Recent times have seen telecom stocks on the rise. This, despite the fact that telecom operators have been posting less than the greatest financial results. For instance, Airtel’s profit has been vastly reduced compared to earlier quarters and year-ago quarters, and Idea is already making losses.
With IUC being cut to 6 paise/min from October 1 onwards, things are not going to get any better for telecom operators in India. Many expect that Airtel would start posting losses in the coming quarters and Idea’s losses would deepen further. It is therefore surprising to see telecom stocks on the rise despite such a grim financial outlook. I am attaching the stock price movement of Airtel, Idea, and Jio (RIL) over the past one month below. I am also attaching the stock price of RIL in case of Jio because Jio is currently playing a major hand in determining the stock price movement of RIL.
As is evident above, all three stocks have soared in value over the past one month. This has happened in spite of the fact that Airtel, Jio and Idea are all expected to post losses for the coming quarter(s). So what is making these stocks soar in value? Are investors blindly pumping in money in these stocks or is there a bigger picture involved? The answer lies not in these figures but in the bigger picture .
The three phases of Indian telecom…and the coming fourth!
Indian telecom operators did not always post the grim figures they are posting now. There are primarily three phases of the Indian telecom sector from a financial perspective. The first phase was between 1995 and 2000, when telecom was sprouting up. Companies were still figuring out what would be the right strategy to approach telecom in India and the regulator was still figuring out how to regulate the sector. During this time, competition was low but Indian telecom operators were not yet making a lot of money as a considerable amount of money was being spent on setting up initial infrastructure, and mobile handsets were still a luxury.
The second phase of Indian telecom lasted from 2000-2007. During this time, Indian telecom operators were signing up millions of subscribers as handset prices had significantly declined and changes made to the NTP (National Telecom Policy) ensured rapid uptake of mobile telephony services in India. It was during this time that Indian telecom operators were making a lot of money and telecom became the poster boy of India’s economy.
The third phase which is ongoing will last till 2017, i.e., till the end of this year, in my opinion: 2007-2017. This phase was particularly bad for telecom operators from a financial perspective. The 2G scam dramatically increased the number of operators in India for a short span of time, which significantly increased competition as a result of which prices hit rock bottom, in turn leading to declining profitability. Meanwhile the 2010 3G spectrum auctions turned out to be so expensive and demand for 3G services was so low that even that turned out to be a dud. Things did become a little better for a brief period of time from 2013-2016 but then Jio entered the scene in September 2016.
The fourth phase in my opinion will start from 2018 onwards. In this phase telecom operators will once again make profits. But why, especially given that 2017 is closing on such a low note? Here’s my rationale.
India: a three operator telecom market now
If there is one thing Jio has managed to achieve in India during its one year of existence, it is consolidation. A number of weak operators in India have either exited the telecom market or merged with each other. As I pointed out in an earlier article on the Vodafone- Idea merger, competition in Indian telecom was always artificial. Not too many operators in India were actually capable of competing in the long run. This was not visible to investors initially but almost everyone can see the writing on the wall now.
Two events over this past month made investors realise that India will shape up to be a three player market. The first was Tata selling its wireless business to Airtel (practically for free) and the other was Rcom’s failed merger with Aircel. Now Rcom has already initiated shutting down parts of its 2G network and DTH business. I am certain that over time, Rcom will gradually shut down both its 2G and 3G networks and will simply become a MVNO riding on Jio’s network.
This leaves just five telecom operators in India – Aircel, BSNL+MTNL, Jio, Airtel and Voda+Idea. Of these five, everyone knows that BSNL+MTNL and Aircel do not have the financial prowess to launch a pan India 4G network. And this leaves just three telecom operators in India: Airtel, Jio and Idea + Voda. Investors understand this now which is why telecom stocks are soaring.
Fewer players = More pricing power
Telecom is a funny field in the sense that the addition or reduction of just one telecom operator can significantly alter the pricing dynamics of the industry. All over the world, three-player markets have enjoyed significantly better pricing power than markets with more players.
As it has become clear to investors that India will end up becoming a three player market in future, they are shoring up telecom stocks hoping for the improved pricing power to improve profitability. That does make sense.
Jio’s price increase – where’s the competition?
It has been a year since Jio started commercial services in India and now the telecom operator is slowly but surely going to start increasing prices for its services. In fact, that has already started happening to an extent. The latest data packs unveiled by Jio are definitely more expensive than the previous Dhan Dhana Dhan packs. And with close to 150 million subscribers, Jio may still look for more customers but will soon reach a stage where it would want to monetize its existing subscriber base instead of expanding it.
Jio’s increasing tariff plans would definitely help improve the ARPU of the industry as a whole as it would give much required breathing space to Airtel and Idea to increase their tariff plans as well. New competition is almost non-existent. Unlike the voice era where 5 MHz of spectrum was enough for a telecom operator to start services, data requires a lot more spectrum which India currently does not have. Also unlike the voice era, setting up a pan-India data network is far more expensive. Which is why I do not see any other company pouring close to USD 30 billion in Indian telecom anytime soon.
Those stocks will keep rising
The fact that Jio is going to continue increasing rates for its services and that India will mostly remain a three player market for the foreseeable future means that telecom operators in the long run are going to post profits. India’s subscriber base is massive and is perhaps only rivalled by China. This massive subscriber base means that any improvement in pricing power is bound to increase profits for telecom operators in the years to come.
China, like India, is a three player market and the largest telecom operator in China i.e. China Mobile, has posted a quarterly profit of USD 3.6 billion in the quarter ending March 2017. By comparison, India’s most profitable private company i.e. RIL posts just USD 1 billion approximately in net profit per quarter. If India can get even a fraction of the ARPU that China Mobile commands in an improved pricing power scenario, then Indian telecom operators are bound to post record profits for the years to come.