Tag: mobile services

Save Vodafone Idea

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Preface / introduction

  • JainMatrix Investments has been tracking the Indian telecom sector, since the days of BSNL and MTNL monopoly, the go-go days of mobile introduction, the rise of Bharti Airtel and the entire sector over 2000-10 with 5-6 players, the high competition over 2010-14, the consolidation over 2013-18, and the rise of Reliance Jio.
  • The mobile sector is still under stress today, reduced to a 4 player industry, including a PSU. Telecom prices are among the lowest in the world, barely supporting their operations.
  • Post Covid, telecom services have enabled many people to Work From Home (WFH) and in general stay safe from infection worries. It is critical infrastructure.
  • Player #3 is Vodafone Idea (VIL) with a ₹25,000 crore market cap, revenues of ₹45,000 cr. but operating losses in FY20, a book value of ₹6,000 cr. and a CMP of ₹8.6. Mobile subscribers number 31.9 cr.
  • VIL has Adjusted Gross Revenue (AGR) dues to Govt. of India (GoI) of ₹50,399 cr. These are either to be paid immediately (impossible) or over a 20 year period (under negotiation and subjudice due to a running court case).
  • Let me start with the worst case scenario –

What if Vodafone Idea goes bankrupt:

  • The National Company Law Tribunal (NCLT) may have to be brought in to start a painful 2-3 year process of Insolvency and Bankruptcy Code (IBC).
  • The AGR dues to GoI of ₹ 50,399 cr. would be struck off.  GoI will get next to nothing back.
  • The debt of VIL of ₹ 112,520 cr. owed to banks and institutions will become almost worthless, taking down many lending Banks and funding agencies with it. This can be a worse and more painful disaster than the IL&FS collapse a few years ago.
  • Vendors are owed at least ₹ 4,000 cr. for equipment, and would start litigation to recover.
  • Subscribers numbering 31.9 crores would be affected. Their services will be disrupted and it will be difficult and time consuming to switch providers.
  • The 18,500 VIL employees would lose their jobs. A lot of working telecom assets would be damaged, destroyed or wasted.
  • India would lose face with the international business community. Another massive loss by a reputed MNC (Vodafone) in India would spoil our Ease of Doing Business ranks
  • The TRAI and Telecom department would become perhaps the worst Indian regulator, as along with our Justice system it has overseen the transition of a 14 player healthy telecom sector, to a monopolistic, damaged, in-reality 2 player industry, in a short 10 year period. The mobile penetration in India has also actually fallen in the last 1 year.
  • The sector would become a virtually 2 player monopoly with no competition. In such a market the price of mobile services can easily rise 2-5X within 2 years, as surviving telecom firms will have a free hand. TRAI and Dept. of Telecom will not be able to control the rise, just as they have been unable to control the fall of service prices in the last 5 years.

While its expected for some firms to fail in an open economy, VIL failing is clearly a disaster that should not happen.

Whats the solution?

  • This solution should be seen as an emergency one time effort, not a solution that can be repeated or generalized for other companies or sectors.
  • All AGR dues to GoI should be paid by VIL equally over a 20 year period, with interest.
  • The annual AGR dues should be collected by GoI every year in the form of fresh equity issued by VIL at the then value of market capital of the firm. Thus GoI becomes a stakeholder of VIL to the extent of its equity holdings in it and payments due.
  • GoI must have a 1 year lock in period for its VIL shareholding and is free to sell the stake thereafter.

Why this solution will work

There are 5-6 major forces at play in this industry.

  1. The telecom sector in India is at the cusp of recovery. Demand for services like calls and internet data are booming. Prices for mobile services have been depressed, but are on a recovery since Jan 2020. Further recovery will ensure operating health of current providers. If VIL can survive the next 1 year, it has a good chance of becoming financially healthy.
  2. GoI will get its AGR dues over a period of time. By not demanding AGR dues immediately, VIL may be able to survive. In fact if VIL does well, then GoI may be able to collect more money than the current owed ₹50,399 cr. as the VIL market cap grows. It also helps if GoI starts solving outstanding disputes with industry faster.
  3. VIL should be able to service its debts from operating revenues. Thus banks and funding agencies do not have to declare this as NPA. This will avert a disaster.
  4. Customers would be able to continue with VIL without disruption. They may have to pay more, but India cannot stay the cheapest place in the world for mobile services forever.
  5. Vendors, employees and business partners of VIL can continue unaffected.
  6. Corporates in India will gain in confidence. Even Reliance Jio and Bharti Airtel should be happy about VIL’s survival. There is ample room for all players to grow.

We have a precedence

Just a few months ago, the RBI stepped in to save Yes Bank from collapse. In an admirable and swift action, the failing bank was recapitalised and the new stake ownership was spread over several PSBs and other investing institutions.

In a similar manner, perhaps more urgently than Yes Bank as this industry has just 4 players, VIL needs to be saved, and given a chance to not just survive but hopefully prosper.

DISCLAIMER

  • This document has been prepared by JainMatrix Investments Bangalore (JM), out of public interest. This is our opinion only and we have not communicated with Vodafone Idea, Reliance Industries, Bharti Airtel, TRAI, Dept of Telecom or SC or any other party directly to come to these conclusions.
  • Punit Jain discloses that he has no equity ownership or known financial interests in Vodafone Idea Ltd, Reliance Industries or Bharti Airtel or any group company, to the best of his knowledge. He has shares in Yes Bank since 2005. Punit Jain does have a VIL mobile service subscription since over 10 years.
  • This report is for information purposes of recipients and not to be used for circulation.  This report should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an Investment Advisor. Punit Jain is a registered Research Analyst under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

JainMatrix reports on Indian Telecom

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  • Date: Oct 15, 2014
  • Sector: Telecom Services
  • Advice: The sector is recovering from several years of hyper-competition. Consolidation and M&As will reduce the number of players in the next 4-6 years. At the same time the survivors will win big.

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Introduction

  • The Indian Telecom services industry was about Rs 2,38,000 crores ($ 39.1 billion) in size in 2013.
  • It directly contributes 3% of the Indian GDP. In addition there is a high indirect contribution through sectors like Retail (cellphones, accessories, prepaid recharge), hardware manufacture, trading, etc. where businesses are associated with Telecom sector. Fig 1.

Revenues, Telecom Sector, JainMatrix InvestmentsFig 1 – Revenues from Telecom Industry

  • Telecom works as a productivity enhancer due to BYOD, personal computing and availability.
  • The telecom sector provided about 28 lakh direct jobs and 70 lakh indirect jobs in 2013 (as per PwC).
  • The sector represents a wonderful story of progress in India where in two decades the sector has leapfrogged from obsolete, poor technology and lagging service standards to a contemporary, modern industry. Mobile penetration in India at an individual level is today superior to TVs.
  • The consumer has benefited as costs of voice and internet are among the lowest in the world.
  • The listed entities in this space are Idea Cellular, Reliance Infocomm, Bharti Airtel, MTNL and Tata Teleservices. It is possible that Vodaphone may list in India in a few years.

Industry News

  • There are 13 operators in India – see Fig 2. The top 5 have 79% of the Telecom Subscriber Shares.
  • Revenue market shares for Mar ’14 are Airtel 31.1%, Vodafone 23% and Idea 16.6%.

Revenues, Telecom Sector, JainMatrix InvestmentsFig 2 – Telecom Subscriber shares

  • The governance for Telecom involves TRAI, DoT, Ministry of Communication & IT and TDSAT for disputes.
  • The NTP-2012 has targeted 100% tele-density and 600 million broadband connections by 2020.
  • The total number of Indian subscribers of telecom services, wireless & wireline, is 93.6 cr. There has been a drop since companies are removing the inactive users from the subscriber base and hence focusing on revenue generating subscribers. The tele-density is 75.7%. Broadband penetration is at 7% (6.53 cr).
  • As of May 2014, the total Indian wireless subscriber base stood at 91.0 cr. There has been a monthly growth of 0.3% in the total wireless subscriber base from April-May 2014. In terms of net additions (April-May), Bharti led with 16.55 lakhs followed by Idea, Vodafone and Aircel with 11.61L, 9.82L and 9.42L resp.

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  • In Feb 2012, the Supreme Court of India ordered the cancellation of 122 unified access service licenses issued in Jan 2008 by former telecom minister A Raja. Players were given the option of buying licenses in auctions. As a result, competition in the Indian telecom sector is reducing. While a few players exit the market (NTT Docomo is divesting stakes, Sistema and Uninor – partial exits), others are selling their operations.
  • In Dec 2015, 4 licenses of Airtel, 7 each of Idea Cellular and Reliance Telecom and 6 of Vodafone will complete their 20-year term and would require renewal. The next auction for spectrum will start from Feb 3, 2015.
  • Reliance Jio Infocomm is expected to launch telecom services in 2015. This Mukesh Ambani firm may be a fierce competitor due to aggression and large balance sheets and investment plans.
  • There is a proposal pending with government for reducing the number of telecom circles in India from the current 22. This will reduce the roaming charges and benefit consumers.
  • The 3G & 4G subscriber base was 4.19 cr. in Jan ’14, a good growth from 2 cr in 2012. Data traffic powered by 3G services grew at 146% in India in 2013, higher than the global average. About 0.3 cr. 3G connections were added during the last quarter Q1FY15.
  • The OTT (Over the Top) services like Skype, Whats app, etc. have been allowed by TRAI (in a case/ dispute) and current operators are able to monetize this in terms of data revenues.
  • A comparison of GSM and CDMA shows higher ARPU for GSM. Both technologies are seeing an improving revenue trend. MoU of GSM is higher, but CDMA is able to charge more RPM. See Fig 3.

ARPU, Telecom Sector, JainMatrix Investments

Fig 3 – ARPU, MoU and RPM for last 4 quarters (source: TRAI) 

Observations and Inferences

  • The near term outlook of the sector looks positive due to reduced costs of acquisitions, higher realized rates on voice calls, improved EBIDTA margins and increased data traffic.
  • Airtel, Idea Cellular and Vodafone India FY15 Q1 performance had been better than the rest.
  • Revenue from the voice segment will grow at a slower pace, while data traffic will grow faster.
  • National Mobile Number Portability is likely to be implemented by March ‘15.
  • GSM 3G/ 4G adoption will accelerate. In the longer run, CDMA usage may stagnate (or even be dropped) as the 3G/ 4G on GSM is better for data & smartphones.

Key Challenges in Telecom:

  1. Competition intensity in Industry: It was low till 2007, but went into hyper-competition levels with newer players in 2008. It is still high today but trending lower with reduction to 13 players, from 16 earlier.
    • The cancellation of licenses issued in 2008 by the government has affected several operators. As a result some foreign and Indian players are exiting, or scaling down their operating and growth plans.
    • There was a squeeze in profitability of telecom firms due to high competition. Profit margins declined, but are now seeing a rebound for larger players. For the first time in several years, the larger operators have been able to actually raise their telecom rates, and we can see a recovery in quarterly profits.
    • Call prices which were among the lowest in the world (and termed uneconomic for operators) are now on the rebound. Some pricing power is returning to operators.
    • Reliance Jio launch is expected in 2015. However it will take long for them to become a significant player.
  2. Regulatory uncertainty: This has reduced a lot since 2012. However there is still a severe shortage of spectrum affecting quality of services by current players.
    • The telecom sector regulatory troika of Indian Govt., TRAI and DoT (and Supreme Court) are slowly resolving issues faced by industry like spectrum and license fees, availability, excess spectrum charges, refarming of spectrum, sharing of 3G services among operators, etc.
    • A successful auction of spectrum happened in Feb 2014 and there has been a stable license regime, negating the effect of cancellation of 2008 licenses. We are seeing that consolidation in Indian telecom is being accelerated by the licenses cancellation. The telecom industry will also soon have new M&A norms which will allow it to consolidate and smaller players will be able to exit at reasonable valuations.
    • But allocation of spectrum won in the Feb 2014 auction has still not been done. And for several operators the 20-year license agreement for some circles expires very soon. So these firms are demanding compensation from DoT and extension of licenses to prevent any loss of service.
  3. Driving usage and utilization of 3G/ 4G assets: The purchase of 3G/4G spectrum and licenses by operators has initially looked like a very expensive buy, as adoption of these by consumers has been slow. It is a complex ecosystem play dependent on online content, applications, games, available hardware (mobile phones and devices) and network rollouts / availability. However the jigsaw puzzle is falling into place for 3G already. In parallel, usage of 4G is being accelerated by Airtel with the launch of data devices.

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Risks

  • The regulatory risks continue to be high. The complex troika of Indian Govt., TRAI and DoT have slow decision making, and govt. acting as both regulator and operator (BSNL/ MTNL) are issues. They have mapped industry needs badly with failed spectrum auctions, many pending litigation/arbitration and delays in spectrum release.
  • The current expectation is that M&As and exits will reduce competitive intensity in the sector. If this does not happen, it will affect profitability and margins of current players.
  • Overpriced auctions and excessive government costs can affect the growth and profitability of this sector. Older players have mentioned a 5% revenue share payable to government, in addition to taxes and cess.

Industry Outlook

  • In infrastructure, success requires the setting up of capacities, achieving critical volumes and ensuring that the cash flows exceed required additional investments in the business. This is true of Telecom too. Many of the 12-13 Indian Telecom firms have not yet have hit sustainable volumes yet.
  • In the next 4-6 years, with consolidation and M&A, the number of mobile services operators may reduce to 6-7.
  • Industry revenues will now be driven by sector consolidation, price increases, mobile based governance, growth of data services, 3G/4G adoption, audio & video, internet and applications usage, rising affluence and small penetration increases.
  • With maturity, the telecom sector will develop FMCG type characteristics, reflecting personal affluence and usage habits.
  • Telecom will continue to be a powerhouse industry as it is consumed by individuals, IT, software and education sectors, and devices such as cellphones, computers and tablets, and in future, the internet of things.
  • We expect that the Telecom sector growth will accelerate from current 10.4% to 12-15% for the next 4 years, driven by an economic recovery in India, better regulations & governance, rising personal affluence and business/ corporate demand.

JainMatrix Knowledge Base:

See other useful reports from telecom, infra, etc. sectors.

  • Snowman Logistics IPO 
  • Bharti Airtel: This is a year of consolidation – LINK
  • Bharti Infratel IPO: Aggressive offering of Passive Infrastructure: Invest – LINK 
  • Telecom: Auctions speak louder than words – LINK 
  • Indian Telecom at Cross-Roads – LINK 
  • Motherson Sumi – Global Auto Ancillary Growth – LINK
  • Why is it that great investors are also good card player? See my thoughts
  • Mid Cap review – LINK
  • CPSE NFO
  • Engineers India FPO
  • When should you Sell your equity portfolio? See Article

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Disclosures and Disclaimer

  • This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation.
  • This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security.
  • The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same.
  • Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein.
  • Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor.
  • JM has been providing equity research and portfolio advisory services commercially since Nov 2012.
  • Any questions should be directed to Punit Jain, the Director of JainMatrix Investments at punit.jain@jainmatrix.com ,
  • Also see: https://jainmatrix.wordpress.com/disclaimer/

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