The proposed merger moves in the telecom sector are expected to lead to less competitive intensity over the medium term.
There are plans for Vodafone and Idea to merge; Reliance Communications, Aircel and MTS are also in the process of doing so. This would mean three major players (Airtel, Vodafone-Idea and Reliance Jio) accounting for a little over 90% of subscriber and revenue market shares in 2018, leading to better pricing power, feel analysts.
Any merger is expected to take at least a year to fructify. Says Manoj Behera of PhillipCapital: “While the near term will see the impact of predatory pricing by the new player (Jio), competitive pressures are expected to come down once it charges its customers, leading to an improvement in cash flows for the larger operators.”
While the near term looks tough, once the dust settles, average revenue per user (Arpu) is expected to improve from the current levels of Rs 170-180 for the top three to about Rs 200 a month. The sector (Arpu of Rs 125 in FY16) would have a 10% internal rate of return at ARPUs of Rs 200, says an analyst.
The situation, however, will get worse before it improves. The impact is best captured in the December quarter earnings of Bharti Airtel. Its Arpu was down 6.5% sequentially and 9.5% over the year-before quarter to Rs 172. If pricing wars were to intensify, this number could fall further, feel analysts, causing havoc to the operating profit margins.
Tanu Sharma, associate director at India Ratings and Research, says things might stabilise but the higher discounts from Jio, given its deeper pockets, could mean further disruption.
Analysts highlight disruption from both pricing and the mergers. Any merger and acquisition is a complicated affair.
While the near term will see a lot of uncertainty, the merger of Idea and Vodafone will relegate Bharti to a distant second. The merged entity will have a subscriber and revenue market share of 40% and 43%, respectively. Its revenues will be 1.5 times that of Bharti and its operating profit would be 1.25 times more. The Street has so far been positive on Bharti, given its relatively low leverage and spectrum portfolio, to counter Jio.
However, Citi Research believes creation of a strong entity (Idea and Vodafone) will be negative for Airtel. For, the balance sheet and spectrum position of Vodafone and Idea, currently relatively weak, would improve. Vodafone and Idea’s proportion of net debt to operating earnings are expected to improve to 3.3 times, from four times now. Spectrum holdings, barring a couple of gaps in 4G circles, will be among the highest.
Given Jio’s 72.4 million customers (as on December 31, 2016) or about 8% subscriber share and Bharti’s 26%, at least three-quarters of the subscriber base would be controlled by the three entities.
While RJio does not currently earn revenue with its ongoing free offer, analysts expect it (once it starts charging the customers) to have 19-20% revenue market share over the next two to three years. Currently, Vodafone-Idea and Bharti (33%) together have 76%.
VODAFONE INDIA THROUGH THE YEARS
1995: Hutchison Whampoa, Hong Kong-based investment holding company, launches telecom operations in India
2000: Starts services in Delhi, Kolkata and Gujarat
2003: Acquires AirCel Digilink; rebrands all circles under ‘Hutch’ brand, ‘Orange’ in Mumbai
2005-06: Acquires BPL Mobile that operated only in Mumbai under the brand 'Loop’ Mobile
2007: Brand Vodafone was launched in India after Vodafone Plc acquired a majority stake in Hutchinson Essar
2007: Purchases 67% stake in Hutchinson Whampoa’s India telecom biz (Hutch-Essar) for $11.08 billion; launches ops in Mumbai; Hutchison Essar renamed Vodafone Essar
2010: Crosses 100 million subscribers
2011: Buys out entire 33% stake of Essar in the Vodafone-Esssar joint venture
2012: Vodafone gets embroiled in a $2.5-billion tax dispute over its buy of Hutch Essar Telecom services in April 2007
2014: Completes 100% acquisition of India unit
January 30, 2017: Confirms news of discussions with the Aditya Birla Group about an all share merger of Vodafone India and Idea
(Compiled by Megha Manchanda)
To read the full story, Subscribe Now at just Rs 249 a month