 "Jio")
For a sector seeing double-digit revenue growth over recent years, FY16 marked a reversal. At Rs 2 lakh crore, the sector grew by six% ; it was nearly double this in FY11-15. Revenue growth for the September was only 4.3% over the year-ago period.
What is hurting the sector, riding high on strong voice growth and robust subscriber addition, is intense competition over the past 18 months. What has aggravated this is the entry of Reliance Jio (RJio), offering free voice and data services, from September. Despite reduction in the number of operators in the recent mergers of Reliance Communications-Aircel and Airtel acquiring spectrum from Videocon, competitive intensity remains high.
Amid all this, the top three have consolidated their market shares and now account for 75% of the overall revenue pie. The September quarter number is up 200 basis points (bps) over the year-before period.
In fact, Bharti’s market share at 33% is at a seven-year high. Among the others, Vodafone has held on to its share of about 23.4%; Idea Cellular has slid. Revenue market share for Idea was down 50 bps year-on-year in the September quarter to 18.7%, partly attributable to its decision to raise prices in the March quarter.
Upping the game
These numbers will change, as RJio has adopted aggressive pricing (including an extended free trial period) to grab share. Since its September launch, the company has added 50 million subscribers — that’s 500,000 a day. The number, say analysts at Motilal Oswal Securities, is a third of the wireless broadband subscriber base and about 30% of Idea and RCom-Aircel’s overall subscriber base combined.
Given the higher than expected addition, analysts have revised their subscriber addition expectation and expect RJio to reach 60 million by the end of the year and touch 84 million in FY18. Though its commercial operations (paid services) will start in FY18, RJio is expected to get a 12% revenue market share by FY19.
The RJio launch has had a twin impact. It has forced incumbent operators to price their products aggressively to retain subscribers. Bharti, Vodafone and Idea recently launched unlimited voice plans, bundled with data. Bharti’s move, according to HSBC analysts, highlights that it is willing to re-adjust to a lower Arpu (average revenue per user) to retain subscribers. Also, with this move, it is attempting to drive utilisation of fourth-generation technology (4G) services. However, the aggressive pricing has not led to a significant uptick in volumes.
Data volume growth, which with the RJio launch was a key trigger for the large investment to strengthen the 4G network by telcos, has slowed. From 100% growth only six quarters earlier, volume growth fell to less than half in the September quarter. Given weak realisations, data revenue growth has come down to 30% from levels where it was doubling every quarter. In the September quarter, year-on-year data revenue growth for the incumbents at 22% was the slowest ever.
Morgan Stanley’s Vinay Jaising and Amruta Pabalkar expect this number to decline further to 13%, as RJio has extended its free offer to the end of March 2017. The key risk for the top three (Bharti, Idea and Vodafone), feel analysts, is further deceleration of data volumes. RJio alone accounts for 80% of industry data volume.
Under pressure
The free voice offer from RJio would also mean that growth voice revenues, bread and butter for the major players, would remain flat due to the slowing volumes. Morgan Stanley analysts estimate voice volume growth to decline in FY19, with data cannibalising voice. This will impact the operating performance of the key players.
While Bharti and Idea are expected to report a fall in operating profit over the next few quarters, Idea could post losses at the net level if it were to bridge the gap by half between RJio’s data offering and its own rates.
RJio’s rates are estimated to be 40% lower than current levels. Having already invested heavily in procuring spectrum and rolling out 4G networks, operators have stretched balance sheets. This will make it difficult for them to play the discounting game for long periods of time.
How the top three fare will depend on their ability to retain their higher Arpu customers, keep costs down and maintain their market shares.
