2020 started with a crippling blow to two of India’s top telecom operators Airtel and Vodafone-Idea (VIL). The Supreme Court gave its verdict on the long-standing AGR dues. Both Airtel and VIL found themselves cornered as they had to pay thousands of crores almost immediately to the Indian government. A few were convinced VIL would go out of business soon and the market could become a duopoly. But, the immediate coronavirus-led lockdown entirely changed the industry’s future. VIL and Airtel stocks have started to bounce back while the rest of the market continues to remain under pressure.
The lockdown strengthened the wireless communications industry
- Obviously, with lakhs of people working from home, internet connectivity became essential. Not all households have WiFi or wired connections today because, over the years, people have gotten used to mobile data. Even if one had it, many prefer to have mobile data handy as a backup in case of an outage. Directly increasing the demand for telecom operators.
- With mandatory quarantine and ongoing restrictions, television and the internet are prime sources of entertainment. The rise in streaming initially was so high, streaming companies like Netflix, Prime Video, and even YouTube had to reduce video quality mandatorily. These restrictions are still in place. According to Netflix, an hour of standard definition video uses about 1GB of data, while HD can use up to 3GB an hour. This also means the general average for data consumption per connection has gone up.
- According to OpenSignal, India has 688 million users, of which a mere 22.3 million have access to a wired connection. COAI, India’s telecom industry-body, says, mobile data has seen a massive 70% rise since the lockdown began. The country’s population is mobile-first, and this has directly helped telcos improve their ARPU. With decent 4G coverage, Airtel and VIL have gradually reduced dependence on older standards of wireless communication. The move to VoLTE and VoWiFi has been an instant boon in reducing operational cost.
- Furthermore, telecom equipment giant Ericsson said the average time spent on 4G increased by one hour globally, while the same shot up by 2.2 hours per day in India. It’s clear that Indians are consuming more content (data) than ever, and telcos have taken full advantage of this period.
- The industry unanimously decided to hike tariff in December and control cash burn. The results are clearly evident in Airtel’s Q4 financial results that were recently announced. Its ARPU increased to Rs 154 from Rs 135 in the previous quarter. Still, the lockdown means Airtel couldn’t acquire new customers during the lockdown. While the country is now gradually opening up, restrictions still remain in place, and people are discouraged from venturing out unless absolutely necessary.
- However, the lockdown acted like a tourniquet for VIL. The company was losing customers in hoards because of its precarious financial situations, rumours about bankruptcy, and poor service offering due to a cash crunch. Going by the most recently available numbers from the Telecom Regulatory Authority of India (TRAI), it lost 3.64 crore and 36.4 lakh subscribers in November and December, respectively. In the last 11 months, it lost 75 lakh subscribers.
- But the lockdown played to its benefit. It stopped bleeding customers during the lockdown. This gave the company some buffer time to improve its quality offering, raise capital, and calibrate strategy.
Jio Platforms stake sale ignited a fresh storm of investments:
- In a bid to go completely debt-free, Mukesh Ambani’s Reliance Industries (RIL) started selling its stake in Jio Platforms (includes Jio wireless telco services, apps, content, enterprise offerings, as well as Den and Hathway). Before the lockdown, RIL was the sole stakeholder. But soon, RIL attracted investments upwards of US$ 10 billion in just a month from investors like Facebook, KKR & Company, Silver Lake, Vista Equity Partners and General Atlantic.
- Facebook acquired a 9.99% stake in Jio Platforms, and within no time, the two companies announced the launch of JioMart with WhatsApp Business integration. If we look deeper, Jio isn’t just about providing internet connections. It’s also about delivering other end-to-end services like streaming, gaming, shopping, and more. With this macro point of view, India’s telecom market now looks extremely lucrative with a user base of hundreds of millions of people.
- Reports have suggested that even Microsoft is keen on scooping up a tiny piece of Jio Platforms. The American tech giant already is working with Jio to bring its cloud gaming solution to India. Furthermore, Abu Dhabi-based sovereign fund Mubadala Investment is in talks for a potential investment of about $1 billion in Jio Platforms.
- If so many investors are bullish about the Indian telecom market, the ripple effects will not just be limited to one company. An early report by Financial Times said that Google is interested in grabbing 5% stake in VIL. The telco later said in a press statement that “currently there is no proposal as reported by the media.” But we won’t be stunned to see a new foreign investor, particularly a tech company, step in and change the fate of the beleaguered company. Google will be a good fit for Vodafone Idea considering it’s biggest rival in the digital advertising space, Facebook Facebook now has a big minority stake in Reliance Jio which is the biggest player in the Indian telecommunications space.
- From an investors point of view, VIL is at significantly lower valuation due to debt but sitting on a vast pile of subscribers that can pay off in the longer run. Airtel is also raising capital and preparing its war chest. Leading promoter Bharti Airtel will sell $1 billion worth of stake in the mobile operator through a block deal.
How did we reach here
- 2020 started with a crippling blow to two of India’s top telecom operators Airtel and VIL. The Supreme Court gave its verdict on the long-standing AGR dues. Both Airtel and VIL found themselves cornered as they had to pay thousands of crores almost immediately to the Indian government. They instead had hoped for a major financial reprieve. Why? All this while, their operations were barely generating a profit, with their debt piling, and investors being increasingly sceptical, things were grim for two of India’s largest telecom operators.
- The Government of India (GoI) was expecting a huge sum of more than Rs 92,000 crore in total collection via the AGR judgement. Even 2019 was a very turbulent year for telcos, and they had to beg the government for a moratorium on spectrum charges. Thankfully, this request was granted, providing some breathing space for companies to operate.
- India has the lowest ARPU (average revenue per user) in the wireless telecom space while providing high data bandwidth. Since its launch, Jio’s competitive pricing drew other players in an unsustainable tariff war. This had a cascading effect on its rivals. Airtel accumulated a lot of debt while Vodafone and Idea merged since they couldn’t take on Jio’s offering individually. According to its FY19 filing, VIL has more than 1 lakh crore in debt and just Rs 678 crore in cash equivalents. Many expected VIL could go bankrupt and cease operations since Vodafone, one of the leading promoters, had said it wouldn’t pump any more money in the venture. But it seems like the lockdown has stemmed the tide in its favor.
- However, coronavirus wreaked havoc across the globe and India decided to impose an indefinite lockdown from mid-March. Instantly, lakhs of white-collar employees were expected to work from home thanks to the Internet. While the lockdown meant that industries like aviation, hospitality, and manufacturing were dead in the water, it turned out to be a blessing in disguise for the telecom industry.
Considering the current market dynamics and the unpredictability of the pandemic, it’s safe to assume that India’s wireless data demand isn’t going to reduce anytime soon. With a direct shift to the work-from-home model, the telcos are better placed in terms of cash flow and won’t be affected like other industries.
This time around, the telcos aren’t wholly about offering data services. Jio has made it clear that it’ll take a lot more to survive and expand in the Internet age. With technology companies eyeing an entry in the sector, the fundamentals are gradually changing.