How Airtel investment strategy and spectrum help in taking on Jio

3G 4G capable spectrum per circleManish Adukia and Piyush Mubayi of Goldman Sachs said investment in Capex (capital expenditure) by Airtel will be more than that of Vodafone and Idea Cellular in coming years.

A recent research report from Goldman Sachs analyzed Airtel’s network investment in 3G and 4G networks. The report notes that investment strategies drafted by Airtel India CEO Gopal Vittal can take on Mukesh Ambani-promoted Reliance Jio.

Bharti Airtel’s Capex related investment in mobile data network has been significantly ahead of peers excluding Reliance Jio, and the company is well-positioned to defend wireless market share from Jio, investment firm Goldman Sachs says.
Airtel 4G coverage forecastBharti Airtel’s revenue growth will be ~300 bps faster vs Vodafone/Idea Cellular, and more than 10 percentage points higher vs other smaller telecoms. This will be driven by Bharti Airtel’s higher investment in Capex, which over next two years is likely to be as much as that of all other telecoms (ex Jio) put together.

Bharti Airtel’s Capex will stay elevated in the near term, with its India Capex to sales averaging around 20 percent for the next 3 years, as Bharti Airtel tries to catch up with Jio on 4G network rollout.
Airtel capex forecastWith Jio targeting 99 percent population coverage over the next 12 months from current 80 percent, Jio’s 4G coverage is likely to have some lead over Airtel’s, but expect Airtel’s lag will be of not more than a year on wireless broadband tower rollout.

Jio grows faster than Airtel

Jio launched services in September 2016, and has garnered more than 50 percent share of 4G smartphones in the country.

Jio has spent almost $25 billion over the last 4-5 years to build a 4G only network; this coupled with its aggressive entry strategy of offering free voice and data services has helped the company unseat Bharti as the market leader in wireless broadband subscribers, with 36 percent share of SIM cards as of May 2017.
Airtel Revenue market shareWireless revenue growth for incumbents have seen a double digit decline in the last two quarters, as they responded to Jio by lowering pricing, in some cases by as much as 90 percent. However, in this declining market, Bharti has been increasing its revenue market share, which at 34.1 percent as of March 2017 – is at an all-time high.

Jio impact on smaller telecoms

Smaller telecoms, who had 24 percent revenue market share as of FY17, have been most impacted by Jio’s launch, with revenue for these telecoms declining by ~20 percent over 2 quarters through March 2017, vs. ~10 percent decline for the top 3 telecoms like Bharti Airtel, Vodafone and Idea Cellular.

Since Jio launch, smaller telecoms have lost 40 million subscribers, while the top 3 telecoms have added an almost equal number of subscribers. This market share loss for smaller telecoms has been driven by their very limited data networks and narrowing of their price gap with incumbents.
Drop in telecom operator revenue India
The above chart indicates about the drop in revenue of Indian telecoms.

Smaller telecoms have about 12 MHz of 3G / 4G capable spectrum (liberalized spectrum) in each service area, compared to ~50 MHz per service area for Bharti and Jio. A sizeable portion of this spectrum for these smaller telecoms is tied up in legacy 2G services.

In addition, all these telecoms have levered balance sheets, with net debt-to-EBITDA close to 10x or more as of FY17; this has translated into inability to invest in new network rollout, irrespective of their 3G / 4G spectrum holding.

3G fades

With the launch of Jio, the 3G ecosystem in India is set for a rapid decline; almost 100 percent of smartphones now shipped in the country are 4G enabled, and with 4G speeds significantly better vs 3G (~10x higher), customers are increasingly likely to shun 3G networks and move to 4G.

Any high-speed data network that these smaller telecoms have is largely based on 3G technology, and with this accelerated shift towards 4G, market share for smaller telecoms is likely to come under even more pressure. Revenue market share for these telecoms will decline to 11.5 percent by FY21 vs. 24.2 percent in FY17.

Jio waits for 4G phones

Jio’s network is 4G only; this means a customer needs to have a 4G handset to use Jio services. As of June 2017, just about 20 percent of all mobile handsets in India support 4G. With almost all new smartphones shipped in India now supporting 4G, the existing 3G smartphone base of ~160 million will likely convert to 4G over the next 3 years.

These smartphone users, which comprise ~40 percent of (unique) industry subscribers, make up ~60 percent- 65 percent of the industry revenue pool. Jio’s aggressive pricing has directly or indirectly already impacted this fairly large revenue pool of the industry, with incumbents responding by lowering ARPU for these smartphone users in a bid to retain them.

While Bharti Airtel posted 9 percent decline in ARPU during each of Q3 FY 2017 and Q4 FY 017, Airtel started seeing stability in Q1 FY 2018, with largely stable ARPU (2 percent q-o-q decline), and an uptick in wireless broadband subscriber additions.

Goldman Sachs forecast a 1 percent q-o-q revenue growth for Bharti Airtel’s India wireless business in Q2 FY 2018 vs. 0.4 percent drop in Q1, which would have been ~3 percent excluding impact due to implementation of GST (Goods and Services Tax).

The launch of cheap VoLTE phones will help expand the data market, benefiting all operators that have a solid data network in place, notably Bharti Airtel and Jio. However, telecoms that do not have pan India 4G coverage could experience a loss of subscribers as 2G feature phones are replaced by 4G feature phones over time.