The com­pe­ti­tion is likely to in­ten­sify de­spite con­sol­i­da­tion in tele­com sec­tor

The Economic Times - - Markets: Beating Volatility - Ran­jit.Shinde@ times­

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.

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