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MOSL: TELECOM-Changing market construct; Bharti, RJio to see exponential benefit

TELECOM: Changing market construct; Bharti, RJio to see exponential benefit

 

The Telecom industry is on the cusp of a major change in market construct, which could have significant repercussions. In this note, we discuss VIL’s immediate liquidity requirements, probable alternatives, and the potential benefit for Bharti/RJio.

 Large subscriber pool up for grabs

India’s large Telecom market, which was once serviced by over 10–12 players, is now operated by just 4 players, with the Top 2 accounting for over 70% of the market. Amid the concerns over VIL’s survival, RJio and BHARTI could gain disproportionately – VIL has a significant ~25% market share (255.4m subscribers), which provides the two telecom giants the opportunity to capture a large pool of subscribers. While it has been a known fact for the last 2–3 years that the competition is deteriorating, the moment of truth is now in front of us, with large repayments coming up over the next 6–9 months. This could potentially offer incremental revenue/EBITDA of INR177b/INR89b (16%/18% growth) for Bharti and INR177b/INR89b (23%/23% growth) for RJio for FY22. Thus, while a tariff hike is keenly awaited to achieve profitability in the sector, the big market share gain opportunity could effectively imply gains equivalent to a 19% tariff hike on the EBITDA growth opportunity. In the last five quarters (4QFY20-1QFY22), VIL’s market share loss has resulted in gains for Bharti; its revenue / active subscriber market share increased 400bp/300bp, driving 28% EBITDA growth. On the other hand, RJio gained 400bp/290bp revenue / active subscriber market share, driving 40% EBITDA growth. Thus, regardless of a tariff hike, the growth opportunity for existing telcos remains high. Furthermore, the growth opportunity is incremental, led by a 6–8% ARPU increase and organic subscriber growth (driven by a favorable mix). This could drive 10–12% revenue growth and over 15% EBITDA growth organically in the Wireless business. A tariff hike of about 30% similar to the one seen in 3QFY20 could also lead to strong EBITDA growth of around INR141b/INR180b for Bharti/RJio, i.e., a 22%/41% increase in FY23E.