Why Airtel Could Take On Reliance Jio And Vodafone Idea Couldn’t

Ambani’s Reliance Jio Infocomm Ltd. has 33 crore subscribers and the biggest market share by revenue in the world’s second-largest market with 1.2 billion users. And it has driven rivals out of business or forced them to merge, shrinking the number of private operators from nine to three. But the fate of billionaire Kumar Mangalam Birla’s Idea Cellular Ltd. and Vodafone India didn’t change after their merger. While it became India’s largest telecom firm briefly, the combined entity continued to lose market share. It now ranks last among the three.

Reliance Jio’s cheaper plans lured away customers, causing Vodafone Idea’s revenue per user to drop. The carrier—45.2 percent owned by the U.K.’s Vodafone Group Plc and 26 percent by the Aditya Birla Group—has been losing subscribers for 11 straight months because of network problems and introduction of a minimum recharge plan to weed out low-paying users. Its customer market share fell to 32.9 percent as of June 2019 from 38.7 percent a year ago.

Bharti Airtel, however, managed to cushion itself. Its revenue market share fell 400 basis points in the last three years but its customer market share increased, aided by acquisition of Telenor India.

The trend reversed in the quarter ended June. Bharti Airtel’s subscriber base declined due to adoption of minimum recharge plans, but its share in the revenue increased first time in five quarters because of focus on high-paying users.

Vodafone Idea’s loss in revenue and customer base may be due to overlap of subscribers between Idea and Vodafone on account of consumers having multiple sims, the company told BloombergQuint in an emailed statement.

“After merger, with parity of offerings between the two brands, consumers have also exercised the choice of being with one brand. The duplication of customer base between the two brands is now almost negligible,” it said. “The merger enabled Vodafone Idea to enhance both 4G coverage and capacity nationally. The company is in the process of completing integration and further expanding its 4G coverage and capacity for both brands.”

Bharti Airtel declined to comment on BloombergQuint’s queries.

What Bharti Airtel Got Right

Reliance Jio launched with 4G-only plans in 2016. At the time, its rivals were still deploying 3G. Bharti Airtel, however, had a headstart. It had not only rolled out 3G completely but also offered 4G services in close to 14 circles.

“Airtel was able to catch the 4G wave and react to Reliance Jio much faster than others due to its earlier experience and knowledge,” said Sanjay Kapoor, former chief executive officer of Bharti Airtel. That, coupled with a healthier balance sheet, allowed Bharti Airtel to invest more in 4G network coverage and that helped the company retain its high-end users, he said.

A healthier balance sheet increased the company’s ability to invest in network and customer experience, Kapoor, who’s also the former chief executive officer of Bharti Airtel’s India and South Asia operations, said. When Reliance Jio launched, others had a catch-up game to play, too. “In such a case, if your balance sheet is weak, you turn slow.”

According to Sandip Das, former head at Reliance Jio, Maxis and Hutchison Essar, the investments not only helped Bharti Airtel to augment its network and keep in step with Reliance Jio but also to take the fight to it. “Their networks have vastly improved, their plans are competitive, they are looking after their customers and also continuing to consolidate their brand.”

Bharti Airtel was able to add more mobile broadband users—who predominantly consume data and generate higher revenue. The operator also managed to surpass Vodafone Idea on this count.

Vodafone Idea’s debt-to-Ebitda has come down to 8.2 times from 28.8 times a year ago, largely due to merger synergies and adoption of new Indian Accounting Standard 116. But Bharti Airtel’s leverage is nearly half that .

Both Airtel and Vodafone Idea recently raised Rs 25,000 crore each to repay debt. But debt didn’t come down by that quantum at Vodafone Idea, indicating the cash burn because of core operating losses.

JPMorgan, in an earlier note, said Vodafone Idea might take in more debt due to these operating losses, resulting in higher interest outgo. And to service that interest, it will have to take on even more debt if its operating performance and cash flow don’t improve—potentially getting trapped in a vicious cycle.

According to Das, the Vodafone-Idea merger, announced seven months after the launch of Reliance Jio, has been a distraction. They are under-invested in their data networks, have fallen behind even in basic voice quality and are the least competitive in the market as they are playing “catch-up” all the time, he said.

“They are advertising and promising a lot more than they can actually service. There is a pronounced dissonance and no clear perceptible strategic direction.”

As of June, the combined entity had managed to achieve 70 percent of targeted synergies. But because of under-investment in 4G and poor services, the fall in subscriber base has been so rapid that indirectly all the financial benefits were lost.

The merger deal led to a delay in capital expenditure towards 4G expansion, slowing their ability to close the network gap with incumbents, said Rajiv Sharma, telecom analyst and co-head, institutional research equities, SBICAP Securities Ltd. But for Bharti Airtel, sustained leadership and clarity on strategy helped limit the impact of Reliance Jio, he said.

Reliance Jio now threatens to disrupt fixed-line broadband and cable television businesses through its high-speed Jio Fiber with content subscriptions bundled in.

While wired broadband space is dominated by state-run BSNL and MTNL, Airtel has a 13 percent share in the market. And its telecom experience in counter Reliance Jio would come handy.

Watch | How Airtel Cushioned Itself Against Jio Onslaught