Mukesh Ambani and Sunil Bharti Mittal arrives for inauguration of the “India Mobile Congress 2017” in New Delhi. (Source: PTI)

Goldman Expects Billionaire Sunil Mittal To Come Out On Top Of The Telecom War

India’s richest man Mukesh Ambani may well leave rival billionaire Sunil Mittal bruised. But he’s unlikely to knock him out.

That’s according to global financial major Goldman Sachs. The tariff and data war unleashed by Ambani's Reliance Jio Infocomm Ltd. is unlikely to dislodge Mittal’s Bharti Airtel Ltd. off the perch in India’s telecom industry, the bank said in a report. Certainly not because of content driven by Jio’s cheap data.

The consensus is that Jio’s bundled video-to-music streaming services will give it an edge in the world’s second-largest telecom market. Since its launch, Jio has been making data cheaper and faster, and consumption has nearly tripled. EY India expects it to more than quadruple in the next five years. That’s also driven the digital entertainment market which is touted to be bigger than India’s film industry by 2020.

"We do not believe content will lead to a competitive advantage in India for one telecom operator versus the other," Goldman said. That’s because content in India is abundant, and mostly free. And producing content is inexpensive relative to a telecom operator’s overall spending. Airtel, for instance, could commission as much content as Zee Entertainment by spending less than 3 percent of its annual capital expenditure, according to the investment bank.

All major broadcasters in the country have apps that offer access to a large chunk of their content for free. In addition, Indian consumers get unrestricted access to YouTube, which has a vast library of content.
Goldman Sachs Report

A price war in India’s telecom industry triggered by Reliance Jio had hurt the profitability of other operators which sought to keep market share intact by matching Jio's cheap data plans. To make matters worse, the telecom regulator halved the fee that operators pay each other on cross-network calls. Bharti Airtel reported its first ever quarterly revenue drop in the same quarter.

Yet, the Mittal-led company will likely remain the market leader thanks to its strong balance sheet and spectrum footprint, Goldman said. It can also sell non-core assets to stay competitive.

Goldman Expects Billionaire Sunil Mittal To Come Out On Top Of The Telecom War

Besides, Goldman believes data tariffs in the industry will sooner or later start going north. The longer Jio puts off raising prices, the more it delays minting profits off its growing subscriber base. That could hit Jio’s valuation by $4.4 billion in the next three years, according to Goldman’s estimates.

We thus see little likelihood of rapid market share gains for Jio (or rapid market share erosion for Bharti) if Jio were to keep tariffs lower for longer.
Goldman Sachs Report

To be sure, there are risks to Airtel’s dominance. Projected earnings recovery for the operator is largely based on improving industry tariffs. If Jio, backed by the strong balance sheet of its parent Reliance Industries Ltd., continues to focus on adding more customers and doesn’t raise prices, Airtel’s earnings may take a further hit.

Another risk stems from competition in segments other than telecom. One-fourth of Airtel's revenue comes from segments such as direct-to-home, broadband, enterprise and tower sharing. Jio is likely to create some ripples in the first three, according to Goldman, which could put further pressure on Airtel.

Of course, Bharti Airtel does not need to buy or renew airwaves at least till 2022. That means most of its spending could go towards expanding its 4G network, Goldman said while reiterating its 'buy' call for the stock.

Bharti’s strong balance sheet is likely to result in elevated capex over the next few years; this coupled with its spectrum footprint is likely to act as a differentiator for Bharti versus peers like Idea and Vodafone India.
Goldman Sachs Report