Indian Telecom Industry & Why It Appeals to the US Tech Giants?

India is the world’s 2nd largest telecom market with a subscriber base of 1.2 billion. A market with a size like this would be attractive to any investor! But, the sector has been burdened with steep debt, huge spectrum fees, and high regulation by the government. It also has one of the lowest ARPUs across the globe due to its highly competitive environment. 

But not everything is so gloomy. The industry is considered to be at an inflection point. This is due to the spike in demand by the consumers, especially after the pandemic- recent push due to work from home. Let us try and understand better...

What has happened? Consolidation!!!

Since Reliance Jio’s entry in 2016, the sector has seen immense changes and consolidation including:

• Aircel and Reliance Communications had to close down their operations
• Bharti Airtel acquired Tata Teleservices and Telenor 
• Vodafone and Idea merged to become Vodafone Idea 

A market that had 14 players in 2017 got consolidated to 4 in 2020. Jio, Airtel and Vodafone Idea are the trifecta that holds, in combination, 90% of the revenue share of the industry and 80% of its spectrum. Amongst them, Jio has become the largest player ever since it's launch in 2016. The fourth player in this competitive industry is the state-owned and rusty BSNL. 

In terms of subscribers, Jio is dominating at the top with 376.6 million. Vodafone Idea, Airtel and BSNL have 329.0, 328.2 and 119.2 million subscribers respectively as per TRAI (Jan 2020).

Market performance of the telecom industry

The telecom sector has underperformed in regards to the overall benchmark in the past 10 years. From Jun-01 2010 to Mar-24 2020 (before lockdown), Sensex has given a return of 61% compared to -9% by the Telecom sector and 57% by Bharti Airtel.

It is as if the lockdown has brought the telecom industry back to the limelight. Telecom services are now considered as a truly essential service in India. People have realized the importance of data and connectivity especially due to the work-from-home drive. The same is reflected in the market returns- 20% for Sensex while 32% and 36% for the Telecom sector and Bharti Airtel respectively. 

What’s next? 

1) ARPU recovery is the focus 

Airtel: 

• Clear revival: 104 in Dec 2019 quarter to 154 in Mar 2020 quarter
• Target: To achieve an ARPU of INR 200 in the short-term and 300 in the long term

Jio: 

• Jio has been able to increase its ARPU from INR 120 in 2019 to 131 in Mar 2020 quarter

2) Telcos’ conscious decision to lower the debt 

Jio: RIL is getting closer to become 0 net-debt company by FY21 (from INR 153,000 crores of net debt as on Dec 2019) 

• Jio Platforms has been able to raise staggering INR 97,900 crores in the past 2 months by diluting ~21% stake, providing an implied valuation of INR 4.9 trillion compared to Airtel’s market cap of INR 3.2 trillion
• The investors include Facebook, Silver Lake, Mubadala, Vista, General Atlantic, KKR and Abu Dhabi Investment Authority 
• With the recently concluded 53,000 crores right-issue and Aramco deal in the pipeline, RIL seems on track to achieve its goal

Airtel: Existing debt of INR 100,000 crores+ 

• There have been multiple efforts by the management to reduce the debt on the balance sheet
• Recent stake sale of 2.75% in May 2020 helped with the cash infusion of ~INR 7,600 crores

Vodafone Idea: Existing debt of INR 100,000 crores+

• Struggling to keep afloat, the company is actively looking for investments across the board

3) Increasing interest from the global tech giants in the Indian telcos 

• Google exploring an investment might give the much-needed push for a successful turnaround story for Vodafone Idea
• Reports of Amazon investing in Airtel might pose a good challenge to the Facebook-Jio combination
• According to the reports, Microsoft is also in talks to invest in Jio Platforms 

So, why are US tech giants or FAMG (Facebook, Amazon, Microsoft, and Google) showing interest in Indian telcos? 

It seems like India is the new battleground for the Big Tech players. The reasons for this interest in Indian telcos include: 

To get a strong foothold in one of the biggest consumer market

• Investing in the 300 million+ subscriber base telcos will definitely help the Big Tech to create synergies and cross-sell opportunities

To get access to the most prized asset- Consumer data

• By partnering with these telco players/data providers, the US giants get access to the new Oil (consumer data)! 

Renewed focus on e-commerce and e-payments 

• The Covid pandemic has shifted the focus to being digital - from commerce to education, everything is going online
• On the other hand, the online retail in India is also considered to be at an inflection point - increasing adoption by Indian consumers after the pandemic 
• For example, Facebook can foray into e-commerce with Reliance’s presence across the country and compete against Amazon and Flipkart! 

Ensuring market dominance 

• Amazon has invested more than USD 6 billion in the country and will not let go off its dominance in one of its key markets 

We all know that Reliance has been trying to transform into a consumer technology giant from an oil and petrochemical leader. It is trying to build Jio Platforms into a digital entity on the lines of Alphabet and Tencent. With the investment from Facebook, it really has opened up the doors for the FAMG to invest further and participate in one of the fastest-growing markets- India! 

Whether these investments go through or not, the strategy works or not- one thing is clear that this sector guarantees a lot of action in the coming months! Stay tuned...