Running a single-technology network, smart mix of owned and leased towers, and lower-than-‘market’ tower rental deals on a good proportion of sites yield a network opex advantage for Jio that incumbents would need to bridge; the sooner the better. Two key implications – (i) exposure to the network cost line (through towercos or other players) is risky, and (ii) Idea-Voda mergeco would likely need to deliver higher network cost savings than is implied in their merger cost synergy guidance.
Jio’s fully loaded network costs much lower than the incumbents
Our analysis suggests that R-Jio’s like-on-like (adjusted for depreciation and capital costs associated with owned towers) network costs for a 200,000-site network could be in the vicinity of `125 bn per annum. R-Jio’s reported network opex for 2QFY18 stood at `13.7 bn (`54.9 bn annualised), we note. The `125 bn annualised like-on-like network opex we estimate adjusts for – (i) likely network opex capitalisation in 2QFY18, (ii) rollout of another 70,000-odd sites to take the total site count to 200,000, and (iii) D&A and capital costs associated with R-Jio’s owned towers; we have made this adjustment to make Jio’s network costs comparable with the incumbents whose networks run predominantly on leased towers.
Comparatively, Bharti’s 2QFY18 annualised network opex stood at roughly `132 bn, per our estimate. We note that these costs supported a network of 162,667 2G sites (average) with 123,181 of these having one or more 3G and/or 4G base stations. To match Jio’s LTE network coverage like-on-like, Bharti would need to roll out more sites and load a larger proportion of the total sites with 3G and/or 4G base stations. These would involve incremental network costs, unless Bharti is able to bring down the per-site costs down materially.
Idea and Vodafone are in an even tougher spot on this aspect. Idea’s 2QFY18 annualised network opex stood at `101 bn —for a network of 131,149 2G sites (average for the quarter) and 125,536 3G/4G base stations. Vodafone’s network opex, 1HFY18 annualised, was higher at around `110 bn for a similar total network presence as Idea’s. Combined network cost of `211 bn annualised needs to go down materially, by much more than the guided synergy benefit, for the combined entity to stay competitive.
Implications – avoid exposure to the network cost line of the opcos Jio’s network cost advantage emanates from three factors as highlighted earlier. The first one, i.e. Jio running a single-technology (4G-only) network versus the incumbents (2G+3G+4G) has a counter-balance in the form of a higher addressable market for the incumbents.
The other two aspects are something the incumbents need to look at closely. Jio may have been smarter about using an owned-tower monopole architecture (along the streets) in large cities where rooftop rentals are extremely high; incumbents perhaps need to relook at the ‘lease versus build’ equation in such locations. The last one, i.e. tower-leasing terms, is perhaps the trickiest one; value-distribution construct between BHIN/Indus and incumbents needs to be more balanced, in our view; however, any change here would benefit Jio as well.
—Kotak Institutional Equities