Gains ahead for Jio, Bharti as telco market heads towards a duopoly

Experts see the telecom sector heading towards duopoly

Bharti Airtel (Airtel) and Reliance Industries (Jio) appear to be the key gainers of the Supreme Court's judgment in the adjusted gross revenues (AGR) case. Brokerages believe a short pre-payment period of 10 years, as compared to the longer time frames the Street was working with will limit its ability to invest in expanding its network and cede market share to its larger better-funded peers. The stock reaction, too, seems to suggest the sector may be heading towards becoming a duopoly; Airtel was the biggest gainer rising 6.4 per cent, while Reliance Industries was up half a per cent. Bharti Infratel and Vodafone Idea were down between 4 per cent and 13 per cent. 

The positive for Airtel and Jio is the temporary relief on liabilities related to traded and shared spectrum (the matter is now referred to the National Company Law Tribunal). The liability for Airtel — on Aircel's and Videocon's account — is  Rs 13,000 crore, while the same for Jio is pegged at Rs 25,000 crore due to its spectrum pact with Reliance Comm. 

A bigger trigger for the two entities is the viability of a cash-strapped VIL and the sector turning into a duopoly. Rajiv Sharma, head-institutional equity research, SBICAP Securities, says: “Any delay by VIL to raise capital and take substantial tariff hikes may lead to a further consolidation of the subscriber base and eventually a two private player telecom market in India.” 

 

 

Jio and Airtel have been gaining market share on the back of superior network and higher capex spends, and this trend could continue going ahead. After two consecutive quarters of AGR growth, VIL’s revenue market share in the June quarter was down over 600 basis points on a sequential basis, according to Emkay Research. The company’s share, which was over 38 per cent at the start of FY19, has now come down to 22.8 per cent. While Jio’s market share has been on an uptrend, Airtel’s has been stable. Jio gained 466 basis points share in the June quarter (QoQ) to 41 per cent, while Airtel improved its share to 34.2 per cent with a gain of 186 basis points on a sequential basis. 

The need to increase average revenue per user (ARPU) to fund AGR obligations will make tariff hikes imminent. Bharti Airtel has been the single biggest beneficiary of tariff hikes among the three telcos, with a 22 per cent increase in ARPU since the hike last year, as compared to 6-8 per cent for Jio and VIL.  

While Jio is best placed given the equity infusion into Jio Platforms and debt restructuring, Bharti Airtel can gain from a duopoly situation. An analyst at a domestic brokerage says: “Bharti Airtel has comfortable free cash flows to meet its payment obligations and has the ability to raise capital. Its average revenue per user is higher than Jio. The incremental conversion of 2G customers to 4G network and impending tariff hike will benefit it further.”

Bharti Infratel is the other player which is on a weak wicket, given the pressure on VIL’s financials. Analysts believe that cut back due to cost synergies and limited capex of VIL will hit the tower company’s tenancies and revenues. While the merger with Indus Towers removes an overhang, brokerages are negative on the company’s prospects due to worries over cancellations and pressure on pricing.