In a market correction, stocks that had rallied the most typically fall more than stocks that are already beaten down. Not so in India’s telecom sector. In the past six trading sessions, shares of Bharti Airtel Ltd and Vodafone Idea Ltd have fallen 6.2% and 12.5%, respectively, in value. Year till date, these stocks have declined 32% and 62%, respectively. In contrast, shares of Reliance Industries Ltd (RIL), which houses the mammoth Reliance Jio project, have fallen merely 1.9% in the past six trading sessions. Year to date, RIL shares have gained 34%.
RIL isn’t exactly a telco stock; although it is true that a large part of the gains in the stock have accrued because of Reliance Jio’s steady upward march in the industry’s market share tables.
In fact, subscriber numbers released by the Telecom Regulatory Authority of India show that the pace of Reliance Jio’s market share growth has accelerated in recent months. The company had relaunched its feature phone called JioPhone in July, which helped its subscriber count grow by 11.8 million in the month. This was much higher than the average monthly addition of 9.5 million subscribers in the previous four months.
For incumbents, growth slowed dramatically. In July, Bharti Airtel’s wireless subscriber base rose by just 300,000, while the Vodafone-Idea combine’s subscriber count rose by 600,000. It was the lowest rate of subscriber addition in the past 10 months.
As pointed out in this column earlier, with none of the small telcos left to grab share from, Jio’s incremental market share gains are expected to come at the expense of large incumbents. In July, Jio’s subscriber market share rose to 19.6%, taking it ahead of both Vodafone India Ltd and Idea Cellular Ltd, which were operating as separate companies at the time. In March this year, Jio’s market share of 15.8% was considerably below Vodafone’s 18.8% share.
Of course, a larger share of Jio’s incremental subscribers are coming from rural areas in recent months, suggesting higher sales of its feature phone. The Arpu (average revenue per user) in this segment is far lower compared to the smartphone segment. As such, revenue growth may be slightly lower than subscriber growth.
More importantly, Jio’s growth is coming on the back of an increased thrust on capital spend. Cash burn can be expected to remain at high levels this year as well.
“Despite strong network metrics, Reliance spent US$2.5 billion in 1QFY19 alone, taking its telecom outlay to US$42.5bn… Telecom debt is already over ₹ 0.8 trillion, in our estimate, with total telecom liabilities likely to reach ₹ 1.9 trillion by March 2019 ( ₹ 1.4 trillion in March 2018) after adjusting for vendor dues, spectrum liabilities and the RCom deal that has begun to close," analysts at Jefferies India Pvt. Ltd said in a note to clients.
Of course, some of the spending is related to the company’s other businesses such as home broadband. With such a high outlay, the asking rate for these businesses in terms of revenues and profit is fairly high. So as much as Jio’s fast-paced growth is commendable, investors should also look at cash flows and return ratios while valuing it.