COMPANIES
Airtel faces challenging year as Jio keeps up pressure
The next 12 months will be challenging for Bharti Airtel, as the pricing assault by Reliance Jio continues unabated. Airtel has beaten Street estimates that it would make a loss in the March quarter, but its profits are down substantially.
Jio has three advantages over Airtel. It has a brand new 4G network with a far lower operating cost and Jio can play the pricing game much more effectively without a squeeze on its margins. It wants to grab a 40 per cent revenue share, up from the 15 per cent it has now. Also, Reliance Industries can leverage its profits from its oil and gas business to raise debt at low interest. And if Reliance Jio goes in for an IPO, it could substantially deleverage the parent company.
Airtel is concentrating on neutralising Jio’s first two advantages. It is investing over ~240 billion this financial year to upgrade its network to 4G LTE and VOLTE, which is in the trial stages in various metros. This comes on top of an investment of ~160 billion last year.
However, most analysts expect that it will take Airtel 12 months before it can increase its 4G coverage from 66 per cent — as determined by OpenSignal, a research company — to come close to Jio, which is at 96 per cent.
That will help Airtel in closing the gap in cost of producing minutes. But this investment will not lead to substantial incremental revenues. It will only help Airtel retain customers by upgrading subscribers on its 2G and 3G networks to 4G.
Airtel has already announced that it will fold up its 3G network in two years, though it will still have to maintain its 2G play until all its customers graduate to the new technology. So there will always be a slight difference in the cost of operations with Jio.
The second weapon that Jio has unleashed is rock bottom tariffs, coupled with feature phones for free. Rivals had assumed that the initial offer would be limited to the first three or six months and Jio would also have to raise tariffs to sustain business. Instead of matching them, they went to the regulator seeking action against what they considered predatory pricing. But the Telecom Regulatory Authority of India refused to intervene, and Jio continued with its aggressive pricing even after March 31, 2016.
Realising that Jio was not going to bring down its tariffs, Airtel has been able to close the pricing gap, even if that meant an erosion of margins. “With Jio planning an IPO, the pricing pressure will continue for 12-18 months as it will want to grab a larger share of the revenues before that,” says a telecom watcher.
It is a matter of debate whether Airtel could have upgraded its network earlier. But to be fair to Airtel, most of Jio’s customers have migrated from smaller players, especially the ones that have shut down. Airtel has been able to retain its subscriber base by and large.
Airtel, with a net debt to EBIDTA of just under 3, has the leeway to borrow more money to take on Jio. Last month, it approved a plan to raise ~165 billion through a combination of overseas bonds and non-convertible debentures.
It can also raise substantial sums by monetising its stakes in Bharti Infratel and Indus Towers. By conservative estimates, it can raise over $5 billion by selling its 42 per cent stake in Indus Towers. It has already raised ~130 billion by reducing its stake in Bharti Infratel, in which it still has an over 50 per cent stake.
Observers say Airtel also has other key advantages. It has a vibrant 4G network, and according to OpenSignal, has download speeds that are faster than those of Jio, which one competing telco has disputed. It also has consumer insights that Jio may take long to acquire.