Hello, what’s up with telecom?

Plenty, since the sector is a battle arena where only the fittest will survive. We screen the key players through four key parameters to show you where they stand



The Indian telecom sector is in deep churn. Reliance Jio is the latest to set off fresh waves of competition, with the launch of its 4G services, even as the listed telecom companies in the fray battle high debt, pricing pressures and declining revenue.

Bharti Airtel, one of the largest players in the industry, has reported declining profits since December 2016. In the recent June quarter of 2017, the company saw a profit decline of 75 per cent compared to the same period last year.

Idea Cellular has reported losses since December 2016. For the June quarter of FY18, it posted a loss of ₹815 crore, as against profit of ₹220 crore last June.

However, not all is doom and gloom, there is a silver lining too. Given the intense competition, companies have improved the quality of services and access to internet. With the smartphone market adapting to 4G or LTE (Long Term Evolution) services, data consumption is likely to increase.

Also, the Centre’s digitisation push with initiatives such as Digital India, e-wallets and smart city projects will help increase mobile internet penetration, which can boost the prospects of these companies.

Here’s taking a look at the telecom scene through four key parameters that will determine the fortunes of the key players.

Spectrum availability

Spectrum is the life blood of telecom companies. The more spectrum it holds, the better for a telecom company. The Centre resolved the issue of spectrum scarcity in the auction conducted last October by releasing 2,354.55 MHz airwaves for sale — the largest spectrum auction in the country.

Presently, Bharti Airtel holds the most spectrum in the market at 1,160 MHz. This is spread across 1,800, 900, 2,100 and 2,300 MHz, thus placing it in a strong position to provide both voice and data services. It has also acquired spectrum in all the 22 circles in India due to which it is able to offer 2G, 3G and 4G services across the country.

With the acquisition of Tikona Networks’ 4G business, Bharti Airtel acquired spectrum in 2,300 MHz band, which was used to expand its 4G footprint in States where it did not have adequate presence. Bharti also has some unused spectrum which will help in launching LTE services.

Reliance Jio comes second, with 840 MHz of spectrum. While other players are slowly expanding their 4G presence, RJio has pan-India 4G and LTE services offering, thanks to its spectrum sharing arrangement with Reliance Communication. Reliance Communication holds 268 MHz of spectrum in 18 circles.

Other major players in the market are Vodafone and Idea. As a merged entity, they would have the highest spectrum portfolio in the market. However, as they await approval, individually, the companies now hold 580 MHz and 540 MHz, respectively. Both companies are yet to expand their 4G footprint pan-India.

Though the companies have filled their spectrum inadequacies, they have spent a huge amount of money for the purchase of spectrum.

This is mainly due to the costly pricing of Sub 1 (less than 1,000 MHz) bands. The lower bands have better clarity level and greater range. These bands are considered the most efficient in terms of the distance the signal can be carried and the ability to penetrate solid objects. The infrastructure cost for laying the network is also lower when Sub 1 bands are used.

However, not all players have Sub 1 bands. Reliance Communication is the leader in 800 MHz band, with nearly 112 MHz spectrum, followed by Reliance Jio which holds about 95 MHz. On the other hand, in 900 MHz band, Bharti Airtel holds the highest level with over 121 MHz spectrum followed by Vodafone and Idea with 83 MHz and 59 MHz, respectively.

Telecom players have fortified their spectrum portfolio to meet the surging data demand in the years to come. However, Bharti Airtel and Reliance Jio are better placed in spectrum availability in Sub 1 MHz bands.

Presence in data services

The launch of Reliance Jio’s 4G services (voice and data) has increased mobile data traffic about 70 per cent between June 2016 and June 2017, according to the Ericsson Mobility Report, June 2017. In India, nearly 95 per cent of internet subscription comes from mobile wireless devices. Given that telecom players are loaded with spectrum, they are battling to provide the fastest mobile internet connection and retain market share.

As of March 2017, Reliance Jio reported 28.3 million data customers and commanded the highest internet market share of 26 per cent (in terms of customer base), followed by Bharti Airtel with 20 per cent. Vodafone and Idea hold customer market share of 15 per cent and 10 per cent, respectively, in the same period.

Bharti Airtel has registered over 45 per cent increase in data usage per customer in the June 2017 quarter, with increase of 19 per cent in data subscribers compared to the same period last year.

On the other hand, for Idea Cellular, though the data subscriber base has declined 22 per cent, data usage has increased tremendously, from 674 MB (megabyte) last year to 2,204 MB in the June 2017 quarter.

In terms of 4G download speed, Bharti Airtel provides the fastest internet connectivity, according to an OpenSignal report, at 11.53 Mbps (megabits per second) when compared to its peers. Idea offers 8.3 Mbps and Reliance Jio, only 3.9 Mbps of internet speed. However, Jio leads in 4G network availability — about 92 per cent of the time — while other players barely crossed 60 per cent (4G) availability.

Data consumption has increased 24 times in the last five fiscals and players had to invest huge sums in network infrastructure to improve capacity and provide better connectivity. To survive in the competitive market, reductions in tariffs were inevitable.

Though data consumption has increased, the penetration of data is still low, which explains the higher data ARPU, over voice. For instance, Bharti Airtel’s data ARPU stands at ₹156 for the June quarter FY18 and voice ARPU for the same period at ₹111.

However, ARPU in both data and voice are down from ₹202 and ₹139, respectively, when compared to the same period last year. For Idea, data ARPU fell from ₹142 in the June quarter of FY17 to ₹119 in the quarter ended June 2017, the voice for the same period fell from ₹130 to ₹108.

Thus, Bharti Airtel leads in data speed in India and usage. It also leads when it comes to data and voice ARPU. With ample spectrum availability, the company will be able to roll out new services such as 5G or LTE in the future.

The pace of decline in data and voice ARPUs could be lower, going forward, as Reliance Jio has started charging its customers for its services.

Consolidation

Consolidation in the Indian telecom industry has become inevitable following the entry of Reliance Jio.

The proposed merger of Idea and Vodafone will catapult the combined entity to the number one slot. This entity will have 40 per cent market share in revenue terms and 35 per cent of the customer base.

The spectrum holding of the combined entity, expected at 1,850 MHz, should ensure better connectivity, stronger spectrum footprint in all the circles and wider customer reach.

Similarly, Bharti Airtel, to retain its competitive position in the market, has acquired Tikona Network’s 4G business at ₹1,600 crore. Through this acquisition Bharti Airtel will strengthen its spectrum in 2,300 MHz band across India and strengthen its 4G services in all the 22 circles.

It has also acquired Augere Wireless, which holds 20 MHz of spectrum in the 2,300 MHz band, according to ICRA. Further, the company has entered into spectrum trading agreement with Aircel Ltd (for 2,300 MHz band) and Videocon Telecom (for 1,800 MHz band) for ₹3,500 crore and ₹4,428 crore, respectively as per data from ICRA. This will enable Bharti to provide fast and reliable connectivity.

Reliance Communication, another listed player in the industry, has also entered into agreements where the wireless business of Sistema Shyam Teleservices Limited (SSTL) carried on in India under MTS brand will be de-merged into Reliance Communication.

Reliance Communication has also entered into an agreement for de-merging its wireless business into Aircel Limited. The combined company set to become the third largest player in the industry. However, the company is awaiting approval for both its agreements.

These mergers will help the company gain spectrum and ensure roll-out of future services given the existing infrastructure.

Reliance Communications and Reliance Jio have also entered into a partnership agreement where the companies share towers, optic fibre, infrastructure and spectrum. These arrangements will facilitate Reliance Communication's access to Reliance Jio’s 4G and LTE services.

Simultaneously, Reliance Jio will benefit from access to the entire portfolio of 800-850 MHz spectrum band in all 22 circles. This deal favours both companies in expanding customer reach and launching new services.

Thus, the three largest companies will dominate the telecom industry in customer market share, with Idea-Vodafone in the lead with 35 per cent, followed by Bharti Airtel with 29 per cent and Reliance-Aircel entity with nearly 16 per cent.

Debt do them part

The Indian telecom sector has an estimated total outstanding debt of around ₹40,000 crore as of fiscal 2017 according to CRISIL. Nearly 35 per cent of the total debt is towards instalment payment of spectrum purchases and huge investments have been made to survive in the competitive environment.

Over the past decade, the operators have committed investments worth ₹8-8.5 lakh crore towards spectrum and network infrastructure, according to CRISIL.

Player-wise, Bharti Airtel’s debt equity ratio has remained flat at about 1 times since FY15. But the company’s interest cover has come down to 1.8 times for FY17 from 2.5 times in FY16.

However, in the case of Idea Cellular, the debt equity ratio is about 2 times for FY17 up from 1.6 times in FY16. The interest coverage ratio has also declined from 3.2 times in FY16 to 0.7 times in FY17. Reliance Communication also has a high debt. The interest coverage ratio is (negative 0.6 times) lowest among all its peers and the debt equity ratio stands at 1.1 times for FY 17.

Though Bharti Airtel is able to manage its finance costs and liabilities better than its peers, high debt has crippled the telecom industry. The players have resorted to different strategies to reduce the burden of debt and improve cash flow.

Some have sold off their tower assets or stake in tower companies. For instance, Bharti Airtel has sold its 10.3 per cent stake in Bharti Infratel, Vodafone and Idea are also planning on selling their tower assets post-merger. Spectrum sharing and trading agreement is yet another strategy used by the telecom players to improve cash flow.

Read the rest of this article by Signing up for Portfolio.It's completely free!

What You'll Get





MORE FROM BUSINESSLINE


 Getting recommendations just for you...
This article is closed for comments.
Please Email the Editor