Telecom: Vodafone idea: when will it stop catching up with Jio, Airtel?

Customers line up outside the store of mobile network service provider Vodafone-Idea in Mumbai
Image: Punit Paranjpe / AFP

EEvery week, investors and stakeholders in Vodafone Idea (VI) seem to breathe a little easier when the debt-ridden company receives new lifelines. Once the fastest growing telecommunications company, VI has, over the past three years, lost subscribers and market share to Reliance’s Jio Platforms and rival Bharti Airtel (see graph).

In October, it was reported that the government is considering withdrawing its appeal on one-off spectrum charges against telecom operators, reducing litigation issues and amounts owed. For Bharti Airtel this means a reduction in liability of around Rs 8,400 crore and Rs 4,300 (check) crore for VI.

Then there was news of the continued expansion of VI’s 4G technology in circles in Andhra Pradesh and Telangana, followed by reports of the highest speeds in 5G trials in Maharashtra and the United States. Gujarat with vendors, expressing some commitment to next generation technology for subscribers. Jio and Airtel have carried out similar tests on their networks and are “ready for 5G”.

The management and promoters of VI have now begun to make forward-looking statements regarding its survival, finalize a business plan and seek fundraising from potential investors. Confidence comes from the fact that from now on, additional funds will go towards the company and not towards the reimbursement of the government. The government, through a massive bailout in September, gave companies a four-year moratorium on paying statutory contributions.

Once the moratorium is accepted, the telecommunications company will still have to pay government interest on the moratorium for four years. He has the option, after four years, to pay (convert) the amount of interest on contributions into equity, which will obviously improve cash flow. Guidelines for this option will be announced shortly.

“By announcing the relief measures, the government provided a lifeline and showed its support for the continued structure of the sector to three private operators,” said Kunal Vora, telecommunications analyst at BNP Paribas. “Now it is up to companies to raise the necessary funds to survive and develop their business. Previously, the money collected would have been used to pay government contributions; now the same goes for network investments which can help defend and increase market share.

Vodafone’s market share fell to 22%, almost half of what it was in fiscal 2017, losing ground in the subways. VI’s total adjusted gross income (AGR) stands at around Rs 50,400 crore, while Airtel’s is disputed at nearly Rs 26,000 crore.

No game changer

For VI, this package is a lifeline, but not a game-changer. Investors cheered when the bailout came in (VI stock jumped 27% on September 15), but soon after (up 1.77% since). Indeed, the short and long term problems are still not resolved for the company.

On the ground, VI must determine which of its 255 million subscribers should be protected from poaching by Jio or Airtel. “Its 150 million 2G customer base is under attack; Airtel and Jio constantly nibble on her. VI can potentially focus on high-end 2G customers and move them quickly to 4G, ”said former Bharti Airtel CEO Sanjay Kapoor, who is now a TMT entrepreneur and consultant advising various telecommunications companies.

The rest of the low-end 2G subscribers may stay or some will go to Airtel and Jio. VI should continue to consolidate its presence in the circles where it is a leader and not inject money where they are lagging behind. “He will have to take advantage of his strengths and make difficult strategic choices,” Kapoor adds. In the wireless subscriber market, Jio has a 37.3% market share, Airtel 29.8%, VI 22.9%, BSNL 9.6% and MTNL 0.28%, according to September data from the Telecommunications Regulatory Authority of India (Trai).

The market share is a function of the number of subscribers and the average monthly revenue per user (Arpu). As with most calamities that affect a particular population, there is a tipping point here. Analysts argue that if VI continues to lose market share to around 17-18 percent, going back from there will be very difficult.

VI operates in the 22 circles (which it has grouped into clusters) of which in 16 circles it has double-digit market share while in the other six it has single-digit market share. It is the market leader in the Kerala circle, according to data from BNP Paribas. VI management refused to speak to Forbes India despite repeated attempts.

While traditionally a more powerful voice calling provider, VI competes more closely for data through its broadband business, particularly the offerings it offers through a subsidiary called “You Broadband,” a provider of broadband. internet services. It now competes aggressively with rivals AirtelXStream, BSNL Bharat Fiber and JioFiber by offering annual broadband plans with unlimited data in around 22 cities, mostly in western and southern India.

Before VI plans its competitive strategy for 5G, it needs to start investing more in the 4G network. Estimates suggest Airtel invests twice in capital expenditure than what VI invests in 4G since 2019.

Fresh capital required

VI CEO Ravinder Takkar spoke positively about a fundraising plan and the interest of potential investors. But the truth is that no commitment has come from the existing promoters, Vodafone Group and Aditya Birla Group, on the injection of fresh capital into the business. This is the most critical part that could decide the long term future of VI.

VI likely only has one window in the current quarter (October to December) to finalize a fundraising plan, as talks have been unsuccessful for months to raise around Rs 25,000 crore. . VI management has often spoken about how investor confidence will rise once Arpus starts to rise, but they may not have the freedom to wait for this given that it needs capital. to compete on the customer experience, invest in the network, repay debt [Rs 1.9 lakh crore] and renew bank guarantees.

But a new investor has to take a lot of risk to invest, since contributions must be repaid with interest. The commitment, in capital and in vision, will have to be real, so that the investor has the capacity to inject money even after the moratorium towards new technologies.

VI non-executive chairman Himanshu Kapania told shareholders at the annual general meeting on September 29 that the company “is talking to other stakeholders and once the board has given its approval “, they would come back to the shareholders on the exact need for financing in the future. “If the funding doesn’t come, we envision an accelerated decline for Vodafone Idea,” said an analyst from a local research firm, declining to be named.

Pay more for better connectivity

VI has seen a steady decline in Arpus since March 2020, while Bharti Airtel has seen a steady increase since then and Jio’s fare has remained stable. The dilemma for VI is whether it should take the risk of increasing tariffs and losing some subscribers. Kapoor thinks the risk is worth taking. “They can grow small, but beautiful,” he says.

After the pandemic, subscribers, at least in the subways, don’t see paying for better connectivity a major concern. “No one denies the need for roti, kapda, makaan and connectivity – the top three have come down Maslow’s hierarchy,” Kapoor said. In the pandemic world, a makaan (house) without broadband connectivity is unnecessary because a person has to work from home, entertain and educate their family, or shop online. “Why wouldn’t the customer be willing to pay more, given that he was willing to pay a few years ago when the rates were higher and broadband wasn’t as fast? Kapoor asks. The Arpus were around Rs 200 in 2015-2016, compared to Rs 150 on average currently.

Bharti Airtel has fortified its postpaid and high-end base with brand-loyal customers, so it shouldn’t worry about the rate hike. Jio is the market leader; its ability to increase prices depends on its aspiration to dominate market share. He can decide to switch from the price to the premium experience at any time. Therefore, for Jio or Airtel, raising prices would further increase EBITDA while VI will need higher prices to survive.

“For Vodafone Idea, its aspiration to be a third competitive player with its current record seems utopian to me. It could be a third player, but a distant third player, ”Kapoor explains.

“In the future, I expect to see a much higher Arpus for the industry, which will improve business operations. Vodafone Idea, which has value in its business activity, must start monetizing its assets in the coming years to help start spending investments towards 5G, “said Sanchit Vir Gogia, Founder and CEO of Greyhound Research, a digital and technology research and consulting firm. Kapoor and Vora also agree that Arpus will continue to grow in the years to come, which will boost cash flow for telecom operators.

The government has done enough to create a structure that allows three (or more) actors to exist and breathe. The current telecommunications service industry in India was a hyper competitive market until the beginning of this decade. Mergers, exits and sales took place, which led to it becoming an oligopoly. Now the industry runs the risk of turning into a duopoly. But experts say that in addition to being a large market, tower manufacturing companies, content creation companies, and digital service platforms have all crafted their business models and established themselves in an oligopoly.

“India’s telecommunications industry needs more than a duopoly,” says Gogia. “If it becomes a duopoly, then the customer will suffer,” Kapoor adds.

Much of the negativity and nervousness surrounding VI’s future is due to the delay in raising capital. If the two groups of promoters change their minds or if private equity players or tech giants decide to invest in VI, the concerns would disappear. But if the funds don’t come quickly, VI may tire of catching up with Jio and Airtel.

Disclaimer: Reliance Industries is the owner of Network 18, the publisher of Forbes India

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