RIL serves another ace

Its entry into the broadband wireless segment could add $1 billion to profits.

The entry of Reliance Industries (RIL) into the broadband wireless market as well as the launch of services by other new licensees could lead to a reduction in broadband prices and impact margins of incumbents further. While the voice services business is facing severe competition, the lucrative broadband wireless space could see competitive intensity go up as RIL, which will be the only player with a pan-India licence, rolls out its network across the country.

The company, which will be investing about Rs 20,000 crore (including licence fee) in the business over the next three years, is betting on the fact that data traffic — which has exceeded voice usage world over (12 times higher) — will play out in India as well due to the increasing usage of smart phones, higher computer penetration and launch of new devices like the iPad. If analysts’ estimates work out, RIL could end up with a sizeable chunk of the wireless broadband base, which is estimated to grow 10 times to 100 million over the next seven years.
 

FY11 ESTIMATES
In Rs crore	Bharti	RCOM	Tulip	RIL
Sales	43,120	22,750	2,500	207,000
Ebitda	16,335	7,872	607	41,000
Net profit	7,700	2,360	340	21,500
P/E (x)	14.10	21.50	8.30	14.60
E: Estimates

Advantage RIL
RIL has some definite advantages over competition. First, it is the only player with a pan-India licence to operate broadband wireless services. Second, the company has indicated it will use an asset-light strategy to roll out its services, which means higher profits unlike most other telecom companies.

Third, the technology is highly efficient, carries more bandwidth and has better penetration. Considering that it is targeting a dispersed but large SME (small and medium enterprise) base that is less competitive than the retail broadband space, this could prove to be a winning combination.

Enterprise segment
Crisil believes the addressable enterprise data segments — virtual private network and domestic leased circuits — are expected to grow at an annual rate of 11 per cent over the next five years to reach Rs 6,100 crore. Currently, three-quarters of the enterprise pie is controlled by Tata Communications, Bharti Airtel, RCom, Tulip Telecom and BSNL.

While the enterprise segment is more profitable and enjoys a higher margin (8-10 percentage points) than retail, this could get tougher for incumbents if players like RIL use the relatively lower cost of setting up last-mile connectivity to tap this segment, especially that of SMEs. Though RIL reportedly has a captive fibre optic network, the company could also tie up with such players as RCom to offer end-to-end high bandwidth and high speed connectivity.

Impact on the retail sector
The current retail data services market is estimated at Rs 4,400 crore, which Crisil expects will grow at a compounded annual growth rate of 19 per cent to reach Rs 10,800 crore by 2014-15. RIL is eyeing this market because the current share of wireless broadband market, as a percentage of the 600 million subscribers, is in low single-digits.

The retail sector is currently dominated by CDMA players RCom and Tata Teleservices. The monthly average revenues per user on these services at about twice those recorded by the voice services are, thus, considered more profitable. HSBC estimates more competition from the WiMax players could see broadband tariffs drop about 15 per cent over the next two years.

The way ahead
While HSBC believes the telecom business will contribute less than five per cent to the overall earnings before interest, taxes, depreciation and amortisation (Ebitda) and two per cent at the earnings per share (EPS) level for RIL, analysts say the telecom entry strategy of the company is quite sound.

To ensure that it has back-end infrastructure, RIL may – in addition to leasing infrastructure — also look at buying into an existing player (given depressed prices due to price wars), which will not only give it a country-wide fibre optic back bone but will also allow it offer multiple services (3G, WiMax/LTE) — all under one roof.

If the 100-million subscriber base for the segment is achieved over the next seven years and if RIL can get a third of that market, analysts believe the wireless broadband business could add about $1 billion to the company’s operating profits. Among listed players, analysts say Tulip Telecom could be the worst affected from RIL’s entry, while the impact on Tata Communications would be less as it caters to large enterprises.

With a nationwide fibre optic base and stronger balance sheets, both Bharti and RCom are better placed than other players to face the challenge from WiMax players.