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Telecom stocks have underperformed the broad market in the recent rally. Morgan Stanley Capital International (MSCI)’s telecom index is still trailing the MSCI India index by 12%.
Research showed that the main reason for this despite a strong fundamental performance by telecom companies was because investors were unwilling to bet on the sector given the threat perception of an aggressive launch by Reliance Jio (R-Jio), the telecom venture of the cash rich Reliance Industries (RIL). However, Vinay Jaising and Amruta Prabalkar of Morgan Stanley say that such fears are unfounded.
According to the study, new entrants in global markets such as Europe and the Middle East have struggled to gain 14% market share and 13% EBIDTA even after seven years of operation. None of the new entrants entered the market with new technology, nor is there any precedent of a new entrant being successful with a new technology.
Several new entrants to the US and Canadian markets over the past five years have a combined market share in mid-single digits. Morgan Stanley argues that R-Jio will not be disruptive to the Indian telecom space but more a market expander.
In another case study, the reports points out that when China Mobile (CM) launched the new technology 4G TD LTE in China, the company already had a market share of 70% in 2G and 50% in 3G. Reliance Jio, on the other hand, has no such advantage.
Despite its strong presence, CM planned to invest around $100 billion over 2013-15 and will be selling subsidised handsets to make a mark in the 4G space. But CM also had to face technological challenges, such as –time lag when switching from LTE network to voice (GSM) via CSFB, despite owning the 2G/3G network. Since R-Jio has no incumbency or network advantage it may need to lease the network for 2G/3G, making its own services more expensive.
Morgan Stanley, however, expects the data market in India to grow exponentially with traffic increasing eight times. Growth in the Indian telecom market will be at the cost of average revenue per megabyte (ARMB), which MS expects will halve to 14 paise over the next four years. This will result in a 40% CAGR in data revenue during this period.
The bank also believes that R-Jio will gain a wireless market share of 11% by FY18 – 8% in voice and 20% in the data market. R-Jio is expected to break-even within three years of launch and become profitable within five years, says the MS report. This too would be possible if R-Jio becomes a market expander rather than eating into other players’ market share by aggressive pricing strategies. Otherwise, like its global peers, it could take five years to break even on EBITDA and 7-8 years to be profitable.
Though MS feels that R-Jio has an advantage over its global peers – an untapped fixed broadband market in India – the company will adopt an integrated wireline/wireless model.
