated to shut down it's 2G operations in a few circles due to license expiry. RCom is solely riding on 2 hopes: first it's consolidation with Sistema, which will add to it's 800/850 MHz spectrum holding and then sharing/trading this spectrum holding with RelJio and ride on the latter's 4G network. The slight chance of consolidating with RelJio is what is keeping RCom alive.

Future Possibilities: 

The war for market share is going to be fought in the Data segment and 4G could be the technology of choice for most operators going forward. Airtel has already launched it's 4G service in over 300 cities/towns across it's 6 or 7 circles on 2300 MHz spectrum. Simultaneously, Airtel is acquiring the smaller 4G 2300 MHz spectrum holders. Rumours are also afloat that Airtel is in talks with Aircel to buy out it's 2300 MHz spectrum holding, which will give Airtel a 4G coverage across over 15 circles. Apart from 2300 MHz holdings, Airtel has 1800 MHz spectrum in many circles and hence Airtel could be the only other 4G player with a pan-India coverage, other than RelJio.

Idea & Vodafone are also rolling out 4G networks on their 1800 MHz spectrum holdings, wherever available. Idea also recently acquired Videocon's 1800 MHz spectrum in 2 circles, which were important to it. The pricing was much higher than the Auction-determined price, but that is the kind of urgency/panic amongst the incumbent operators to rollout 4G networks & try to protect their Revenues after RelJio's onslaught begins. Idea & Vodafone might need to hold hands together to offer a wider 4G presence across maximum circles as they are not self-sufficient, while Airtel is self-sufficient. Both Idea & Vodafone are on the verge of launching their own 4G service in few select cities. Both of them would look to scale up their networks to atleast a few hundred cities each in the circles where they hold good AGR share and wouldn't like to lose it in the coming months.

RCom's possible consolidation with Sistema is already announced. During the same announcement, it was mentioned that RCom will later get merged into Sistema's Global operations. In such a scenario, RCom might only look at spectrum sharing/trading with RelJio. I have a feeling that RelJio might not want to take over anything other than RCom's 800 MHz spectrum. In any case RCom's subscribers quality is not good & low revenue generators. There are reports which suggest that RelJio might look at keeping it's ARPU well over Rs.300/- by offering it's customers the complete package of Voice Calls, Data packs and even different kinds of Content. All this will unfold through the year 2016, starting in a couple of weeks from now. Going by RelJio's potential scale of network rollout, RelJio could be at No.4 or 5 position in AGR stakes in 12 months from now and will certainly be amongst the Top-3 before the end of year 2017.

It is still very unclear on how other operators like Aircel, Tata Tele & Telenor plan on surviving in the coming months/years. Telenor has played by a clear strategy of pure 2G service at ultra-low cost. It has done well by reaching operational break even in most of it's circles of operation. But the success of this strategy will depend on whether or not our Rural population upgrades to Data usage or not. I am sure that Telenor too would like & would have to enter the 4G fray sooner or later. Tata Tele & Aircel, both currently have decent sized operations, but have bigger worries on the Debt front. If they urgently don't get into consolidation mode with some other operator or bring in new larger investors, the chances of their survival are very bleak.

Over the next 12-24 months, I am expecting the following 4-5 players/groups to play an important role in the Indian Telecom space: Airtel & RelJio will certainly be there on their own individual merits; Vodafone & Idea will do better if they join forces via virtual JV or atleast Roaming agreements; BSNL&MTNL with their 3G/Broadband/WiFi services; Amongst the rest I am expecting Telenor to take a lead in some kind of consolidation exercise. I am saying so going by the seriousness with which Telenor has rapidly scaled up it's operations within those limited circles of operations and also achieved operational profitability in most of them. Let's see how things unfold.

Happy Investing!!!

Reliance Industries Ltd. - Segmentwise Contributions Update.

Everybody knows that Reliance Industries Ltd. (RIL) posted it's best ever quarterly Net Profit figure for the Quarter ending Sept.'15. RIL's performance was boosted by it's two core business segments of Refining & Petrochemicals. All other segments had a subdued performance.

Here I will be sharing my analysis of Trailing-Twelve-Months numbers of RIL's segmentwise EBIT & Capital Employed numbers over the last 2 years and then present my expectations of how things could move over the next 2 years. First have a look at the Charts below:

In Sept'13, Refining & Petrochemicals together contributed about 88% of the company's Total EBIT of Rs.24,290 crores. Over the next 12 months, by Sept'14, RIL's Total EBIT grew by 14+% to Rs.27,765 crores. Oil&Gas, Retail and Media&Broadband segments posted faster growth rates, though on smaller bases, which pulled down the contribution from Refining & Petrochemicals segments to 84% of RIL's Total EBIT.

Over the last 12 months, i.e. for the period ending Sept'15, RIL's Total EBIT has posted a Y-o-Y growth of another 11+% to hit a figure of Rs.30,910 crores. Almost all this growth has come from the Refining business alone, which grew it's EBIT by a staggering 27% Y-o-Y. This alongwith the 5% growth in EBIT from Petrochemicals segment, pushed the contribution from these 2 core segments to 90% of RIL's Total EBIT. 50% drop in EBIT from Oil&Gas segment too aided this.

Now let's come to the other interesting part, i.e. Capital Employed in different segments. Between Sept'13 and Sept'15, RIL's Total Capital Employed number has increased by nearly Rs.1,00,000 crores. The Refining & Petrochemicals segments, which contribute around 90% of the company's EBIT, contributed just under 40% to this incremental Capital Employed number (36% from Refining & 3.5% from Petrochemicals). Part of the increase in Capital in the Refining segment could be because of the company's pile up of Crude Inventory, while the prices are low. 15% of the incremental Capital has gone towards Oil&Gas segment, most of it towards the company's Shale Gas subsidiaries in the US. Retail has consumed a negligible 1% of the incremental Capital. The remaining 44% of the incremental Capital has gone towards the Media&Broadband segment. Most of it towards the rollout of RelJio's 4G network.

If you look at the Chart alongside, more than 50% of RIL's Capital is now invested in businesses other than Refining & Petrochemicals, primarily in Oil&Gas and Media&Broadband. But the Revenue & Profit contribution from these segments is negligible currently. The contribution from Oil&Gas segment has been severely affected due to sudden & sharp fall in Global Crude Oil & Gas prices. This segment's growth is now linked to recovery in Oil & Gas prices.

The more interesting story will be the start of commercial 4G & Broadband services, slated to happen from the end of this year. The company seems to have done huge amount of ground work for a massive rollout, which has not been seen in India ever. January to March'16 will be the introductory launch phase for the company. There will be massive promotions across various media to increase the visibility of the Jio brand and all it's services across the country. Revenues for the company will start pouring in during this period, but it will be very small compared to the Expenses the company will entail towards this business & it's promotional activities. Hence we can expect the company to report a substantial EBIT Loss for this business during the quarter ending March'16. I am expecting the EBIT Loss to be anywhere in the region of Rs.3000 to 5500 crores. From April'16 onwards, the company's revenues are expected to grow at a very fast pace, which we will call the Ramp-up phase for the company. The revenues will keep increasing month after month, but the Expenses will grow at a much slower pace as most of the Operating Expenses will be steady right from Day-1. Hence the company's EBIT Losses will keep reducing with every passing month. I am expecting RIL's 4G & Broadband business to break-even at an EBIT level in about 6-8 quarters of the launch of services, i.e. by about June-December'17. These expectations might seem a bit on the optimistic side, but I think the company is going to be extremely aggressive in expanding this business and hence it could be an achievable target.

While the ramp up of RIL's 4G business will be happening, it's major CAPEX on the Petrochemicals side will also come on stream next year, which is expected to boost the company's Profits substantially. That means on one side the 4G business will report large losses in the initial few quarters, but at the same time the company's profits from the core business are expected to increase. The combined effect will mean that the Net Profit's may not get completely wiped out for anything more than 1 or 2 quarters. Beyond those 1 or 2 quarters, i.e. post June'16, it could be a double booster for RIL's profit numbers. On one side the 4G Losses will keep reducing with every passing quarter and profits from Petrochemicals segment will keep increasing till March'17 as the major CAPEX comes fully on-stream. FY'2017-18 will be the year to watch out for in terms of Reliance Industries Ltd's Financial performance. It could take RIL into a completely new trajectory.

Let's wait & watch if my expectations do turn out to be true!!

Happy Investing!!

Fear of RelJio launch pulling down Telecom stocks.

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.

Reliance Industries Ltd. - Poised for some interesting times ahead

Look at Reliance Industries Ltd. It is amongst the largest companies in India on several counts. With Annual Revenues of about Rs.4.50L crores, Net Profit of over Rs.23K crores & a Market Cap of over Rs. 3L crores, it certainly is a Mega corporation. But look at it's current businesses. Over 90% of the company's revenues and about 80% of profits come from Refining & Petrochemicals business. And these businesses are not posting any handsome growth for the last many quarters. At best these businesses will grow in single digits or low double digits in the coming quarters.

A few years ago Reliance Industries Ltd stepped into new businesses of Oil & Gas production and Modern Retail. As we all know the Oil & Gas production business of the company has been a big disappointment mainly because the initial estimates & projections were very large & exciting, but the actual numbers have been quite lacklustre in comparison. Nevertheless this business is chugging along & profitable too. But it is difficult to predict if this business will grow to a much larger scale or not. Reliance's Retail business did have a false start initially, but the company has done well to make a smart comeback over the last 2-3 years. Reliance is now India's largest Retail company, having overtaken Future Group a few quarters ago. Eventhough the Retail business is currently contributing only about 3-4% of Reliance's annual turnover, it is growing at a healthy pace of about 15-20%. And the better news is that the business has reached break-even too at the operating level. With further expansion the economies of scale will further help the company improve profitability and sooner or later it will start posting Net Profit too. Reliance Retail already has over 2000 stores operational across all formats and cater to millions of customers across several large cities.

Now lets come to the most interesting part of Reliance's large investments: Broadband. Many of us have been hearing about Reliance Jio Infocom (RelJio) being the only company to hold broadband wireless spectrum across the country. We have been hearing this for the last over 4 years now, but we haven't seen any launches happening. As per regulatory requirements, RelJio needs to launch it's services in all service areas latest by second half of 2015. What was the company doing sitting idle with all that spectrum for nearly 20% of the license period?? Frankly I think it was an intelligent move. 4 years back the LTE technology was still at an experimental stage and all it's equipment were very expensive. Thanks to this delay, RelJio will be able to install equipment which is better evolved and at much lower prices. The technology is still very new even at a Global level, but availability of it's equipment is now much much better than what it was 4 years back. Over the last 3-4 quarters, the activity at RelJio has shot up with the company first signing up agreements with almost all Tower companies & then signing agreements with Equipment Vendors for implementation of BTSes across the country. The company has been laying it's own OFC across most of the important cities as it is anticipating a huge load of data traffic on it's Wireless Broadband network. The company had paid something like Rs.12K crores for the Broadband spectrum, but it is investing well over Rs.50K crores to setup all the related infrastructure across the country. These numbers are not too short of what any other Mobile Operator has invested in Infrastructure for a nationwide rollout. Going by these numbers, RelJio is planning to launch it's services in thousands of cities & towns and lakhs of villages in the very first year itself. To make things even more interesting RelJio has bagged 1800 MHz spectrum in 14 important circles, which can help the company jump right into regular mobile service competition as well.

I am expecting RelJio to launch it's services on 28th December'2014, Dhirubhai's anniversary and the phased rollout will happen over the first half of 2015. As per my estimates RelJio will be targeting to achieve Quarterly turnover of Rs.4K crores within the first 4-6 quarters of launch. RelJio could be posting a turnover of about Rs.10K crores in FY'2015-16 itself and will be close to breaking even at EBITDA level. Within a few months of RelJio's launch we should see a price-war in the Data business. If RelJio's service experience is good, then even a price-war cannot stop the company from capturing substantial incremental as well as existing market share from all other operators. RelJio could touch 10% market share figure in the Data business within the first 4 quarters itself, provided the initial customers are happy with the company's services. If there is a neutral-to-positive word-of-mouth about RelJio's services in the first 2 quarters, we could see many customers jumping from other operators to RelJio's networks to enjoy faster speeds and larger usage limits. The first 2-4 quarters from launch are going to be crucial.

If everything works out fine, we could see RelJio touching the Rs,50K crores turnover mark within the first 5-6 years and by then the company will be generating healthy Cash Profits and Net Profit too. The Retail business expansion alongwith the huge potential in the Telecom business is what will bring the exciting times for Reliance Industries Ltd & it's shareholders. The company's stock has been underperforming for the last many years now. There have been valid reasons for the same. The revival in Indian economy will also help boost demand for RIL's petrochemical products and who knows the company could get back into fuel-retailing in a big way too in the coming couple of years. There are many potentially positive things that could happen with the company. The stock price which has been languishing in the Rs.700 to 1100 range for all of last 6 years, finally could breakout above the Rs.1100 price levels in the coming quarters.