How India’s telecom sector fares in a 5G world

Reliance Jio and Bharati Airtel appear reluctant to hike tariffs until they have maximised their 5G rollouts and gain the first mover advantage.

India’s telecom sector has witnessed a sea change in the last decade. The 5G rollout, which started on October 1, has covered over 700 districts and over 200,000 sites since then.

In Q4 FY23, the total data consumption of Reliance Jio users increased by 23 per cent YoY, while Bharti Airtel users’ mobile data consumption witnessed a 20 per cent YoY increase. This is an indication that data consumption is witnessing a sustained increase following the 5G rollout.

This makes it a good time to understand how the dynamics of the sector are shaping up and whether the growth runway in the sector can continue. It is important to understand how the sector has transformed in the past decade.

The Disruption Era

There was a time in March 2013 when the telecom sector was crowded with competition with more than eight players vying to increase their market share. In 2016 the price war began with Reliance entering the sector through Jio. Jio's dramatic market disruption (where it was initially offered for free, and later at cheap rates) drove competitors to either lower their pricing or leave the market. Jio offered free SIM cards, free voice calls throughout India and priced the data plans as cheap as Rs 50 per GB, while the incumbent players earned a major portion of their revenue from voice calling and the data plans were as high as Rs 250 per GB.

Source: Telecom Regulatory Authority of India

India’s current telecom market consists of four major players — Reliance Jio, Bharti Airtel, Vodafone Idea, and BSNL, with Vodafone Idea and BSNL struggling to sustain due to continuously making losses and needing to service a large amount of debt. The gross debt of Vodafone Idea as of March stood at Rs 2.09 lakh-crore. This placed Reliance Jio and Bharti Airtel in a good spot, especially since the tariff hike cycle started at the end of 2021.

Will Tariffs Rise?

A sustained tariff increase in 2021 and 2022 by Bharti Airtel and Reliance Jio helped shore up the margins of the two companies significantly. The average revenue per user (ARPU) of Reliance Jio has increased by 29 per cent in March 2023 compared to March 2021, while the ARPU of Bharti Airtel increased by 33 per cent over the same duration. However, there still seems to be some uncertainty over increasing tariffs in recent quarters.

Source: Investor presentation of respective companies

It seems that the reluctance of the two major telecom operators to hike tariffs is because they would want to maximise the 5G rollout to more customers first to try and gain the first mover advantage. The data usage levels of Reliance Jio and Bharti Airtel customers have increased by 4 per cent and 2.7 per cent respectively between October 2022 (when the 5G rollout began) and March 2023 indicating that 5G-led data consumption is strong. It can be expected that with increased penetration of 5G SIMs, the data consumption growth will continue to remain strong, and keeping tariffs at current levels will help the companies bring more customers on board.

In the longer term, however, the telecom companies would want to increase their tariffs significantly to recover the investments and costs they are incurring for the 5G spectrum and related infrastructural charges. In the 5G spectrum auction that took place in August 2022, Reliance Jio led with a total bid amount of Rs 88,078 crore, while Bharti Airtel bid for Rs 43,084 crore for various bands of spectrum.

Some of the major capex requirements for 5G technology would be fiberisation, network densification, and for upgradation of technology as the sector has historically seen low infrastructure investment. Hence, FY24 could be a testing period for the telecom sector as keeping tariff rates stagnant while needing to incur high capex and needing to service the debt infused to finance the capex would be a challenge.

With tariff hikes unlikely, the growth in the ARPU would be either through higher data consumption or through a shift of lower-end subscribers to higher-end subscribers. While the second option risks losing the market share to the competitor, the first option could be a major tailwind for the telecom companies given that 5G consumers use up to 2-2.7 times more data compared to 4G.

Telecom Duopoly

Over the past three years, Vodafone India has had trouble keeping up with Jio and Airtel's 4G rollouts. Its lower ability to invest in the network for coverage and capacity is further hampered by greater regulatory payouts from the AGR case judgement. BSNL too, has continued to depend on the government’s equity infusion in the company to keep the operations running. The Union Cabinet recently approved the third revival package for BSNL with a total outlay of Rs 89,047 crore. As per March numbers, the wireless subscriber count for Vodafone India and BSNL has continued to decrease. Net subscriber loss for Vodafone India increased from 22.9 million in FY22 to 24 million in FY23, while BSNL lost 14.2 million subscribers in FY23 compared to 4.8 million in FY22.

The high capital intensiveness in the sector is a major hurdle for new players to emerge and remains a strong entry barrier. With no newer players and two of the existing players having major financial problems, Reliance Jio and Bharti Airtel continue to have room for the addition of subscribers. How they would handle the tariff hike would be an interesting prospect to watch in the future.

(Parimal Ade (Twitter: @AdeParimal) is Founder, and Gaurav Jain (Twitter: @gaurav28jain) is Co-Founder, Investyadnya.in)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.