Why are Reliance Jio and Vodafone Idea divesting their Fibre & Tower infrastructure?

Over the last few weeks we have seen announcements from both Reliance Jio as well as Vodafone Idea, about their actions or plans related to divesting their stake in their Fibre and Tower subsidiaries. Telecom Towers and Fibre Optic cables form the crucial backbone of Wireless telecom services. Then why are two of India's Top-3 operators in a hurry to reduce or divest their stake in their telecom infrastructure subsidiaries?

Each of the Top-3 wireless operators in India; i.e. Vodafone Idea, Bharti Airtel and Reliance Jio; have their network equipment working on nearly 2 lakh telecom towers across the country, which helps them to cover over 90% of the population of India with their 2G or 3G or 4G services. While Reliance Jio is a 4G-only operator, Bharti Airtel and Vodafone Idea are still offering 2G services with a population coverage of almost 95%. It is mainly being used to serve the people who are yet to upgrade to smart phones and mainly use their phones for voice calling service. 2G service is being used by many Smart phone users as well, where their primary sim is on 4G network, but their secondary sim has to be on 2G network. The secondary sim doesn't generate much revenues and is mainly used for incoming calls. And now we can see newer smart phones being launched with the ability to have both sim cards latched on to 4G networks.

Hence the days of 2G networks existence are now numbered. The 3G network will die even faster. Vodafone Idea and Bharti Airtel were having a 3G network mainly in areas of higher population density and was mainly used for Wireless Data services, before the advent of 4G networks. Now both the operators are focused on expanding their 4G networks, starting with areas of higher population density and busy highways, and then moving to lower density regions. While doing so, they are even re-farming their 2100 MHz spectrum (which was used for 3G service) for use with their 4G network in order to increase their 4G Data handling capacity. It goes without saying that the 4G network is lot more efficient than 3G or 2G networks and can now carry both Data as well as Voice traffic.

Since the traffic on 2G networks is also decreasing with every passing day, these operators are reducing the spectrum allocated for 2G networks (mainly 900 Mhz and 1800 Mhz bands) and re-farming major portions for use with their 4G networks. While Reliance Jio has already achieved a population coverage of nearly 90% with their 4G-only network, both Bharti Airtel and Vodafone-Idea are currently at about 65 to 70% with their respective 4G networks. As and when they approach 90% population coverage with 4G networks, these operators will start shutting down their 2G & 3G networks at a much faster pace, forcing their customers to upgrade their phones to receive better service.

Each of the three operators offering 4G service, are seeing an average monthly Data consumption of nearly 10 GB or more per customer. With nearly 450 to 500 million people already enjoying 4G services, there is humongous amount of Data traffic being carried by these operators. This is where the role of the Fibre Optic cables comes into play. While Reliance Jio has a higher proportion of their telecom towers connected with Fibre optic cables, it has a capacity advantage. Reliance Jio network design was planned to handle such huge amounts of Data traffic, right from Day-1. On the other hand, Bharti Airtel and Vodafone-Idea were relying more on Wireless micro-links for communication between different towers in a region and only a select few 'Node' towers were connected with fibre optic cables. They are now being forced to increase the fibre connectivity to higher proportion of their towers in order to be able to handle the hugely increased data traffic.

With the Towers and the Fibre infrastructure playing such an important role in the functioning of a wireless data network, Why are these operators in a hurry to reduce or divest their stakes in those subsidiaries?

And the reason is Monetisation. Reliance Jio has built nearly 1.5 lakh towers of it's own. On all these towers currently only Reliance Jio equipment is fixed. Most of these towers are said to have the capacity of have equipment of more than 1 operator. By having another operator putting up their equipment on a tower, Reliance Jio's tower company can start earning rental income, without any significant increase in operating costs. Whichever operator becomes a tenant on Reliance Jio's towers, would also be interested in sharing the Fibre optic cable that most of these towers are connected with. This way Reliance Jio's Fibre company will start earning lease income by leasing a portion of it's cables capacity. With progress in technology, Fibre optic cables have seen huge increase in their capacities and it's not too expensive to increase the capacities of older cables, that were laid a few years ago.

Bharti Airtel, Vodafone India and Idea Cellular had collaborated to form a company called Indus Towers, which has been India's largest tower company for many years now. Now Reliance Jio's tower company will give it a tough fight, in a number of towers department. Bharti Airtel has it's tower company too, i.e. Bharti Infratel, which also is amongst the larger tower companies in India. Indus Towers is an unlisted company with 42% ownership each with Bharti Infratel and Vodafone India and the remaining 16% with Idea Cellular. Indus Towers is now merging with the listed Bharti Infratel to regain the No.1 position in terms of number of towers. Idea Cellular's shareholding in Indus Towers is now a part of Vodafone-Idea JV. It's highly likely that Vodafone-Idea will encash their stake in the merged Bharti Infratel, as the merger concludes.

In the Fibre front, both Vodafone and Idea Cellular had their own respective Fibre optic cables laid across nearly a lakh kilometres each. After the merger, it is likely that they have several overlapping routes. Just last week, Vodafone-Idea have received the approval from NCLT to separate their Fibre optic cables capacity into a separate subsidiary. This is most likely in preparation to divest a part of their stake in it and then let it operate as an independent company, which can lease it's surplus capacity to other operators.

Monetisation and all is fine as of now. But the question in mind is that, since the Data volumes are increasing at a rapid pace, they will be using an increased portion of their Fibre optic capacity with every passing month. So whatever is said to be Surplus capacity today, might not remain Surplus maybe say 12 or 24 months from now. That time they might have to lease capacity from someone else. Or else build new capacities. Sometimes I think that these operators lack long-term foresight. A few years back, they did nothing when Reliance Jio was building a brand new 4G-only network with huge capacities for Data consumption. Airtel, Vodafone & Idea clearly were over-confident on their 2G & 3G services and thought that their customers are more than happy with the services they were offering. Reliance Jio spent about 3 good years building it's fibres, towers & network and with it's big bang launch, it completely changed the way people consumed Data and also the financial metrics of the entire industry.

Telecom Analysis - June Quarter AGR Numbers

August'2016 has been an action-packed month for the Telecom industry. Mainly because Jio's activities have built up quite a bit of pace, which has got all the existing operators running for cover & fire their own ammunition. After bundling a Jio 4G Sim with every LYF handset sold (with 90 days of Preview Offer) from the month of May'16, which picked up considerable pace only in June and July, Reliance Industries started offering the Preview Offer Sim cards to anyone with a compatible 4G handset from a huge list of manufacturers in the second half of August. Reliance Jio was expected to have activated over 3 million 4G Sim cards under 'Test' by the end of July'16, but the mad rush over the last 2 weeks must have helped it double the Active Sim Cards number by the end of August'16. With so many users eligible to use Free 4G Data and even Voice Calls (to some extent) for a period of 90 days, it is bound to impact the Revenue numbers of all existing operators for the September quarter.

TRAI recently declared the Operatorwise & Circlewise Revenue numbers for June'16 quarter. This is probably the last quarter before Reliance Jio starts making a noticeable impact on numbers for all other existing operators. Hence it becomes important to see which operators have gained pace just before the real war begins. In my analysis here, I have considered the Circlewise Adjusted Gross Revenues for all operators. (RCom has not declared it's numbers for June'16. Hence I have considered a 3% drop from it's respective March'16 numbers, just to get some approximate value. In any case RCom forms just about 3.3% of the Industry's AGR. Hence it's not going to impact the actual numbers much.)

The AGR numbers for the entire industry has posted a Q-o-Q growth of around 1.3%. As expected the Top-3 operators have managed to grow at a better rate with Airtel leading the growth charts, followed by Vodafone (surprisingly) & then Idea. Tata Tele and Telenor too have posted marginal Q-o-Q growth, while Aircel has posted a marginal drop. The biggest shocker came from BSNL/MTNL combine. It's AGR numbers are down by nearly 19-20% Q-o-Q, after having posted a strong 10+% growth in March'16 quarter. It seems as if BSNL/MTNL booked some advance revenues during March'16 quarter in order to make the numbers for the previous fiscal look good. Will be interesting to see the numbers & market share BSNL/MTNL manage to post for Sept'16 quarter. BSNL was the first to announce super-aggressive 3G tariffs offering 10 GB Data for just Rs.549/- and Unlimited (No FUP) Data for Rs.1099/-. These tariffs have become applicable from 25th August.

Metro Circles: Thanks to the massive fall reported by BSNL/MTNL, all other operators have seen their market share jump up Q-o-Q. Vodafone continues to lead here with over 34% market share & a healthy growth number too. But Airtel clearly seems to be catching up with stronger growth. Both Airtel & Vodafone are offering 3G as well as 4G service in Mumbai, Delhi & Kolkata circles. Idea is clearly losing this race, first by being a late entrant and now because of inability to offer 4G in all the 3 circles and No 3G in Mumbai circle. Surprisingly Tata Tele has managed to post marginal growth despite offering only CDMA services in Delhi and only 2G GSM services in Mumbai & Kolkata circles. It's Wireline business seems to helping it here. But still it's commendable to see Tata Tele fighting for the 3rd spot in the Metro Circles category with No 3G or 4G service.

Category-A Circles: Despite substantial fall reported by both BSNL and Telenor, the AGR for Category-A Circles has posted a 1.2% growth. Airtel has extended it's market share lead with fastest growth rate. Airtel now commands a third of the revenues in this category, a full 140 bps improvement over March'16 number. Vodafone & Idea too have seen 50 bps and 20 bps improvements. Vodafone growing faster than Idea in Category-A surprised me. I was expecting Idea to do better as it had 4G presence in more circles in this Category than Vodafone. Let's see if things change in the current quarter. Tata Tele has again done a decent job here. Telenor's performance in Maharashtra & Gujarat circles was quite disappointing in June quarter.

Category-B Circles: This category has proved to be the fastest growing one during the June'16 quarter. Airtel has posted a super-strong near 10% Q-o-Q growth in AGR, but is still in the 2nd spot in this category. Idea continues to lead in this category despite a lacklustre 1.7% growth. While Idea lost 80 bps in market share, Airtel has gained 140 bps, thus bridging the gap considerably. Vodafone & Telenor too managed to post healthy growth rates in this category, which helped them enhance their market shares by a small extent. Vodafone again managing to outpace Idea's growth even in this category is really commendable. It will be interesting to see if Vodafone can manage to hold on to this momentum in the coming quarters. Telenor's UP(E) & (W) circles continue to do well and the operator is now comfortably placed at the 4th spot in these 2 circles with near 9% market share.

Category-C Circles: Airtel has taken another big leap here and is just a fraction away from the 50% market share mark. The rest of the 6 operators have managed to hold on to just over 50% of the market in this category. Vodafone, Idea, Aircel and Telenor have all posted decent growth and have also managed to inch up their market shares, all at the expense of BSNL. Another interesting point is: Telenor, which operates only in Bihar circle in this category, is now about 3 times bigger than Tata Tele in that circle, despite being a very late entrant. Telenor now commands a respectable 7.3% market share in Bihar circle. This is the only category where Aircel has managed to post some decent growth in AGRs. Tata Tele is the smallest operator here and may seriously look to close down it's operations in these circles in the near future.

Summary:

Airtel has clearly gained good momentum in June'16 quarter and is seriously pitching itself for some tough competition with RelJio. The announcement of the 'Mega Saver' pack earlier this week was one big step in that direction. Each of the existing operators is going to get hurt due to RelJio's services, but Airtel will clearly be hurt the least. It will be very interesting to see how Airtel's 2G+3G+4G operations across almost all 22 circles will fare against RelJio's pure 4G operations across all 22 circles. With aggressive Data packs, Airtel is trying it's best to retain it's Data subscribers. But RelJio is not looking at just Data subscribers, who are mainly focused in Urban & Semi-urban locations. RelJio is pretty serious about Voice Calls business too and hence has already built excellent 4G coverage even in Rural and remote areas.

I am expecting RelJio to grab the No.5 spot in terms of AGRs within 6 months of launch. RelJio is already having over 6 million active users on it's networks and it could easily be having around 20 to 25 million users by the times it completes 6 months of Commercial operations. With ARPU expected to be a minimum of Rs.300, RelJio could be generating quarterly Revenues of over Rs.2000 crores by then. But while doing so RelJio is expected to put a bigger hole in the combined AGRs of the rest of the operators as the over-competitive environment will bring down tariffs in a knee-jerk manner, while the increase in usage will happen only over a period of time.

As of now all eyes are set on RIL's AGM tomorrow, i.e. 1st September, when everyone is expecting to hear a definite date of RelJio's Commercial launch. My hunch is that it is not very far from now. Possibly well before the end of September'16.

Idea Cellular & Bharti Airtel's Data consumption & Data Revenues progress

There was virtually no impact on the India (wireless) businesses of Bharti Airtel & Idea Cellular from waiting-in-the-wings operator Reliance Jio until the end of March'2016. Till that point Reliance Jio had offered sim cards only to it's employees & some business partners, totaling just about half a million in number. But in the month of May'2016, Reliance Jio opened the gates for outsiders to also get an opportunity to use their 4G services via the Preview Offer, where a customer buying a LYF handset (in-house brand) would get a complimentary Jio sim card with 90 days of Unlimited usage of Data, Calling & SMS. The news of the availability of Preview Offer started spreading and by the first half of June'16, thousands of heavy Data consumers across the country were buying the LYF handsets everyday, purely to enjoy unlimited 4G service for 90 days. It is expected that Reliance Jio enrolled about 1 million 4G customers in the month of June alone and July to be better. By now we are seeing Jio's signboards even in all small towns and even many villages along the highways. The operator seems to be almost ready for a commercial launch now.

Coming back of Bharti Airtel & Idea Cellular, their June-Quarter results have thrown up many important signals of things to come. (In this analysis I have focused only on the India Wireless Data business of the two operators.) These signals are not surprising at all as I have been saying it since last year that All Existing Operators will take substantial hit because of Reliance Jio's entry into the market. We just have to

keep an eye on how efficiently each operator is facing the competition. Let's start with growth in 3G/4G Data subscriber base of the 2 operators:

Bharti Airtel's 3G/4G subscriber base was just 7.4 million in Sept'13, which has now increased to 36.6 million by June'16, that means an addition of 29.2 million subscribers in 11 quarters at an average of 2.65 million per quarter. The Dec'15 quarter was the best for the company when it added 7 million new users in this category, followed by addition of another 4.6 million in March'16 quarter. But Airtel has quickly lost all momentum with addition of a paltry 1.1 million Wireless Broadband (3G/4G) subscribers in June'16 quarter. Idea Cellular has had a much more linear growth even in the recent quarters. It's 3G/4G subscriber base has increased from just about 5 million in Sept.'13 to 27 million in June'16, that means an addition of 22 million users in 11 months at an average of 2 million per quarter. And June'16 proved to be it's best quarter here when it added 3.4 million Wireless Broadband users. Out of these 3.4 million new users that Idea Cellular added, about 1.1 million were on the 4G network, after having added about 0.7 million 4G users in March'16 quarter. That means the aggressive rollout of 4G network in 10 circles, where Idea holds 4G compatible spectrum, seems to be helping the company add more users than it's larger competitor, which now has 4G compatible spectrum across all 22 circles of the country. After the recent acquisitions of Videocon's 1800 MHz and Aircel's 2300 MHz spectrum in nearly a dozen circles, Airtel now becomes the only operator other than Reliance Jio to hold a pan-India 4G compatible spectrum in either 2300 MHz or 1800 MHz bands or both (in a few circles). Now a lot depends on how quickly it manages to roll out 4G networks using these spectrum bands and also the quality of it's coverage. Idea Cellular has done a superb job of 4G network rollout in several cities & towns in the 10 circles that was possible to the operator.

Strong subscriber addition number for Wireless Broadband services in a particular quarter not just has an impact on the Data consumption

in that quarter, but also has a spillover effect in the following quarter. Have a look at the chart alongside. The Quarterly Data consumption on Bharti Airtel's networks (2G/3G/4G) has multiplied four & half times in the last 11 quarters from about 34 million GBs in Sept'13  to about 158 million GBs in June'16. Nearly 90% of this growth has been propelled by the proliferation of 3G networks initially and 4G networks in the recent couple of quarters. The situation is even better with Idea Cellular, which has seen it's Quarterly Data consumption on it's networks to multiply five & half times over the last 11 quarters. It was just about 17 million GBs then, which has now reached 93 million GBs. Idea's Data consumption number had posted an extremely weak growth in March'16 quarter on the back of nearly 10% Q-o-Q drop in 2G Data volume and a relatively slow 7.5% growth in 3G/4G Data volume. But the operator has bounced back smartly with over 16% Q-o-Q growth in 3G/4G Data volumes and over 13% growth overall in June'16. That is a big outperformance over Bharti Airtel's volume growth of under 8% in June'16. Out of the most recent 9 quarters, Idea Cellular has managed to post better Q-o-Q Data volume growth than Bharti Airtel in 5 quarters. With wider 3G & 4G coverage across all 22 circles, Bharti Airtel is certainly expected to do better than Idea Cellular in both subscriber additions as well as Data Volume growth. But it seems Idea Cellular is not going to take it lying down with superior performance in the 17 circles where it holds either a 3G license or a 4G license or both. This fight will be very interesting in the coming quarters. Both operators have recently announced substantially higher usage limits on existing Data plans, which is probably the initial steps to counter the pressure being felt from Jio's Preview Offer. We could see more upward revisions in the usage limits in the coming few weeks as the pressure keeps piling up as Jio's commercial launch gets nearer. This is the only way that the existing operators can try & maintain it's Data Volume growth.

Both Bharti Airtel & Idea Cellular have seen their Quarterly Data Revenues multiplying about three and half times over the last 11 quarters. With Reliance Jio effect expected to start kicking in from Sept.'16 quarter onwards, it will be interesting to see how long do these operators manage to continue posting growth in their Quarterly Data revenues. Frankly I am expecting almost all existing operators to report Q-o-Q drop in Data revenues over the initial couple of quarters of full-scale commercial launch by Reliance Jio, though of varying degrees. The drops experienced by each operator will depend on how well these operators are able to offer Good Quality of service at not-so-expensive tariffs compared to Reliance Jio.

I am expecting the Drops to be more severe for smaller operators like Aircel, Tata Tele & Uninor, who offer 3G or 3G-like services in very limited number of circles. Amongst the biggies, Vodafone is expected to take the biggest hit mainly because of it's limited 4G presence currently. Vodafone is expected to be the most aggressive participant in the upcoming Spectrum Auctions scheduled to start on 29th September'16. Both Idea Cellular & Bharti Airtel are a little better placed at the moment, but both of them will still experience some bit of drop in Revenues. Reliance Jio's 4G coverage across the country is expected to be currently way superior to 3G/4G coverage of any of the existing operators. Data Speeds on Reliance Jio's 4G network may not be the best at all locations, but it will certainly be better than 3G speeds offered by any of the existing operators, and priced much more aggressively. Apart from Data speeds, Reliance Jio is expected to offer Free Jio-to-Jio VoLTE calling across the country, bundled with it's Data packs. That means the existing operators have not just the Wireless Data business to worry about, but even it's bread-and-butter Voice business too.

Let's see how Reliance Jio's commercial launch unfolds (hopefully in this quarter) and how the Sept.'16 quarterly numbers turn out for Bharti Airtel & Idea Cellular.

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.

Reliance Industries Ltd. - Firing on 2 cylinders & 2 more to start firing soon!!

Reliance Industries Ltd positively surprised everyone with the kind of numbers it posted for Q3-FY'16. I was myself expecting a Net Profit number of between Rs.6800 to 7000 crores for the quarter, but the company delivered Rs.7290 crores!! The product prices continued to fall during Q3, thanks to further downward movement in Crude Oil prices. But Reliance Industries seems to have clearly managed to bring down it's raw material prices even more, which has led to a sharp improvement in it's margins. Reliance Industries reported an improvement in it's EBITDA margin of just over 250 bps in Q3 compared to Q2 of this fiscal. Some part of the benefit could also be due to the commissioning of certain projects both on Refining side as well as Petrochemicals side.

Amongst the two segments, the Refining business is clearly the brighter shining star in RIL's portfolio. The actual EBIT from Refining business has double in Q3 this fiscal compared to the same quarter in previous fiscal. This is a very very big thing, even overshadowing the fact that the Petrochemicals business too posted a near 30% growth in actual EBIT, which in itself is a very positive thing. The charts above show the T-T-M progress in EBITs of the two most important business segments for Reliance Industries.

With the mammoth Refining & Petchem CAPEX cycle coming to an end over the next 3-4 quarters, there is a possibility of further improvement in margins from these 2 businesses. But the Q3-FY'16 numbers itself were so good that even if the company manages to post same kind of numbers for the next few quarters, it will still seem to be very good performance. We could see some fluctuations in numbers depending on sharp Crude price movements & corresponding Crude sourcing for the company. But the company has done well till now to use the Crude price movements in it's favour. Another small factor that is boosting the company's margins slightly is the increased demand locally, leading to increased allocation for local markets. Reliance already has got 750 of it's own Fuel Retail centers operational and more are joining with every passing month. We can expect this number to double over the next 12 months or so.

Reliance Retail & upcoming Jio launch:

Reliance Retail did spring a small surprise during the Q3, having crossed the Rs.6000 crores turnover mark for the first time. It was a sharp Q-o-Q jump of 20%. At the end of Dec'15, the T-T-M Revenues from Reliance's Retail business also crossed the Rs.20,000 crores mark with a 7% Q-o-Q jump. All this even before the launch of e-commerce platform of the company, which is expected to happen over the next 2-3 quarters, alongwith Jio's commercial launch. Just last week Reliance Retail has started selling Jio LYF branded handsets through it's own outlets including Reliance Digital, Digital Express and Express Mini outlets. In the coming weeks, Reliance Retail will also start selling these handsets via 1.2 lakh small retailers spread across the country. The sale of handsets will only pick up speed only after Jio's commercial launch of 4G services. Reliance Retail will use these distribution channels to sell not just LYF branded handsets, but will also supply the small retailers with handsets of other popular brands. Reliance Retail could become the one-stop-supply-source for many of these small retailers & could also integrate them with it's upcoming e-commerce platform.

The best part about Reliance Retail's progress is that the handsome growth is not coming at the cost of profitability. Even though the EBIT numbers are not big, but the important point is that the EBIT number is positive, which many other large retail chains are struggling for. Even the large e-commerce platforms are still burning cash. Going forward there are many more growth avenues for Reliance Retail, some of which I have highlighted above. This is also one business which will grow much more in size in the coming years, though it may not add too much to the company's profits, but still will play an important role in increasing presence in Reliance's consumer-facing businesses.

I have already highlighted the potential of Jio's 4G & Broadband business in my earlier posts related to Reliance Industries. Hence I won't repeat it again here. The media reports doing the rounds currently suggest a commercial launch in March/April period. Let's hope these reports finally do turn out to be true.

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!!

Bharti Airtel vs Idea Cellular - Which is the best Telecom stock?

The options for investing in Telecom are quite limited in India. Only the No.1 (i.e. Bharti Airtel), No.3 (i.e. Idea Cellular) & No.4 (i.e. Reliance Communications) mobile operators in India are listed on Indian stock exchanges. Tata Teleservices (Mah.) Ltd., which is a small part of the No.7 operator TTSL, is also listed, but can be termed as a regional player due to it's 2-circle operations. Another option that can be ignored is MTNL, which is again a 2-metro circles operation only and can be termed as completely lacklustre due to it's past performance.

Other players like Vodafone, Uninor, Aircel, BSNL, etc. are unlisted entities. Amongst the listed options, it is only the Top-2, i.e. Bharti Airtel & Idea Cellular, which are reporting strong growth in their India operations and also commanding strong market shares and consistant profitability. Bharti Airtel has operations in about 20 countries, which includes India and few other South-Asian countries and also in many countries of Africa. Bharti Airtel is also not just a pure-play mobile services provider, but it offers a gamut of services like DTH, Wireline, International Bandwidth, etc. The contribution from India-based business is nearly 60-65% in Bharti Airtel's Topline. On the other hand Idea Cellular is a pure-play mobile services provider based only in India.

In terms of size, Bharti Airtel is nearly 3 times the size of Idea Cellular, when Toplines are considered. To compare their performances over the recent 3 years, what I did was to compare how much percentage was Idea Cellular's Consolidated T-T-M numbers compared to Bharti Airtel's Consolidated T-T-M numbers. If the 2 companies grew at the same pace, then the percentage number will remain stagnant, but if Idea Cellular has grown faster, then the percentage number will rise & vice-versa. Have a look at the charts below. I have compared T-T-M numbers from June'2012 to June'2015 to give us a reasonable idea of who outperformed over the last 3 years.

From the charts above, it is extremely obvious that Idea Cellular has been the clear outperformer on Total Income, EBITDA and Cash Profit front. In the case of Total Income, Idea Cellular's number was just about 28% of Bharti Airtel's number at the end of June'12, which remained around the same level till March'13. But over the next 9 quarters, that percentage has shot up to touch a figure of 35.8% by June'15. There are two primary reasons for this huge outperformance by Idea Cellular: One being Idea's faster growth by some margin in the Indian Telecom market; and Second being very slow or negligible growth in Bharti Airtel's Africa business, which contributes over 25% to the company's Total Income.

On the EBITDA and Cash Profit front, the outperformance by Idea Cellular is even more staggering!! At the end of June'12, Idea's EBITDA formed just 22.3% of Airtel's EBITDA. But the number has shot up to 37.6% by June'15, i.e. over the last 12 quarters. In case of Cash Profits, the percentage number has nearly doubled from a level of 21.9% in June'12 to 42.8% in June'15. This is just too big an outperformance to ignore. Now look at the progress of T-T-M Cash Profit margins for the two companies. Bharti Airtel's Cash Profit margin dropped from 24.1% in June'12 to a figure of 21.5% in June'14, but has started improving after that to touch a figure of 22.8% in June'15. In case of Idea Cellular, the change has been consistently positive from a level of 19% in June'12 to a very very respectable figure of 27.3% in June'15.

Valuations: At the current price of Rs.157 per share, Idea Cellular commands a Market Cap of Rs.56,500 crores, which is 6.2 times it's T-T-M Cash Profit. In case of Bharti Airtel, the Market Cap stands at about Rs.1,52,000 crores at the current price of Rs.380 per share. At this price, it trades at about 7.2 times it's T-T-M Cash Profit. What this means is that despite strong outperformance on all Financial parameters over the last 3 years, Idea Cellular still trades at about 15% cheaper valuations compared to it's larger peer Bharti Airtel.

Could this mean that the market expects Bharti Airtel to better face the upcoming competition compared to Idea Cellular? If we look at the spectrum holdings in Indian space, Bharti Airtel is clearly the better bet as it holds considerable amount in all crucial frequencies like 900 MHz, 1800 MHz, 2100 MHz and 2300 MHz in various circles. After the recent auctions, Bharti Airtel is now said to be able to offer 3G services on either 2100 MHz or 900 MHz spectrum in 21 of the 23 circles in the country and hence will be less dependent on Roaming arrangements. Bharti Airtel can use it's 2300 MHz and 1800 MHz band holdings for 4G services, but it doesn't have these holdings in all the circles at the moment. On the other hand, what Idea Cellular has done is to ensure that it has enough spectrum holdings in all it's prime circles where it is No.1 or 2 operator and is able to combat any competition as these circles contribute nearly 65-70% of it's Revenues and almost all it's profits. Idea Cellular has a combination of holdings in the 900 MHz, 1800 MHz and 2100 MHz bands in most of the circles of operations. Idea Cellular will use a combination of 3G and 4G technologies using these bands to protect it's revenues from upcoming competition. 4G on 1800 MHz band in certain circles and 3G on 900 MHz and 2100 MHz bands in most of the other circles.

The developments are going to be fast & very very interesting to watch in the coming few quarters. The upcoming competition from RelJio is not very far and the existing operators will have to move swiftly to try & protect their revenues. The Data services market has been exploding over the last few years and the growth is expected to remain strong over the next few years. Every operator is trying to arm themselves with capacities to take a good chunk of this growth. I am not going to hazard a guess as to who will do better in protecting their revenues from the new competition next year onwards or whether the new competition will actually make a huge dent in the market shares or not. I would like to wait for more things to unfold & then take a calculated guess.

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.

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.

Reliance Communications Ltd. - Very Very dull performance, but one Glimmer of Hope is there!!

Reliance Communications Ltd. (RCom) used to be the flagship company of Reliance ADAG. At one time in late 2007, RCom used to enjoy a Market Cap of over Rs. 1,50,000 crores and was the 2nd or the 3rd largest Telecom company in India. But the last 7-8 years have been terrible for the company. RCom's current Market Cap stands at just about Rs.17,000 crores, that means nearly 90% below it's peak levels. In FY'09, RCom had posted a Total Income of Rs.22,948 crores and a Net Profit of Rs.6045 crores. While RCom posted a Total Income of Rs.22,321 crores and a Net Profit of Rs.1047 crores in FY'14. That means RCom's financial performance has degraded in these 5 years. Let's compare that with Idea Cellular's performance. During the same 5 years Idea's Total Income jumped from Rs.10,149 crores to Rs.26,518 crores, while Net Profit jumped from Rs.901 crores to Rs.1968 crores.

What happened to RCom during these 5-6 years??!! The Indian Mobile Service Industry went through a lot a turmoil during these years. First the entry of many new service providers in 2009, thanks to the ill-famous 2G Scam, which led to hyper competition in the market for a couple of years until SC stepped in & cancelled those new licences. Then the Auction of 3G spectrum in early 2010, where RCom managed to bag spectrum in 13 circles, including the crucial circles of Mumbai & Delhi. Probably RCom stretched it's Balancesheet a bit too much for the 3G auction & the subsequent network rollout. RCom can be said to be the biggest victim of the hyper-competition & the Debt trap created by it's ambitious bidding during 3G Auctions. And despite having one of the highest number of 3G circles in it's fold, RCom did not manage to capture a good amount of market share. It holds spectrum in 800 MHz CDMA band (across India), 1800 MHz 2G band (in 15-16 circles), 900 MHz 2G spectrum (in 6-7 circles) and 2100 MHz 3G spectrum (in 13 circles).

Look at RCom T-T-M Financial performance over the last 8 quarters. It has gone nowhere. All numbers are almost flat. During these 8 quarters, most other telecom operators have seen a huge surge in Data traffic & revenues from the same. With RCom having Nationwide CDMA spectrum & 3G spectrum in 13 important circles, there hasn't been much growth for RCom. Or atleast the growth from Data revenues has been equally negated by drop in Voice revenues. Over the recent quarters the company is working towards reducing it's Debt burden, which should lead to drop in Interest Costs & hence improvement in Cash Profits. The company has recently issued fresh shares to the Promoter Group at a price of Rs.150 per share. Few months back it raised funds abroad at low interest rate to retire some old high-cost debt. Plus RCom is expecting improved Cash Flows from it's Tower Assets & Optic Fibre Cable network once RelJio launches it's 4G service and starts paying Rent/usage fees to RCom. RCom has not done any significant CAPEX in the last 2 years. The improved Cash Flows should enable the company to work towards improving it's 3G coverage.

But all this is not going to help RCom survive the competition onslaught which is expected to intensify once RelJio launches it's services. RCom, which has not managed to grow it's revenues when all it's existing competitors are growing pretty well, will start losing revenues once RelJio starts and even other operators like Airtel, Vodafone & Idea start launching their 4G services. So, what is the Glimmer of Hope that I was talking about? It is the possibility of having a much larger partnership with RelJio. RelJio has already signed agreements with RCom to rent it's Towers and use the OFC network, wherever possible. But there is a possibility of RelJio using RCom's 2G & 3G network as a fall-back network for it's subscribers in regions where it will find it unviable to setup it's own 4G network, atleast in the initial years. This kind of arrangement can help RCom improve it's network utilisation levels & also add to increased Cash Flows. Another possibility is that RelJio could allow RCom to piggy-back on it's 4G network and allow RCom subscribers to experience 4G speeds without being charged any Roaming fees. If they do manage to have such an arrangement, then RCom will be able to protect it's existing Data subscribers & revenues from being churned. This kind of arrangement will be a win-win situation for both. RelJio will need quite a lot of time to build usage of it's brand new network on it's own. If it allows RCom subscribers to use it, revenues & utilisation levels will get a good boost. And if things improve between the two brothers, then they could even think of merging the two companies a few years down the line.

All these are just POSSIBILITIES and nobody knows as of now, on how things will pan out in the coming quarters. But at the current price of less than Rs.70/-, RCom is trading at very cheap valuations, though it's past performance doesn't deserve much higher valuations either. But if RCom does manage to tie-up an operating partnership with RelJio, it can change RCom's fortunes & it's financial health.