New pecking order on the cards in telecom space after Vodafone Idea entry

Jio may unleash an aggressive bid to woo the nearly 300 million Vodafone-Idea's subscribers, who are still on 2G, to shift to 4G

A fresh battle to determine the final pecking order based on revenue share is set to be unleashed with the merger of Idea and Vodafone getting its final seal of approval.

The reason is two-fold: One, Jio has set up an ambitious target – it wants to grab at least 40 per cent of the telecom revenue share (based on adjusted gross revenue and revenues from national long distance) from 22.4 per cent in June this year and with new additions in the country’s mobile subscriber base growing marginally, it has to come from existing operators.

Two, incumbent player Vodafone-Idea Ltd (VIL), which has the highest number of subscribers, faces a severe challenge to stem the tide of its falling revenue market share.  

It went down steeply from 42.9 per cent in the first quarter of FY18, to 34.7 per cent in the first quarter of FY 19, bruised by the onslaught of Jio.

However, Bharti has closed in on the gap between the two and is perilously close to them — with a 32.1 per cent revenue market, a level which it has been able to defend through the year with a marginal fall. And, it could be close race for the top slot once the Tata Teleservices (which would add about 1.7 per cent market share) merger is completed.

There is another challenge to Vodafone-Idea as well as Airtel’s position in the pecking order. 

Jio, which has been quiet on the tariff front (last major reduction was in January in pre-paid), may unleash an aggressive bid to woo the nearly 300 million Vodafone-Idea’s subscribers, who are still on 2G, to shift to 4G.

It will also nibble into Bharti’s large 2G customer base and some analysts like CLSA say the latter would lose about 15 million customers due to Jio 4G feature phone’s aggression between June 2018 till March 2019. 

However, Bharti’s ability to retain revenue share will depend on whether it can drive data consumption among its subscribers.

Already, Jio has gone ahead of Bharti Airtel to become the second largest telco in terms of market share based on adjusted gross revenue (excluding NLD revenue). In the first quarter of FY 19, Jio went passed Airtel with a 27.9 per cent share compared to 26.3 per cent of Bharti but behind Vodafone -Idea at 32.2 per cent.

Jio’s plan is its Rs 501 Jio feature phone bundled with six months of data and voice at less than Rs 1,100. The device already constitutes nearly 40 to 50 per cent of the net additions of customers, according to sources close to the company. Already as many as 35 million customers of Jio are on its 4G feature phone. Jio will also look at a pricing war in case its competitors push tariffs down. A source says that it will keep an average 20 per cent lower price than its competitors.

Of course, all this means large fresh investments in the network (expanding coverage for Jio and upgrading network, from 2G to 4G for incumbents). But the problem is that Vodafone-Idea is the most leveraged of the telcos-with a net debt/EBIDTA of 20.7 x compared to only 4x of Bharti Airtel. And, according to analysts like J P Morgan, even after the three-year cost reduction plan due to synergies (like reduction of number of towers) is implemented, the net debt/EBIDTA would be “uncomfortably high “until there is a substantial increase in revenue recovery.