Reliance Industries Ltd - Q4 FY'16 update : Surprise after surprise.

Throughout Q4 FY'16, it was widely expected that Reliance will launch it's long awaited & much delayed Jio 4G services on a commercial basis by the start of April'2016. But the company did not fail to Surprise (read as Disappoint) AGAIN as there is absolutely no confirmed announcement about Jio's launch even by the first week of May'2016. More on this later....

The bigger Surprise from Reliance Industries came in terms of continued strong profitability in it's primary business units of Refining & Petrochemicals. The average price of crude hit the lowest levels during Q4-FY'16. Hence it was no surprise that the Revenues from Refining business took a proportionate hit. But the Refining EBIT number did better than expected with only a 1.5% Q-o-Q drop, but was still 30% higher Y-o-Y. The chart alongside shows the T-T-M EBIT progress of RIL's Refining business. The surge seen over the last 3-4 quarters will now lead to stability or only a gradual improvement going forward, unless the company has more surprises in store for us. I am expecting to see the T-T-M EBIT number for Refining to stabilise around the Rs.24,000 to 25,000 crores mark in the coming few quarters. The huge improvement in EBIT numbers from Refining unit of Reliance Industries did not come on the back of big expansion in capacity, but mainly because of improvement in efficiency of the existing capacities. I am not expecting further huge improvement in efficiencies, but there could be minor improvements.

On one hand I am expecting RIL's Refining business to stabilise in terms of EBIT numbers, but on the other hand I am expecting the PetroChemicals to continue deliver further improvement in EBIT numbers. In fact the EBIT improvement journey has just started for RIL's PetChem business. After posting a 27% Y-o-Y jump in EBIT in Q3-FY'16, RIL's PetChem division posted a stronger 35% Y-o-Y jump in Q4-FY'16. With more CAPEX projects coming on stream during the current fiscal, we can expect this division to continue posting strong Y-o-Y growth in EBIT number for few more quarters for sure. The CAPEX at the PetChem unit is leading to increased capacity of certain products as well as improvement in efficiency at certain other products. The full effect of all this CAPEX is expected to be seen in FY'18. That means we still have atleast another 4-6 quarters of continued improvement in EBIT numbers. The growth rates may vary, but they will still be good enough. As of Mar'16, the T-T-M EBIT from Petrochemicals unit has crossed the Rs.10,000 crores mark and could very well progress towards Rs.12,000 to 13,000 crores mark over the next 3-4 quarters.

As of March'2016, the two business segments of Refining & Petrochemicals of Reliance Industries Ltd. together contributed a total EBIT of around Rs.34,000 crores on a T-T-M basis. Over the next one year, I am expecting this figure to increase by atleast another 10% or so to levels of over Rs.37,000 crores.

The remaining three business units of the company together contributed just about 5-6% of the company's Total T-T-M EBIT as of March'2016, down from a contribution of over 15% at the end of March'2015. The primary reason for this is a near 90% fall in EBIT from Oil & Gas production business, which was on expected lines as the International prices of Crude Oil & Natural Gas had seen a collapse during the year 2015. The prices of these commodities seem to have bottomed around Jan-Feb'2016 and have seen a smart bounce back over the last 2 months. The Crude Oil price for example is now trading around $45 per barrel compared to lows of under $30 registered over 2 months ago. Even if the prices continue to trade within a 10% range of current levels, I think RIL's Oil & Gas business too will start posting improved EBIT numbers, mainly because of it's US Shale assets, where the company has managed to bring down operating costs considerably. Hence the recent recovery in prices will help boost profitability from near-zero levels in the most recent quarter. The T-T-M EBIT from the Oil&Gas business has dropped from levels of around Rs.3200 crores to under Rs.400 crores over the last 1 year. Even if Crude Oil stays within the $40 to 50 per barrel range for the rest of the year, I think RIL's EBIT from this business could partly recover to levels of around Rs.1200 crores or so quite easily.

Coming to RIL's most important consumer-facing business (until Jio's launch happens), which is the Retail unit. This business has progressed on expected lines with just over 20% growth in Revenues as well as EBIT. The current year & the next could prove to be the most important years for Reliance's Retail unit. We will see launch of e-commerce verticals of several of Reliance Retail's divisions. This Online expansion will benefit from Jio's infrastructure. In return, Jio will also immensely benefit from the Retail unit's wide network of stores as well as consumer connect. I think we can expect the Retail division to continue posting handsome growth of around 20% Y-o-Y, while the EBIT could post a little higher growth rates.

Coming to the All-Important question of RelJio's launch, I think Reliance will finally start charging for it's services & open it to general public anytime in the next 3 months. Currently the service is being offered completely Free-of-Cost to over 5 lakh users, most of whom are part of the company's employee base or their relatives. As a next step, Reliance has started an invite system where each employee can invite upto 10 people onto the RelJio's network. But there is one condition attached to this invite: the Invitee needs to purchase a LYF handset, which will entitle him to enjoy all of Jio's services without any further costs for a period of 90 days. This invite system could alone add another million users to RelJio's network in the coming few weeks. Apart from this, RelJio's network will see addition of another couple of million users in the form of RCom's CDMA subscribers, who are being migrated to 4G to free up the 850 MHz CDMA spectrum. That spectrum in about 17 circles is either being sold to or shared with RelJio to introduce a third 4G band on the network. This 850 MHz band will enhance the reach & indoor penetration of RelJio's 4G network. The process of integrating this band is what is said to have further delayed RelJio's commercial launch by an additional few months, than the April launch which was earlier expected. So even if RelJio plans for a August or September launch of commercial 4G services (atleast in some crucial circles), it could be having about 3 to 4 million active users on it's network. And once doors are opened for general public, RelJio could easily add another 15 to 20 million subscribers during the 2nd half of the fiscal. By then the company could be easily having a monthly revenue in excess of Rs.1000 crores, which should be good enough to cover about 75% of it's operating costs. I am expecting RelJio to be EBITDA positive during the next fiscal.

Coming to the Valuation part, RIL's share price has come down by about 10% post the announcement of the company's Q4 result. the primary reason being the continued uncertainty on RelJio's commercial launch. I think this is an excellent opportunity for those who still haven't invested enough in Reliance Industries. At the current price of about Rs.975 per share, the company's Market Cap is around Rs.3.15 lakh crores, which is just about 6 times it's current T-T-M EBITDA and less than 8 times the Cash Profit figure. Excluding RelJio, RIL is expected to post further double-digit growth in EBITDA & Cash Profit during the current fiscal & the next. This makes the current valuation of Reliance Industries look very very attractive. RelJio is expected to post substantial EBITDA & Cash Losses during this fiscal, but the numbers will dramatically improve in the next fiscal. Hence on a Consolidated basis, I am expecting RIL's numbers to look bad at the end of this fiscal, but will be substantially better from the next fiscal onwards. With most of the large CAPEX for RIL to end by the end of this fiscal, the company could start reducing it's large consolidated Debt from the next fiscal using the huge Cash Profits from the primary business units. I will further reiterate that FY'18 could be a dream year for Reliance Industries Ltd and nobody should miss the chance of being a part of it, especially when the stock is available at reasonably attractive valuations currently.

Bharti Airtel - the New 4G King??!! - Media creating Sensation!!

I was highly surprised to read the headline flashed by ET-Telecom last week saying Bharti Airtel is the new 4G king post the Videocon spectrum deal. The article is so pathetically researched and it's headline is clearly trying to sensationalize the recent development in order to promote Bharti Airtel's position. The article even quotes reports from reputed Brokerages/Research Houses like Goldman Sachs & UBS. I seriously doubt that the reports from these reputed institutions actually meant something like what ET-Telecom's headline suggests.

The article/report also considers the combined paired spectrum volume. Spectrum in 1800 MHz band alongwith that in other bands like 800 MHz, 900 MHz and 2100 MHz are paired frequencies, where spectrum is always allocated in pairings for separate Uplink & Downlink units (FDD technologies). Unlike this, the spectrum in 2300 MHz is unpaired as both Uplink & Downlink can happen on the same frequency unit (TDD technologies). This is unfair comparison as paired units cannot be used on a standalone basis as Uplink frequency cannot be used for Downlink purpose & vice-versa.

For the time being let's focus only on the headline. Is Bharti Airtel truly the new 4G king after the Videocon deal? I tried to collect data on 4G compatible spectrum holdings of both Reliance Jio Infocom and Bharti Airtel to bring to you the true comparison (Hoping that my information sources are correct. :) ). As per information available in public domain, 4G service is currently possible on 3 different frequency bands primarily: 800/850 MHz (FDD), 1800 MHz (FDD) and 2300 MHz (TDD). Only BSNL holds spectrum in 2600 MHz in a few circles, but I am not sure how it plans to use it. BSNL is already shutting down the WiMax service it had launched some years ago.

The table alongside gives circle-wise & band-wise spectrum holdings of Reliance Jio Infocom and Bharti Airtel. I have only considered 4G compatible bands as the question is about who is 4G king. Apart from these bands, Bharti Airtel also holds spectrum in 900 MHz and 2100 MHz bands, which are 3G compatible. RelJio has no holdings in those bands as it's focus is purely on 4G.

RelJio had announced it's entry into Telecom space in 2010 by winning one 20 MHz unit of 2300 MHz band across all 22 circles of the country in the spectrum auction. In the same auction, Bharti Airtel had won 20 MHz unit only in 4 circles in the same band. Later it acquired Qualcomm's spectrum holding in 4 other circles in the same 2300 MHz band to increase it's number to 8. A few months ago it has announced acquisition of Augere's MP circle spectrum and now Bharti Airtel holds 2300 MHz spectrum in 9 circles, which includes the 3 metro circles and a few Category-A circles too. These 9 circles contribute just over 40% of Airtel's AGR. But here RelJio is the clear leader as it holds spectrum in 2300 MHz band across all 22 circles. Still we will have to wait & watch how much of an advantage RelJio has from this spectrum & how it is utilised, as it's a well-known fact that 2300 MHz spectrum does have indoor penetration problem and long distance propagation. Hence it needs installation of many many more BTSes and/or Small-Cells.

When it comes to 800/850 MHz spectrum, RelJio again has a very clear advantage. It has managed to win a 5 MHz unit each in 10 circles in the last auction. RelJio also plans to share/trade for spectrum in this band with Reliance Communications for some or all of the remaining 12 circles where it does not hold it. Details for the same are still not available and hence we cannot consider it currently. There are several operational advantages for this spectrum, exactly the ones which are missing in 2300 MHz band. Long distance propagation and indoor penetration are both excellent for spectrum in 800/850 MHz band. The handsets that Reliance Retail is selling under the LYF brand support this band as well. Soon after launch of RelJio's 4G service, other manufacturers too will start selling handsets with support for this band. Bharti Airtel has no presence in this band. But Airtel does hold 900 MHz spectrum in certain important circles, where it is launching 3G service under the 'Platinum 3G' brand. It will try & use this service to combat RelJio's 4G service in 800/850 MHz band.

Coming to 1800 MHz spectrum band, the fight is much more interesting & crucial too. Bharti Airtel has a minimum of 5 MHz or more quantity in this band in 18 circles (post Videocon deal). RelJio has the same in 16 circles and hence is quite closely matched to Airtel's holding. It is said that an operator needs atleast 5 MHz of contiguous spectrum in this band to offer good quality & capacity for 4G service. In other circles where both operators hold less than 5 MHz or nothing in this band, they will try to win the same in the upcoming auction or via spectrum sharing/trading with other operators.

One important point about the quantity of 1800 MHz spectrum held by Bharti Airtel: It holds quantity substantially more than 5 MHz in about 8 to 10 circles. If it is able to utilize all this spectrum for 4G, it could offer it substantial advantage to Bharti Airtel in those circles in terms of capacity. But we cannot forget the fact that Bharti Airtel also needs to support it's HUGE existing subscriber base, majority of which is still using 2G voice service primarily. Hence Bharti Airtel needs to implement dual-tech hardware on this frequency band to support both existing 2G as well as future 4G subscribers. On the other hand, RelJio does not have any such restrictions and hence can fully utilize it's 1800 MHz spectrum holdings purely for 4G service. Hence, whatever quantity advantage Bharti Airtel holds in the 1800 MHz band, it loses because of the need to cater to the legacy business.

4G Spectrum Gaps: RelJio has 4G spectrum in atleast one of the three bands across all 22 circles. Excluding the circles of Punjab & UP (W), RelJio has 4G spectrum in atleast 2 bands across the remaining 20 circles. In 6 circles, RelJio can offer 4G service in all the 3 bands. In case of Bharti Airtel, it does not hold any/enough quantity of 4G spectrum in any band in 3 circles of Assam, J&K and West Bengal. Bharti Airtel can offer 4G service on 2 spectrum bands in 8 circles. In the remaining 11 circles, Bharti Airtel can offer 4G service on either of the two bands. Isn't it obvious now that even without considering the strong possibility of sharing/trading agreement with RCom, RelJio has a clear advantage over Bharti Airtel when it comes to 4G spectrum holdings.

Now the important question if that of Coverage within these circles. As per media reports & past announcements, RelJio intends to have 80% of the country covered under it's 4G network by the 2nd half of 2016. This will bring RelJio's coverage very close to Bharti Airtel's 2G+3G+4G coverage as of now. If this really turns out to be true later in the year, RelJio will have a very clear advantage in terms of ability to offer high-speed internet access service across maximum areas of the country. On the other hand, Bharti Airtel's 4G coverage alone is lagging far behind with presence in about 400 cities & towns currently. Even in these 400 cities & towns, there are several pockets where the 4G signal is absent & it falls back on it's 3G network. I am sure that Bharti Airtel is working overtime to plug these gaps as well as extend coverage to more & more cities/towns with every passing week. But if RelJio does launch it's service next month, as is widely expected, then Airtel will lose the first mover advantage in thousands of cities/towns across the country. With when Airtel's existing 3G coverage is combined with it's 4G coverage, it may not be able to match RelJio's 4G coverage in the initial few months or quarters. Airtel will certainly try & catch up as soon as possible.

Summary: Any which way one looks at it, RelJio has everything it takes to shake up the market and snatch market share from each & every operator currently operational in the country. Some of the smaller operators may have to shut down their operations due to unviability at some point, if they are not able to merge/consolidate with another operator. Amongst the larger operators, Vodafone India could prove to be the biggest market share loser, followed by Idea Cellular. Both these operators have very little 4G coverage compared to both Bharti Airtel and RelJio. As per my guesstimates, Bharti Airtel could lose the least in terms of market share. This is one company which has been most aggressive in changing it's focus to high-speed wireless broadband as soon as it realised the potential size of the threat from RelJio. I am looking forward to this very interesting market share fight. We will hopefully have some concrete number to discuss a couple of quarters down the line.

Wireless Data - the only major hope of Wireless carriers!!

With increasing penetration of 3G networks across the country & rising percentage of subscribers with a Smartphone in their hands, the usage of Wireless Internet services was bound to grow at a very very fast pace. Almost all telecom operators in India, including BSNL, have seen a staggering growth in the monthly consumption of Giga Bytes on their networks, which has translated into an almost similar staggering growth in Revenues from the Wireless Data service over the last 2 years.

I have information from Quarterly reports shared by Bharti Airtel & Idea Cellular, which are two of India's Top-3 Wireless carriers in India. Between Sept'13 and Sept'15, Bharti Airtel's Quarterly Data Revenues have seen an almost 180% jump. During the same period, the company's Quarterly India Telecom Revenues have grown by just 20%. About 80% of this incremental growth over this period of 8 quarters has come from Data Revenues alone. Data now contributes 21.2% of Airtel's Quarterly revenues compared to just 9.1% two years ago.

The quarterly volume of Data carried by Airtel's networks has increased by more than 230% over the last 8 quarters from under 35 million GBs to 115 million GBs. During the same period, the Average Rate per MB charged has come down very gradually from 30 paise to 25.2 paise. This slow erosion in rate is not because of increased competition, but primarily because of increased proportion of subscribers now opting for a Data pack instead of being charged on pay-as-you-use basis.

Coming to Idea Cellular, the company's Quarterly Data revenues have grown an even stronger 211% between Sept'13 and Sept'15. On the other hand Idea's Total Quarterly Revenues have grown by about 38%. Data business has contributed about 48% to Idea's incremental growth over this period of 8 quarters. Data's contribution to Idea's Quarterly revenues has jumped from 8.6% in Sept'13 to 19.3% in Sept'15.

In case of Idea Cellular, the growth in Quarterly Data volumes between Sept'13 and Sept'15 has been even more staggering. From about 17.5 million GBs, the quarterly volume has more than quadrupled to 72 million GBs over the period of 8 quarters. The Average rate per MB has seen a slightly faster erosion for Idea as compared to Airtel. Idea's Average rate per MB has fallen from 31 paise to 23.4 paise over the last 8 quarters. Despite faster growth in volumes and revenues from Data services, the contribution of Data to Idea's Total Quarterly revenues at 19.3% still lags Airtel's figure of 21.2%. This is mainly because Idea has done better with it's Voice business over the last 8 quarters, as compared to Airtel. 

Conclusion: 

As per my estimates & gut feeling, the Indian Telecom industry is at the cusp of a very dramatic change in it's composition. From being a Voice-dominated industry, it will soon take big strides towards being a Data-dominated one, over the next 2-3 years. It will all start with the launch of nationwide 4G services from Reliance Jio Infocom Ltd, which is a subsidiary of Reliance Industries Ltd. Expected to start by the end of this year, Reliance Jio will herald a new wave of communication services, not just Data service. I am expecting Reliance Jio to try & capture even the traditional Voice business by offering VoIP based services. Reliance Jio may or may-not offer the traditional Voice service, where we are charged on a per-sec or per-min basis. Everything could get counted in terms of Mega Bytes & Giga Bytes, even the Voice Calls.

Many of us have already experienced VoIP, either via Whatsapp calling or Google Hangouts or Video/Voice calling via Skype or Facebook Messenger, etc. These things work well only when there is good reliable high-speed internet service at both ends of the conversation. 3G networks have enabled us to have a glimpse of such VoIP services, but the experience has not always been very smooth. Hopefully with 4G speeds, there should be no problem even with HD-voice & HD-video services. Just like the way the use of Mobile Internet shot up with increasing population of Smartphones with subscribers, the use of Voice & Video calling over Internet services will shoot up with increasing penetration of 4G networks across the country. My prediction is that the mobile operators will start experiencing an erosion in their Voice revenues right from the first half of the year 2016, something which they have never experienced in the last 20 years.

All leading operators, including Airtel, Vodafone, Idea, have already started testing their 4G networks in various cities across the country. Airtel has already launched it's 4G service in over 300 cities, but the network coverage currently isn't like full-blanket coverage, but more patchy. Hence the user experience has been quite mixed. But things will improve as all operators are working on war-footing to have some kind of good 4G coverage, atleast in the crucial markets, so that they don't lose too much of revenue-generating customers to the upcoming new competitor. Vodafone has been repeatedly announcing that it will launch it's 4G service in important cities like Mumbai, Kolkata, etc. in December'15 itself and then expand further to other large cities in the following months. Idea Cellular too recently announced plans to launch 4G service in about 150 cities/towns between January & June of 2016. Unfortunately, none of these three big operators have All-India 4G-compatible spectrum and hence they will ultimately get into Roaming Agreements amongst themselves to offer maximum coverage to their subscribers. 

Another thing that the existing incumbent operators will be worrying about is: rapid erosion in the Average Rate per MB they are able to charge after Reliance Jio starts commercial operations. At the moment the Big-3 are able to charge around 23 to 25 paise per MB. But I am expecting that the rates will rapidly fall to something like 10 to 15 paise per MB within 6 months of Jio's launch. So we can call it a double-whammy for all the existing operators. On one hand a part of the existing as well as incremental Data consumption will start shifting to Reliance Jio, while on the other hand the rates will also fall at a rapid pace in the initial few months. We could see some knee-jerk reaction in the first few months from all operators as they try to protect their revenues & market shares as much as possible. Things might start stabilising about 3 quarters after launch of Reliance Jio's operations.

Until now the combined 3G network capacity of all operators has been falling short of the market demand. Hence the user experience has been like 'kabhi khushi...kabhi gham'. Once Reliance Jio opens it's gates, a Huge Empty Network capacity will become available, which will try & pull subscribers from all angles. It might take a couple of quarters to analyse how long before the surging demand is able to completely consume the available supply (capacity). We will see rate corrections happening until the supply (network capacity) is substantially more than the demand. Things will only stabilise after that. As per my guess, we are barely 6-weeks away from getting to experience Reliance Jio's 4G services. So let's just spend these 6-weeks in anticipation of some big excitement!!

RelJio Tsunami coming in December'15.

Mukesh Ambani just spelled out the launch plans for Jio at Reliance Industries' AGM. First let me highlight the salient points mentioned:

* Jio is already present in all 29 states in 18,000 cities & towns. 80% countrywide coverage at the start.

* Jio currently undergoing testing, Beta launch in a couple of months and Full Commercial launch in December'2015.

* Jio network will be scaled up to 100% countrywide coverage in 3 years.

* Jio already has capability to serve 100 million customers, which will be scaled up further in coming years.

* Jio is working with OEMs to introduce 4G handsets from under Rs.4000 price point by December'15.

* Several apps are ready for launch, like JioChat (audio-video messenger), JioDrive (cloud storage), JioPlay (media & entertainment), JioMoney (digital wallet), etc.

* Jio has also applied for MSO license to offer broadcasting services over it's 4G & Fibre network.

......... More details & views will be added soon to this article.

Data Revenues - Now and the Next 2 years.

All telecom operators in India are currently dependent on the increasing Wireless Data usage to see their Revenues grow. The last 12-18 months have been the most exciting for all operators, especially the ones who have 3G operations in a decent number of circles. Until about 2 years ago, the CDMA operators (i.e. Reliance Communications & Tata Teleservices) were enjoying a rapid increase in their revenues from Wireless Data services because they were able to launch high-speed internet services using EVDO technology, which was primarily used via USB dongles. The subscribers of these services were giving reasonably high monthly revenues, mostly in the range of Rs.500 to 1000/- and their monthly usage was in the range of 2GB to 10GB. But the CDMA operators had introduced the EVDO network in limited number of urban centres in every circle and the monthly subscriber additions were only in a few thousands.

Over the last 2 years we have seen all 3G license holders expand their networks at a ferocious speed. Now we have 3G networks in hundreds of cities & towns in every circle and even major highways have been covered. People started using 3G services for PCs via USB/WiFi dongles as well as in their Smartphones. Every month lakhs on subscribers started using 3G services and now we have nearly 20% of the total mobile subscriber base of all 3G operators using the Data services. Initially the Average Monthly Data usage per subscriber was less than 400 MB, but it has been rising with every quarter and it is close to 700 MB now. This trend of increasing usage will continue for a long time to come. The Smartphone penetration is increasing and people have started using it not just for communication & social networking, but also for entertainment via watching videos, TV shows and live matches. All this added to the fact that Internet usage is quite addictive in nature, we will see more & more people using more & more Internet with every passing quarter.

Coming to the Revenues part, FY'15 was quite a landmark year, where most operators posted nearly 60-75% increase in their revenues from Data services on the back of near doubling of Data volumes on their networks. As per my estimates, the mobile industry generated around Rs.35,000 crores in Total Data Revenues in FY'15, translating in over 15% of it's overall Total Revenues. A year ago this number was well under 10%. Bharti Airtel leads with around 22% market share and FY'15 Data revenues of about Rs.7800 crores. Vodafone mostly holds the 2nd position with about Rs.7000 crores and 20% market share. These 2 operators along with Idea Cellular, together command over 55% market share currently. Other details as per my Estimates are mentioned in the Table alongside. Let us now focus on how things could progress over the next 2 years.

The biggest change that will happen in FY'16 for the Wireless Data business is the entry of Reliance Jio Infocom with it's 4G services. It has been delayed to quite an extent, but the company will have to introduce the services latest by Q2 of this fiscal. Initially the services will be launched in limited number of cities across the country, but will be rapidly expanded to take it to nearly 5000 cities & towns over the next 12-24 months. Since the company will have limited urban coverage and action for less than 9 months of this fiscal, I have estimated RelJio to capture about 8% market share in FY'16 with Total revenues of about Rs.4000 crores. With the entry of RelJio, it is widely expected that all the existing operators will experience a substantial slowdown in their growth as a section of their subscriber base will certainly shift to the new 4G operator. RelJio is expected to have the widest 4G coverage in India and also offer the most competitive tariffs, which will certainly attract the usage of heavy Data users across the country.

Coming to tariffs, operators like Airtel & Idea have declared in their quarterly reports that the net realisation is close to 25 paise per MB, which translates into a rate of about Rs.250 per GB. The same must be true for Vodafone. These three operators together offer 3G services almost across the country with the widest coverage in every circle and best quality subscriber base and hence charge slightly premium rates. The 2nd rung of operators like Reliance Communications, Aircel and TTSL (RAT) are now trying to play catch-up with the trio of larger operators (AVI). They are enhancing 3G coverage rapidly in their respective circles and are also looking at tying up internal roaming agreements to offer a near All-India 3G coverage to compete with AVI. The trio of RAT is trying to attract subscriber attention by offering an effective rate of well under Rs.200 per GB. With increasing coverage, they are certainly seeing success with traffic & revenues shooting up in recent quarters.

When RelJio launches, we could see further aggressive pricing with effective rates of under Rs.150 per GB for lower plans and going down to under Rs.100 per GB for higher plans. Initially RelJio is expected to target households with good Smartphone presence. Imagine a family with 4 members with almost everyone using a Smartphone. If RelJio offers them WiFi routers with plans like 10GB for Rs.1000/- or less per month, will the family not consider it as an attractive offer? I am sure there are lakhs of such households which will grab such offers. Then there are lakhs of SMEs which need internet connectivity for their business operations, which will also take to RelJio's services via WiFi routers. Initially the WiFi routers will form the biggest business segment for RelJio because their sim cards will not work in over 95% of the Smartphones currently in use as they don't work on 4G LTE networks. 4G LTE smartphones are now getting launched at a rapid pace, but for it's penetration to increase to respectable levels will take another year or two easily.

By the end of FY'17, we could see RelJio's subscriber base to be anywhere between 20 to 40 million with an ARPU anywhere in the range of Rs.400 to 700 per month. Depending on the success of RelJio's services, competition will have to react and reduce their effective tariffs to avoid most of their premium users from shifting to the new operator. This will certainly have an impact on their growth rates. The Industry's total Data revenues is estimated to grow from Rs.35,000 crores in FY'15 to about Rs.50,000 crores in FY'16 and to Rs.66,000 crores in FY'17. And I am expecting RelJio to go from 0% market share in FY'15 to over 20% market share in FY'17. I think the trio of AVI to manage the increased competition in the best way amongst all other operators. Going by the spectrum holdings that these three operators have managed to pile up, they will still manage to grow by about 10% to 15% even in FY'17, when RelJio's aggression is expected to be much higher than in FY'16. All other operators, including the trio of RAT, are expected to struggle for growth in FY'17. Some of them could even be looking at their survival chances depleting. We could see some substantial M&A deals happening during FY'17, if not earlier.

Pls remember, all the thoughts mentioned above are My personal Estimates. It will be really interesting to see how things progress once RelJio's services are launched.

Following are the links to the Easy Results Summary pages of the listed Telecom operators:

Bharti Airtel Ltd.

Idea Cellular Ltd.

Reliance Communications Ltd.

Tata Teleservices (M) Ltd.

Idea Cellular Ltd. - Update Post March'15 Result.

Idea Cellular Ltd. was expected to post strong results for Q4-FY'15, based on the fact that the subscriber additions were very strong for the industry as well as the company in specific. Apart from the subscriber additions, the momentum in Data Usage growth has been very strong since the last 6-8 quarters and it is expected to continue for the next couple of years. For Q4, Idea Cellular posted a 22% growth in Total Income & a superb 60% growth in Net Profit on the back of expanding profit margins. Idea's growing scale of operations has been helping the company improve it's EBITDA and Net Profit margins. Have a look at the chart alongside. In March'2012, Idea's EBITDA margin stood at just over 25% and Net Profit margin was just under 4.50%. Idea's Quarterly revenue stood at about Rs.5300 crores then. Over the last 3 years or 12 quarters, Idea's Quarterly revenues have grown to over Rs.8600 crores and it's EBITDA margin has improved to a best ever figure of just under 38% and Net Profit margin too has improved vastly to close to 11% now. As we can see, the EBITDA margins have seen a smart jump in the last 2 quarters, which can be attributed primarily to Idea's Wireless Data business reaching a decent scale of operations now and has now started positively impacting the company's overall profitability.

( Click Here for Idea Cellular's Results Summary Page. )

It is no secret that the Wireless Data business is the main growth driver for any Telecom operator in India currently. All operators are scaling up their coverage and Data-handling capacities to keep up with the demand. Currently the demand is outstripping the supply and hence we see the Data rates remaining steady. As and when the supply starts going ahead of demand, we could see the rates coming down. As per the information shared by Idea Cellular in their quarterly reports, the amount of Data it's networks carried on a Quarterly basis has shot up from just about 7.2 million GBs in June'2012 Quarter to 54.5 million GBs in March'15 Quarter, i.e. it has multiplied nearly 8 times during these 10-11 quarters!! During the same period, the Quarterly Data Revenues have multiplied nearly 6 times from Rs.240 crores then to over Rs.1400 crores now. In the March'15 Quarter, Data Revenues contributed over 16.2% of Idea's Total Revenues, compared to less than 10% in March'14 quarter. So we can clearly derive that Data Revenues are now contributing a substantial portion of Idea Cellular's incremental Revenues growth. This is something that is true with almost all Telecom operators in India. 

On a Trailing-Twelve-Months basis, Data Revenues for Idea Cellular were Rs.4540 crores as on March'15, which is 97% higher than the number at the end of March'14 and it is nearly 275% higher than the number at the end of March'13. Have a look at the chart alongside:

As we can see in the chart, Idea's Data (T-T-M) revenues contributed just about 21% of the company's Incremental T-T-M Total Income. With every passing quarter the share has been increasing and has now hit the 45% mark at the end of March'15. Between Dec'14 and Mar'15, Idea's T-T-M Total Income was higher by Rs.1565 crores, while the company's T-T-M Data Revenues were higher by Rs.710 crores. During the last 8 quarters, Idea's T-T-M Total Income has grown at an average rate of about 4.5% Q-o-Q, while the company's Data Revenues have grown at an average rate of almost 18% Q-o-Q. This stupendous growth is expected to continue for another couple of years, though the Q-o-Q growth rate might slow down gradually to about 10-12% over the next 6-8 quarters mainly because the base for comparison will keep rising rapidly. 

RelJio Factor: The single biggest factor that can disturb the growth momentum in Data Revenues of any of the existing Indian Telecom operator is the potential launch of RelJio's 4G services. The launch has been delayed by quite a few months, but it is expected that we are getting closer to launch with every passing week. Still no body knows the exact timeline of the launch. This delay is playing very very well for all existing operators, including Idea Cellular. The current level of competition and the demand of Wireless Data is allowing the companies to continue growing without thinking about price cuts. In fact, many of the larger operators have been threatening to hike prices for Data packs. These operators can think about hikes or even go ahead with it only & only until RelJio's launch does not happen. I am very very sure than within days of RelJio's rollout starts, we will see all the existing operators starting to 'think' about price cuts. RelJio might take a few months to reach some scale of operations which will start impacting the businesses of existing operators noticeably. But it will happen. 

Valuations: Idea Cellular's T-T-M EPS stands at close to Rs.9/- and it's stock is currently trading at about 20-21 times it's EPS. This is not expensive valuations considering the growth momentum the company is currently experiencing. If we ignore RelJio's potential launch, I would bravely say that there is substantial potential of re-rating of Idea Cellular's stock upwards. This is despite the fact that the company's Interest Cost is expected to jump substantially in the current year, mainly because of the extra borrowing for Spectrum payments and newer rollouts. But the company currently has healthy cash flows from it's operations and can easily take care of that. But the big question mark is how and when will RelJio's network & service rollout happen. How aggressively does that company go after gathering subscriber base and increase it's network usage. Purely & purely because of this one factor, I cannot confidently say that Idea Cellular will see anything more than 15-20% movement on it's stock price over the next 12-15 months.

Reliance Industries Ltd's Q4 - Not as splendid as it looks!!

Ever since RIL's stock started rallying earlier this month, suddenly every News channel was repeatedly shouting that RIL is expected to report it's best ever Quarterly Net Profit with a sharp increase in Gross Refining Margins (GRMs) to around the $10 per barrel mark. And boy, did RIL disappoint??!! Not a All. Reliance Industries Ltd did post a record Quarterly Net Profit figure of Rs.6381 crores, which was 21% higher Q-o-Q, but just 8.5% higher Y-o-Y. RIL's Q3 Net Profit was expected to be lower because of the Inventory losses arising from sharp fall in Crude prices. In fact I would rate RIL's Q3 to be superior than Q4 because the company still managed to post a healthy profit figure despite huge Inventory losses.

In Q4 RIL did not face any further Inventory losses, was able to buy Crude at very low prices and the end-product prices were coming down at a slower pace compared to Crude prices, which was expected to boost the margins enjoyed by most Crude Refiners & RIL being the most efficient Refiner was expected to be the biggest beneficiary. The end result was RIL managing to earn record margins in it's Refining business, which is also the biggest contributor to RIL's revenues & profits. Have a look at the chart below which shows the Quarterly EBITA & Net Profit Margin percentages over the last many quarters:

The chart clearly tells us the story of Q4. Between March'12 to December'14, RIL's EBITDA margins have hovered in a range of 9% to less than 12%, never above that. In March'15 quarter, it has shot up to a staggering over 17%!!! The story is similar in case of Net Profit margin. It used to be in the 4.5% to 6.5% range until December'14, but shot up to over 9% level in March'15. So the profit margins have been clearly very unusual during this quarter and there is a very high possibility that these margins will come back close to the normal range within the next 1 or 2 quarters. 

( Click Here for Reliance Industries' Results Summary Page. )

Don't get me wrong. I am not at all negative about Reliance Industries Ltd's future prospects. The company will continue to do record utilisation levels of it's plants in the Refining & Petrochemicals businesses. It's ongoing CAPEX to expand capacities in Petrochemicals segment and improve efficiencies in the Refining segment is absolutely on track and is expected to boost the company's margins by about 2% over the normal operating range. But I don't want investors to get swayed by this Record Net Profit figure posted this quarter. Remember than the input as well as end product prices of RIL's Refining & Petchem businesses are nearly 30% to 40% lower than what they were a year ago. This is expected to keep the company's turnover at levels much lower than last year levels. In such a situation if the company's profit margins come back closer to normal levels, then the company's quarterly Net Profit number could drop considerably from the one posted in Q4-FY'15.

But there could be some positives coming from the Oil & Gas business in the coming quarters. Q4 was expected to be the worst quarter for all Oil & Gas producers as the International prices were at the lowest levels of around $50 per barrel mark. Since then the prices have shown signs of bottoming out and any improvement from these levels will boost the profitability of all players in this business. RIL's domestic production volume numbers were disappointing as expected & hence did no good in mitigating the fall expected from lower product prices. But the production from RIL's Shale JVs have shown handsome growth, continuing the trend from earlier quarters. The increased production helped arrest the drop in turnover from this business segment, but the profitability was expected to be impacted & so it did. EBIT margins from this segment were about 10% lower than normal, but we can say that worst is behind if the crude prices don't fall to levels lower than that seen in Q3 & Q4. As mentioned earlier, any improvement in crude prices coupled with increased production volumes will boost the company's turnover & profits from this business over the numbers posted in Q4.

Coming to RIL's Retail business, it was slightly on the surprising side. Q3 of every year has lot's of festivals compared to other quarters and hence the sales recorded by any Organised Retail company is generally higher in Q3 than in Q4, especially in the Same-Store-Sales comparison. This year RIL's Retail business has managed to post some bit of Q-o-Q growth in Q4 over Q3 and this is excellent news. It's planned expansion seems to be working well and FY'16 will be much better both for turnover growth & improved profitability. The Retail business will also be benefiting from the launch of RelJio's Telecom business, as and when it happens. 

Unfortunately, there is not much news regarding when the 4G launch will happen. As per law, RIL needs to have a operating network presence in 80% of urban centres & 50% of rural centres within 5 years of receiving it's spectrum. The 5-year period for the 2300 MHz band spectrum ends sometime in August-September'15 and hence everybody is expecting the company to start doing commercial roll-out from the current quarter. But things have become a little bit more complicated with the company aggressively acquiring spectrum in 1800 MHz & 800 MHz bands in the last 2 spectrum auctions. These acquisitions will certainly involve substantial changes in the roll-out plans of the company. Let's just wait & watch how RelJio's launch pans out, hopefully soon.

Data Revenues going very Strong for Telecom operators, their Only Hope.

The Telecom Industry in India is experiencing a paradigm shift in it's priorities over the last 4-6 quarters. From a voice-led business model, all operators are now shifting to Data-led business model with most of the incremental CAPEX being used to augmenting capacity to handle higher & higher Data traffic. Operators have invested heavily in expanding their 3G coverage across Cities & even Small Towns and have multiplied their Server capacities over the last 18 months and they are continuing to do so. Internet usage via Mobiles as well as on Desktops/Laptops over Wireless networks is shooting through the roof. Not just the number of consumers using Internet is going up, even the average usage per customer is also increasing rapidly. And with rates remaining more or less stable in the recent months, the increased usage volumes are directly impacting the revenues of all Wireless telecom operators. With this the contribution of Data Revenues in each operators Total Revenues is increasing rapidly.

I have analysed results of Bharti Airtel & Idea Cellular, 2 of the Top-3 operators in India. Bharti Airtel had reported Mobile Service Revenues from India operations of about Rs.43,000 crores in the 12-months ending March'14. Data Revenues contributed Rs.4362 crores, i.e. about 10% of Total Revenues. At the end of December'14, Airtel's Total India Mobile Service revenues have jumped to about Rs.47,500 crores, while contribution of Data Revenues have jumped to Rs.6803 crores, i.e. over 14% of Total Revenues. That means nearly 60% of incremental growth in the company's revenues is coming from Data services. I think this proportion will increase further in the coming quarters. The story is similar in case of Idea Cellular. Data services contributed less than 9% of Idea's 12-months revenues at the end of March'14. The same has increased to 13% by the end of December'14. Both Bharti Airtel & Idea Cellular have seen their Data Revenues grow at a rate of 16-18% Q-o-Q over the recent quarters.

Look at the above chart. The Average Data Revenue per User (ADRPU) per month is increasing strongly over the recent quarters, clearly indicating that the average Data Consumption per user is increasing rapidly. At this rate the ADRPU will soon shoot past the Voice RPU of most operators. And I am sure this will boost Profitability of almost all operators in the coming quarters. In case of both Airtel & Idea, only about a fifth of their total customer base is using Data service currently. In the coming years, even this percentage will grow. And there will be a time when the total Voice usage might start dropping gradually once a substantial chunck of the user base shifts to using High-speed Data services on 3G & 4G networks.

Bharti Airtel's T-T-M Data Revenues have hit Rs.6800 crores mark by December'14. Assuming Airtel to hold about 20% market share, we can safely assume that combined Annual Data Revenues of the entire Industry must be close to Rs.35,000 crores, which is a very healthy number. Even if we assume the growth to slow down to an average Y-o-Y level of 50% for the next 2 years, the Annual Data Revenues size should be around the Rs.80,000 crores mark by December'16. By then Data Revenues should be over 30% of the combined Industry's revenues.

It will be very interesting to see who takes what percentage of the market share in the next 2 years. In the recent quarters, the trio of Airtel-Vodafone-Idea have been gaining market share mainly because they offer the widest 3G coverage across all states thanks to their Roaming agreements. But the threat of big competition looms large on all operators. Once RelJio starts offering it's 4G services, which should happen anytime in the next 2-3 months, most existing operators will start losing market share in the Data service business. But the question is at what rate? I am expecting RelJio to capture about 8-10% market share in the first 12 months of commercial launch of it's services across the country. And in 3 years time it could be around the 25% mark. The fight between the trio of Airtel-Vodafone-Idea and RelJio will be very very interesting. We should see Data tariffs fall considerably once RelJio starts it's 4G services. Let's wait & watch & have fun!!

How RelJio's Financials could impact Reliance Industries Ltd's Quarterly Results

Reliance Industries Ltd (RIL) is a behemoth when it comes to Total Income numbers with an annual figure of close to Rs.4,50,000 crores, which translates into an average Quarterly number in excess of Rs.1,00,000 crores. About 70% of RIL's Total Income comes from it's huge Refining business, 20% from it's Petrochemicals business and the rest 10% is contributed by it's Oil & Gas business and it's Retail business combined. On the Net Profit front, RIL does about Rs.5,500 crores on a Quarterly basis and about Rs.22,000 crores annually. Most of the Net Profit comes from Refining & Petrochemicals businesses. Oil & Gas business is around the break-even level at a Net basis and the Retail business has just broken-even at an Operating level.

With RIL's biggest & most ambitious investment in any new business set to start it's journey anytime now, let's try & build some estimations on how it's financials in the first few quarters will be & what will be it's impact on RIL's consolidated numbers. The preparation for the journey is almost complete with RIL already having invested close to $11 billion in acquiring spectrum in 2300 MHz & 1800 MHz bands and building network infrastructure across the country and setting up Data Centers at several different locations to handle the huge amount of Data Traffic expected to travel on it's 4G LTE network. Until the company starts commercial operations of it's 4G services, all it's expenses related to that business will be Capitalised & will be considered as CAPEX. As soon as the 4G services are launched, the regular Profit & Loss account will be prepared for that business.

As per media reports, RelJio is expected to have a Network coverage in about 5000 cities & towns and another 4,00,000 villages within a few months of launch, if not at the start itself. This coverage is not much less than the kind of coverage that Airtel or Vodafone or Idea Cellular have at the moment, after being in the business for nearly 2 decades. Let's say that RelJio's expected coverage is about 75-80% of the coverage of any of the Top-3 operators. RelJio is also expected to have set up over 1,00,000 BTSes, most of them on Rented Towers. Compare that to a number of about 1,45,000 BTSes active on Airtel's Network. So, in terms of Network Operating Costs, we can expect RelJio's costs to be about 70% of Airtel's costs. Taking Bharti Airtel's latest Quarterly numbers as a reference, the Operating Costs + Employee Costs for RelJio could be in the region of Rs.3000 to 4000 crores per Quarter. So RelJio will be able to break-even at an EBITDA level as and when it manages to generate a Quarterly Revenue of around Rs.4000 - 5000 crores.

Now the question is: By when will RelJio be able to generate revenues of around Rs.5000 crores on a Quarterly basis?

As per media reports, RelJio's plans involve being more than just a Wireless Data service provider. RelJio already has acquired lots of content that it will offer it's customers over it's Fibre network as well as it's 4G LTE network. It includes Television services, Movies on Demand, Episodes of popular TV Serials/Shows on Demand, possibly even Educational services where Live or Recorded lectures of certain courses from certain institutes can be accessed sitting at home. Infact a reliable High-speed Internet backbone can be used to provide services in various categories like Entertainment, Education, Security, Healthcare, etc. With the advent of 4G networks, we could see more & more people using Video-call services as well. The point I am trying to make here is that considering RelJio's plans, the ARPU (Average Revenue Per User) per month for the company will be much higher than what other operators enjoy. I am expecting RelJio's ARPU to be atleast around Rs.700 per month.

The main target customers for RelJio are the ones who are currently using 3G services or USB Dongles. They are currently giving substantial revenues to existing operators. They are the ones who will shift to using RelJio's services. On a conservative side we can expect between 1 to 2 million customers to take up RelJio's 4G connection every month. Initially most of them will be buying the 4G MiFi device, which can support upto 10 WiFi devices at a time. There are millions & millions of Smartphones, Laptops & Tablets with customers across the country, which do not support 4G network, but can use WiFi services. RelJio will be targeting all these customers with the MiFi device. At the same time we are already seeing 4G Smartphones being introduced in India and many more are on the way in coming months. It will take atleast 6 to 9 months for the 4G Smartphones to get popular amongst the buyers.

To calculate the EBITDA Break-even point for RelJio, I have kept my estimates simple & conservative. I have estimated a monthly addition of 1 million new customers & an ARPU of Rs.700/- per month. That will mean a recurring revenue addition of Rs.70 crores every month. At this rate, RelJio should be close to EBITDA break-even in about 6 to 8 Quarters time.

During the First Operating Quarter for RelJio ( RJIL - Reliance Jio Infocom Ltd ), the company is expected to post a mammoth EBITDA as well as Net Loss. The EBITDA Loss could be to the tune of over Rs.2500 crores and Net Loss could be in excess of Rs.4500 crores. In addition to the EBITDA Loss, there will be things like Depreciation, which is expected to be to the tune of atleast around Rs.1500 crores, and Interest Cost, which is expected to be well in excess of Rs.500 crores. Hence as & when RJIL launches it's 4G service, the first quarter is expected to be the biggest Pain Quarter for Reliance Industries Ltd's Quarterly result. RIL's Consolidated Net Profit could get wiped out to the extent of 80 to 90% in the first quarter. But the Pain will reduce with every passing quarter as the Revenues build up at a handsome pace. Eventhough RJIL is expected to Break-even at an EBITDA level within 6 to 8 quarters, it will continue to post Net Loss for 3 to 4 more quarters after EBITDA break-even. So, RJIL's financials are expected to have a negative impact on RIL's Quarterly numbers for about 8 to 10 Quarters, with the impact being the maximum in the initial quarters and reduce substantially with every passing quarter.

For RJIL to take rapid strides on the subscriber acquisition front & on the Revenues chart, it will have to do a stellar marketing of it's services and offer a good service experience to all the customers joining their network. The initial months will be full of euphoria but after that it will be the marketing & word-of-mouth that will enable the company to pile up new subscribers & revenues. Let's see how & when things unfold, but please be prepared to see a negative impact on RIL's Quarterly results initially because of RJIL's Financials.

Happy Investing !!!