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Business News/ Industry / Telecom/  Reliance Jio vs Airtel battle may still be some time away
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Reliance Jio vs Airtel battle may still be some time away

Reliance Jio's record investment, adding up to $22 billion, could limit it from irrational price cuts that would crimp its returns

Photo: Abhijit Bhatlekar/MintPremium
Photo: Abhijit Bhatlekar/Mint

It is clear that billionaire Mukesh Ambani’s second entry into the telecom industry through Reliance Jio Infocomm Ltd will happen over the next three-four months. But the anticipated face-off between Reliance Jio and current market leader Bharti Airtel Ltd may still be some time away.

Ambani’s Reliance Jio will take on fellow billionaire Sunil Mittal-controlled Bharti Airtel only after its operations stabilize, brokerage firms say.

As a result, there is unlikely to be an immediate price war, as Reliance Jio’s record investment, adding up to $22 billion, could limit it from irrationally cutting prices that would crimp its returns. However, Reliance Jio will compete on network quality and offer a few propositions such as exclusive content, though Airtel is well-placed to offer these as well, since it has had enough lead time to prepare, with Reliance Jio’s launch delayed by around three years.

Airtel has also beefed up its 4G spectrum and has invested in analytics to selectively respond to Reliance Jio’s tariff cuts to select segments, rather than its entire base.

Reliance Jio is possibly the single biggest bet made not only by Reliance Industries Ltd but perhaps by any Indian corporate ever. There is a raging debate among investors on whether the scale of investments will add value or not. But large capital investments ensured the highest 4G spectrum for Reliance Jio with the largest number of 4G sites, access to the biggest optical-fibre network and superior LTE technology, which are all clear advantages.

“We see the risk of a high competitive scenario around 6-9 months post Jio launch, as Jio may get aggressive once it realizes that the initial uptake is lower than its expectations," said a Bank of America Merrill Lynch (BAML) report released on 15 June.

This is largely because the brokerage believes that the high-end market size is not large enough to help Reliance Jio meet its targeted user base of 100 million.

“We see a larger possibility that Jio would reduce its minimum ARPU (average revenue per user) requirement from 300-500 to around 200. Such a move would end up giving Jio access to another 100 million target subs (subscribers). However, this would trigger price cuts from the incumbent telcos, as they would try to retain their subs from being poached away by Jio," added the BAML report.

BAML expects the major impact of the Reliance Jio launch to be felt in 2017-18, when competition will intensify, leading to a marginal slowdown in revenue growth for Airtel and other operators.

There are parallels between Ambani’s latest Reliance Jio venture and Reliance Communications’ (then known as Reliance Infocomm Ltd) launch in 2003, which, too, he had spearheaded. The executive management is the same in both instances. Reliance Communications’ (R-Com’s) pan-India launch was on a scale comparable with that of the incumbents and it surpassed Airtel’s voice throughput within three years. However, Airtel’s revenue share and margins were not affected by its entry.

This time around, Airtel appears to be better prepared.

“Contrary to investor expectations, we do not anticipate any impact on its revenue share or margins from Reliance Jio’s launch. We believe Bharti’s business performance is poised for multi-year improvement, which should be reflected in its share price," said a 20 April report by Deutsche Bank Markets Research. “The continuity in Bharti’s management and the lessons learnt post R-Com’s launch in 2003 have likely helped it to anticipate Jio’s strategy this time around. Bharti has been strategic in acquiring the largest amount of incremental spectrum since 2014. This has helped it to pre-empt Reliance Jio by launching 4G on a pan-India basis and increase the competitive gap with incumbent peers, which remain spectrum constrained in their key markets," added the Deutsche Bank report.

To be sure, Reliance Jio is likely to have a phased launch from September-October and focus on the high ARPU segment initially. It may have a pan-India coverage only by December.

“We expect Jio’s overall market share in five years to be around 10%, but we do not expect it to come from Bharti. In fact, we expect Jio to be the third operator in terms of data revenue market share, overtaking Idea by FY21. However, on an overall basis, Idea would be still the 3rd operator by market share, given its strong positioning in voice market—especially in the rural markets," said the BAML report.

As for the benchmark for Reliance Jio’s success, it will need 180-140 million subscribers with ARPU of 250-300 for 10% pre-tax return on capital employed on its $22 billion capital expenditure, according to a 12 May report by CLSA.

“Achieving this within five years may be seen as a success," CLSA said. It projects the number of smartphone users to go up to 500 million for 4G smartphones in India by 2021 and 300 million subscribers with ARPU over 300 by March 2018.

CLSA forecasts 25 million subscribers by 2016-17; 70 million by 2017-18 and 100 million by 2018-19.

“We model these rising to 150 million subscribers by March 2021," CLSA said. “Using an Arpu of 250 rising to 300/month in five years, we get an estimated Ebitda/FCF/PBT breakeven in FY18/19/20."

Ebitda refers to earnings before interest, taxes, depreciation and amortization; FCF to free cash flow; and PBT to profit before tax.

Nevertheless, like any consumer business, it is customers who play kingmaker and as of today, the telecom services in the country leave a lot to be desired. The Telecom Regulatory Authority of India’s first independent test drive on dropped calls, conducted in Delhi, showed that most telecom operators failed to meet the call drop benchmark set by it. Similar results were found when such studies were conducted in Hyderabad and Bhopal.

Reliance Jio will take note of that. After a field test of Reliance Jio’s services, Mumbai-based brokerage firm IDFC Securities came out impressed by its overall service offerings, even as it noticed teething issues such as customer on-boarding, in-building coverage and “lacklustre experience of certain applications on low-end handsets".

“We extensively examined R-Jio services over the last fortnight, covering 225km via road/rail network in and around Mumbai," IDFC claimed in a 1 June report.

Seamless coverage along the highways, voice call clarity, above-par experience of entertainment applications (especially Jio Play) and faster data speeds were the key highlights, it said.

“During our testing, we observed that Airtel 4G network was perhaps the closest to offering a similar experience. However, we note that the network experience could differ materially once the load increases on R-Jio network," IDFC said in the report.

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Published: 20 Jun 2016, 12:32 AM IST
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