Clear signals for Bharti Airtel, Reliance Jio: Dial into a future of growth

India’s telecommunications (telecom) scenario effectively constitutes a duopoly, with Reliance Jio (Jio) and Bharti Airtel (Airtel) holding a combined revenue market share of 78 per cent. The third private operator, Vodafone Idea (Vi), lags with 16 per cent, and Bharat Sanchar Nigam (BSNL) holds the rest.

Jio (460 million) and Airtel (376 million) boast 836 million subscribers.

Jio and Airtel are likely to pull further ahead. Both have already rolled out 5G networks and claim a combined 125 million 5G users. Vi is yet to roll out 5G, and BSNL has just started the 4G roll-out. Any subscriber upgrading from 2G is likely to migrate to one of the top two networks.

The duopoly has enabled the duo to hike tariffs, resulting in better average revenue per user (ARPU). Vi has also increased tariffs. Jio and Airtel also anticipate a decline in capital expenditure (capex) as they complete the 5G ramp-up.

The drive to go digital is strong, given policymakers’ focus on digitising most services, aside from entertainment.

India leads as the highest data consumption market globally, with a per-capita consumption of 25 gigabytes per month.

While there are long-term plans for Jio to be listed, as of now, it remains a Reliance Industries (RIL) subsidiary.

Airtel is a pure-play telecom service with a strong footprint in Africa and Sri Lanka. If Jio is listed at favourable multiples, Airtel will also receive a valuation boost.

Jio has deeper pockets due to the RIL balance sheet. Airtel has excelled in terms of capex management; it rolled out 5G much more affordably. Airtel has the highest ARPU, although Jio has a greater revenue market share (RMS) at 41 per cent.

There is a policy commitment to supporting Vi. The promoters have also been attempting to raise funding for capex and debt service.

However, the trend of migration to Jio and Airtel is likely to continue. Moreover, ARPU is expected to rise for several reasons.

The top two have more pricing power, and calculated tariff hikes are likely, with both aiming to achieve the Rs 300 mark ARPU as soon as possible.

Also, apart from Vi’s 200 million base, which is vulnerable to ‘poaching’, Airtel itself still has an estimated 130 million 2G voice-only subscribers likely to upgrade. Jio is targeting these through its net-enabled feature phone, but a fair number will also switch to low-end smartphones and stay with Airtel. Either way, ARPU will rise across companies.

Both Jio and Airtel are seeking new revenue streams by leveraging 5G networks and fixed wireless access. Both are promoting enterprise-level services. It’s challenging to assess in concrete terms, but it’s an upside that could accelerate revenue growth as 5G gains traction at the enterprise level.

Airtel has a more stretched balance sheet. However, net debt should start reducing this financial year (2023-24) after peaking at around Rs 1.35 trillion in 2022–23. Good free cash flow generation should bring it down to below Rs 90,000 crore by 2025–26 (FY26). Depreciation and amortisation (D&A) should also decrease, while earnings before interest, tax, depreciation, and amortisation (Ebitda) margins can be maintained. This would mean a steady rise in earnings and a higher return on capital employed.

Jio will see a longer runway to reducing D&A because of its higher capex, although it may generate higher Ebitda.

Some analysts are assuming roughly a 30 per cent rise in ARPU by FY26. By then, the duo should jointly be generating Rs 3.08 trillion in revenues with 40 per cent Ebitda margins and 82 per cent RMS. That’s a base-case scenario — an enterprise revenue pick-up and fixed wireless access penetration could drive it higher. So could greater RMS.