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!!

Jaypee Infratech Ltd - Parent's woes affecting it's valuations.

Jaypee Infratech Ltd is a subsidiary of Jaypee Associates Ltd, where the promoter holds about 74% stake in the company. Jaypee Infratech is in the businesses of operating the Yamuna Expressway, which connects Noida with Agra, a distance of 165 kms, and is also developing 5 land parcels with a cumulative area of 6100 acres along the Expressway. The Real Estate development will be like building 5 distinct townships involving Residential Towers, Parks, Shopping Malls, Educational Institutes, Hospitals, Commercial Spaces, Internal Roads, Water Supply, Sewage Treatment Plants, etc. everything that a town needs. Jaypee Infratech will do the town planning and construct the things where they hold expertise and sell/lease plots to other service providers where it doesn't have any experience.

Things are progressing rapidly in the townships which were located closer to Noida region. Bookings & Construction started way back in 2008-09 and buyers started getting possession of their apartments from 2012 onwards. In the last 4 financial years, Jaypee Infratech has already booked revenues to the tune of over Rs.12,000 crores from it's Real Estate division, comprising over 90% of the company Total Income during the period. The construction of the Expressway was also completed & tolling started sometime in the Q2 of FY'2012-13. Currently the Toll Collections from the Expressway contributes to just about 10-15% of the company's Quarterly Revenues and is probably not enough to even cover the Project's Interest Cost. With traffic expected to increase in the coming years, hopefully it will start paying for it's own Interest Cost possibly in the next 3-4 years. The other big advantage that this Expressway brings to the company is that it improves accessibility to the townships it is building along the expressway. Once these townships are occupied by more & more population, the usage of the Expressway will also increase substantially, leading to the project becoming profitable. Most probably it will happen 10 years down the line. Until then the Real Estate division will solely contribute to the profits of the company.

As can be seen from the T-T-M charts, Jaypee Infratech had two bad quarters during March'14 & June'14, when the company posted substantial drop in revenues Y-o-Y and almost negligible Profits. But the performance has bounced back smartly during Sept'14 quarter with healthy profits too. The slide in EPS starting from Sept'12 quarter is mainly because of the Interest Cost for the Expressway Project, which started commercial operations during that quarter. The Slide was expected and fortunately that has also halted at around Rs.2 per share mark. We can already see a slight improvement during the Sept'14 quarter and going forward we can see further improvement in EPS alongwith improvement in Total Income.

Coming to the Valuation part, the stock trades at about 11 times it's EPS at current price of around Rs.22/-. I think this is gross undervaluation of this company. In the coming quarters we will see the company's EPS grow at a slightly faster pace than the growth in it's revenues, mainly because the Interest Cost is expected to gradually come down. With the potential of Revenues from the company's Real Estate division being huge in the coming years, I think the company deserves much better valuations. I have a 12-18 months price target of at least Rs.50/- on this stock. The main problem being the promoter JP Associates' fragile financial condition. JP Associates could look at selling some of it's stake in Jaypee Infratech as and when the company's valuations improve.