Last updated: 10 Jun, 2020 | 08:05 am
ARPU's expected to double in next 5 years
India’s mobile revenues /GDP ratio is at 0.7%, among the lowest vs countries with similar per capita GDP. Countries with lower competition have higher mobile revenue/GDP. For eg. Philippines, a duopoly historically, has a mobile revenue/GDP ratio of 1.2-1.7% vs Indonesia, a 5-player market, where this ratio has been lower at 0.6-0.8%.
It is probable that India is set to become a virtual duopoly, therefore revenue/GDP is expected to rise from 0.7% to 1.0% in the next 5-6 years. India’s telecom revenue for FY20 was US$19bn. Telecom sector’s Average revenue per user (ARPU) for FY20 was Rs 108/month. The revenue and ARPU is expected to double in the next 5-6 years. The chart below compares India's ARPU with other major economies around the world. (source: Jefferies report)
Industry regaining pricing power
When JIO entered the markets, it caused a huge price war amongst all players which led to many companies on the verge of bankruptcy. However, the Indian Telecom sector has entered a phase of tariff consistency, which is likely to sustain. The market is expected to become a virtual duopoly, with competition being the lowest it has ever been. JIO and Bharti are expected to gradually increase the tariff as any price war now will hurt them both with a major impact on JIO, being the market leader.
In FY20 as per revenue market share trend, Reliance JIO was the market leader with 35% market share followed by Bharti at 31% and Vodafone-Idea at 27% and 7% others. Bharti Airtel and Reliance JIO are expected to maintain their market leader status. Bharti is expected to benefit the most from the revival in industry revenues due to a strong spectrum footprint, robust balance sheet and strong execution. The Supreme Court's verdict on payment terms for AGR dues will decide the fate of Vodafone Idea. They require a huge capital infusion to sustain which is highly unlikely.
Foreign investors have shown a keen interest in the Indian telecom space. The recent deal between Facebook and JIO is a prime example of what is to be expected. Other investors are actively looking to gain some exposure in the very attractive Indian telecom sector.
Our VGQM model has a BUY rating on Reliance and a HOLD rating on Bharti Airtel. We expect the rating to move to BUY soon. The telecom sector is starting to look attractive.