Over the past few years, the Indian telecom industry has witnessed a consolidation of revenues and subscriber market share for the top three players. Telecom operators were able to increase tariff owing to a fall in the competitive intensity. The top three players have again consolidated their positions at the spectrum auction and are likely to gain market share from the smaller players.
However, we consider the spectrum-sharing guidelines and entry of Reliance Jio as impediments to further tariff increase. We believe Reliance Jio will need to compete on pricing coupled with bundled offering of services and, therefore, its entry will increase the competitive intensity and put pressure on the margins of telecom players.
In addition, existing telecom players will continuously need to spend money over the next few years to upgrade their ageing infrastructure, which will eventually increase the need for consolidation in the industry. In this scenario, smaller players would largely struggle owing to smaller subscriber base and overleveraged balance sheets. Larger players would be able to take advantage of the explosion in data usage.
Therefore, in our view, the competitive landscape in the telecom sector is turning favourable for large telecom companies, as they have consolidated their leadership positions over the last few years.
Telecom companies derive moat through bundled offerings and assets like spectrum and tower ownership. Spectrum sharing could possibly dilute the second factor and we expect new business models to emerge after the announcement on spectrum-sharing guidelines. In our view, Reliance Jio is already preparing for spectrum sharing with Reliance Communications. If it is able to stitch together a seamless network, we can expect Jio to be a formidable competitor. Over the next couple of quarters, we expect telecom companies to benefit from increasing data usage while the entry of Jio will aid expansion of the 4G ecosystem.
