Reliance Jio vs the Rest of the Indian Telecom Industry Players. Who will win or will all lose? What does this mean for investors? As the events unfold, volatility in telecom stocks will increase. The underlying fact is that the industry is heavily indebted, growth has dramatically slowed down and disruptions are in the form of one company acquiring customers from another company. Investors should wait and watch the “War” in the Indian Telecom Industry and not get sucked into the volatility.
On 01st September 2016, Indian telecom industry witnessed its first massive disruption, which changed the dynamics of the telecom industry. Reliance Jio was launched on that day, offering unlimited data to its subscribers to fulfill the Digital India dream of Prime Minister Narendra Modi. Jio’s launch caused Bharti Airtel, Idea Cellular and Reliance Communications Rs. 134.65 billion of market capitalization.
However, Jio’s disruption in the industry has not stopped at market capitalization loss of Rs. 134.65 billion. It has lead to fierce competition in the industry and a tariff war, which has acted as a catalyst for mergers happening in the span of last 4 months. On 21st February 2017, Jio’s Chairman Mukesh Ambani announced the company’s first milestone of achieving 100 million subscriber base within 170 days. of launch. Jio’s subscriber base have used almost 1 billion GB of data in the month of January 2017.
Last week, further consolidation was announced in this heavy debt laden industry with India’s largest telecom operator Bharti Airtel acquiring Telenor India. The Telenor acquisition will give Bharti Airtel additional spectrum in 1,800 MHz band besides a foothold in seven circles — Andhra Pradesh, Assam, Bihar, Gujarat, Uttar Pradesh and Maharashtra — where Telenor operates. The buyout gives Airtel additional access to 43.4 Mhz spectrum in the 1800 MHz band. Share price of Bharti Airtel rose 10% intra–day on the acquisition news.
Prior to this acquisition, on 30th January 2017, Vodafone India confirmed a potential merger discussion with Aditya Birla Group for an all share merger of Vodafone India (excluding Vodafone India 42% stake in Indus Towers) and Idea Cellular. The new combined entity will be India’s largest telecom company with revenues close to Rs. 800 billion, revenue market share of 43% in India and active customer base market share of 40%.
Indian telecom industry in 2016, witnessed what was at that time the biggest consolidation deal when Reliance Communication and Maxis communication (promoters of Aircel) agreed to merge their wireless business to form the fourth largest telecom operator in the country. The new merged unnamed entity will have an asset base of approximately Rs. 650 billion and net worth of Rs. 340 billion. R-Com and Aircel would continue to hold 50% each in the new merged entity. The entity will hold 26.42% of the total spectrum spread across 800 Mhz, 900 Mhz, 1800 Mhz, 2100 Mhz, 2300 Mhz . The new entity will have a debt of Rs. 280 billion in its balance sheet.
Telecom is a capital-intensive industry and with heavy debt on balance sheets of most telecom operators, freebies will be hard to come by. Telecom operators in the country had a total debt of Rs 2.73 trillion on their books in the year 2014-2015. Having such heavy debt on the balance sheets, it is difficult for telecom companies to withstand disruptive competition. Acquisitions, mergers and joint ventures would help them to improve their financial status and also unlock shareholders value.