Telecom’s Brief Sunny Season Over, Back To Price Wars?
The bias toward telecom as an internet play as opposed to a ‘pipe’ suits Jio, and will cost its competitors, writes Niraj Shah.
Any investment is part numbers and part story. As Raamdeo Agrawal said in a BloombergQuint interview, he asks a promoter he meets, ‘kahaani kya hain?’ That the one who tells a better story tends to win. At times, the better story grabs such dominant attention that competition tends to suffer. Currently, in the Indian telecom space, there is one player playing the kahaani and the others are moving to that tune. Jio dhan dhana dhan? Airtel and Vodafone shareholders would disagree.
The recently-announced postpaid tariffs by Jio are just the latest version of its long-run price war. The idea that a Jio user will get used to paying Rs 400 a month for just connectivity, is wishful thinking. The Rs 400 will be paid because the user gets content worth that much and more. Jio knows this too, and which is why the attempt at this is not with offering Jio Cinema or some other non-headline making offering. As part of the bundle, Jio has chosen three of the most-watched OTT offerings in Netflix, Amazon Prime Video, and Disney+ Hotstar, and they surely come at a cost. It will cost the other two mobile operators when they try to match this, which I believe they will have to soon. The final impact, of any price war, is on profitability. Do note that Jio hasn’t price its offerings lower – so officially, it can’t be accused of predatory pricing. As has been the plan that Mukesh Ambani outlined in RIL’s 2015 AGM, Jio is offering more than just the connection pipe and time.
With its reinforced balance sheet, Jio can lay the siege and remain patient for long.
The most poignant thing from an Airtel shareholder’s perspective is that the narrative has changed considerably from just a few months back. From a narrative of a sector that was believed to be the most crucial cog in the wheel in a work-from-home environment and thus a net beneficiary with higher ARPUs and higher usage a given, the mood is now of a sector that is crucial but still with very high competitive intensity and the strongest player still baying for blood. It shows in the numbers.
The combined assumptions of higher ARPU and a duopoly market with strong service had proved to be irresistible back in May for an Airtel shareholder. In less than four months, not only has the ARPU jump not come but it seems that prices, directly or indirectly, may be on their way down. For the same Rs 399 and Rs 499, Vi and Airtel respectively now have to serve more bundled services... a quasi price cut. And it is has stayed a three-player market, even if the third is weakened one. Airtel enjoys the backing of a strong shareholder in SingTel, but it needs to whip up a story. Small acquisitions, press conferences on a platform having a cool apparel name but only serves as an alternative to Zoom, won’t help.
Globally, stock prices of pureplay telecom pipe companies are not exactly doing well for their shareholders. Verizon Communications has been flat since the start of 2019. China Mobile has only destroyed shareholder wealth since April 2015. Vodafone, which is currently trading at around 100 GBX, last traded at 300 GBX in January 2014, and since then has only headed lower. This is not to say that Bharti or Vodafone Idea will follow suit. What ails these global telcos isn’t the point of this piece, but any portfolio manager will tell you that the investment story has been tilted toward the internet businesses as opposed to the ‘connection pipe’ telecom businesses. This narrative suits Jio because it is, for all practical purposes, an internet stock. Because Reliance wants more customers in these times, it will and can afford to continue to be cutthroat in its pricing.
The healing from those cuts was to pan out this year. Now, does the pain continue?
My colleague Sajeet Manghat argues otherwise. He thinks that Jio’s postpaid content-bundled pricing is unlikely to impact Airtel and Vi because the postpaid segment seems much lower customer churn than pre-paid. He points out that Jio has had postpaid plans at Rs 199 a month for two years now. That is at a 60% discount to Airtel’s entry-level plan, and has not hurt Bharti. As Sajeet points out, Airtel’s subscribers in the postpaid segment have increased by half a million. Vodafone, now Vi, has had quality issues and marginal churn due to lower network capex, it still has more postpaid customers than Airtel.
Goldman Sachs’ most-recent note, makes the same point as Sajeet. ‘Despite Vodafone Idea having a c.15% lower 3G/4G customer base vs Bharti, its postpaid customer base continues to be significantly higher than that of Bharti (by c.50%). While we do expect continued erosion in Vodafone Idea’s market share, despite a weaker network vs peers, the company has largely held on to its customer base so far, reinforcing our view that this segment has very high customer stickiness.’ JPMorgan has retained its overweigh stance on Bharti - estimating that matching Jio’s bundling can impact FY21 EBIDTA by 1-6% for Bharti or Vodafone.
To Sajeet as well as Goldman, I ask – what happened to the higher ARPU and higher EBIDTA argument on which the entire bull-case was based on?
Lastly, the demand-supply technical factors. Back-of-the-envelope math done in June 2020 suggested that compared to the Nifty weightage of 14%, Reliance shares were only 6.32% of assets under management for mutual funds. Meanwhile, Bharti Airtel, with a Nifty weightage of 2.55%, was 2.62% of the mutual funds’ AUM. The comparison considers the overall AUM of funds because large caps and multi-cap funds would be the largest AUM funds. Because of the surge in the RIL share price, mutual funds not owning RIL with proportionate weightage have had issues in relative performance. Simultaneously, Bharti has been a marked underperformer. Therefore, it is technically unlikely that mutual funds would rush to buy Airtel and/or simultaneously sell Reliance.
Even if you don’t buy my argument, at least ask the first question posed in this article - kahaani kya hain? That could help you get some answers.
Niraj Shah is Markets Editor at BloombergQuint