The competition is likely to intensify despite consolidation in telecom sector
ET Intelligence Group: Idea Cellular’s stock has gained 54% since the announcement of merger talk with Vodafone India on January 30. Over the past 12 months until the announcement, it had fallen sharply out of favour as investors were jittery over the intense competition from Reliance Jio. Though the merger news has boosted the stock back to near 52-week high, sustaining the gain will not be easy since the competition is expected to remain steep given the aggressive tariff plans of Jio.
On a successful merger, the combined entity will have 39% share of the country’s total active mobile subscriber base of 98.8 crore considering the December 2016 data released by the Telecom Regulatory Authority of India (TRAI). This will be significantly greater than the 26% share of Bharti Airtel which is the current market leader.
According to TRAI’s data on the sector’s adjusted gross revenue (AGR) for the 12 months to September 2016, the merged entity will have 40.5% AGR share. This compares with Bharti’s 30.9% share. The merger synergies will also improve operating margin before depreciation (EBITDA margins). In the first half of FY17, Vodafone reported 29.6% margin, while Idea had a margin of 31.5%. “The (merged) entity can drive significant benefits from synergies leading to 420820bps improvement in EBITDA margins,” mentioned Edelweiss Securities in a report. However, the merged company will continue to face competition despite consolidation in the sec- tor. Jio, for instance, has announced aggressive tariff plans. “We expect RJio to maintain lowerthan-incumbents’ prices. This is likely to lead to further pressure on realisation and subscriber acquisition costs,” said Edelweiss in another report.
A lot will depend upon the effectiveness of Jio’s tariff plans in retaining the current user base. The company recently announced that it acquired 100 million users. However, ICICI Securities highlighted in a report that Jio’s active user base as a percentage of total subscriber base fell to 80% in December 2016 from 94% in October 2016. The proportion was above 95% for the top telcos including Bharti, Vodafone, and Idea.
Idea and Vodafone also need to figure out a way to reduce the combined revenue market share in six circles below 50% to abide by the regulations, which will impact its market share. These factors increase uncertainty about the revenue and profit growth rate in the coming quarters thereby limiting the scope for further increase in Idea’s stock price.