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Telecommodification .. no respite

I would like to start this blog by referring to a post i had written way back in March 2016. Read it here: Telecommodity

In that post, I had shared my thoughts on how ‘brands‘ like Airtel and Idea would get commoditised, thanks to the grand entry made by the big daddy Reliance JIO and how the sector valuations should melt.

Roughly 3 and a half years down the line, heres how the industry has performed:

Then –

Picture 1.png

Present –

Picture 2.png

Change in the period –

Picture 3.png

While it may not be the rightest to compare Reliance Inds (with telecom as one of its businesses) with the other 2 players, but you get the drift. As seen in the table above the impact on sector performance and, thereby, valuations is very apparent. And how!

This is despite a further consolidation in the industry over the last 3 years, to a virtual 3 player market, which essentially should have eased competitive intensity. Check out the consolidation since 2016: Videocon exits the industry by selling its spectrum to Airtel, MTS India gets merged into Reliance Comm (which itself shut shop in 2019), Vodafone gets merged into Idea in 2018, Aircel marks its exit by declaring bankruptcy in 2018 & Telenor and Tata DoCoMo merge into Airtel over the last 2 years!  This now leaves Indian telecom to be a 4 player industry, led by the big daddy Reliance JIO, Airtel, Vodafone Idea & the government owned BSNL.  Well, BSNL actually doesn’t even figure as competition. Wasn’t a competition even in its hey days and now when its struggling to even pay staff salaries, we can safely write it off.

Now with the industry having consolidated, will the normal business economic principle of ‘consolidation of any industry benefit the few surviving players’ work? Doubtful, in my opinion. With the predatory pricing tactics RJio chooses to continue with, incumbent players could find it very difficult to make money even going forward. Not to mention the big blow that operators received last week when the Supreme Court upheld government’s way of computing the telecom revenue, from which dues like licence fee and spectrum usage charges are derived. As a result of this verdict, Vodafone Idea may have to pay about Rs 40,000 crore, while Bharti Airtel faces a liability of around Rs 42,000 crore (including licence fees and spectrum usage charges)!!! As if the reduction in IUC charges from 14 paise a min to 6 paise a min in 2017 (complete withdrawal by 2020) wasn’t causing pain to those players already, by way of reduced IUC income. Faced with challenges like increased customer attrition and little headroom to improve ARPUs, how will these companies be in any position to honor their huge debt obligations, leave alone their ability to invest into improving their infrastructure.

And this trend is here to stay, for quite some time atleast.

Without wanting to hazard a guess on near term valuation or stock rebounds, I would prefer staying away from the sector and rather invest my monies in more predictable and sustainable cash flow businesses.

Would love to hear your thoughts on the same.

Cheers!!!

Sudhir

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