Contrary to its expectations however, the telco is likely to be spectrum-constrained in the medium term
Idea expects the data market to be driven by subscriber growth rather than ARPU (average revenue per user), similar to the trajectory of the voice market. There is space for Reliance Jio without affecting the revenue shares of the incumbents if sector growth remains at the current level of 8-9%. Idea expects significant availability of spectrum in the 1800Mhz band in the medium term and intends to buy spectrum largely on a ‘just-in-time’ basis. We concur with the first two assertions, but our current forecast assumes Idea will be spectrum-constrained in the medium term. Hence, it should defend its revenue share at the cost of margin and cash flow. Maintaining Buy rating (target price of Rs 137).
Fall in data pricing should catalyse exponential usage-driven revenue growth: Over the next four years (FY16-20e), we expect mobile revenues to grow at 8% p.a., driven by -3% growth in voice and 28% growth in data. We believe that data pricing should halve over the next three years. We expect incumbents to maintain their current revenue shares in the medium term. Market shares for incumbents in the telecom sector tend to be very durable, and we believe that investors underestimate the strength of incumbents’ franchises.
Investors should focus on data usage rather than pricing: Contrary to consensus, we expect Jio to adopt a ‘whole-of-market’ approach rather than exclusively target high-value subscribers. We also believe it should not affect the revenue table of the sector—its offers are likely to come at existing price points but provide higher data allowances. Jio’s key goal will likely be to match the cost position of the incumbents, which requires a rapid ramp-up in data throughput.
Our DCF-based target price of R137/share implies 5.6x FY18e EV/Ebitda
We assume a Risk free rate (RFR) of 7%, ERP (enterprise resource planning) of 7.1%, WACC (weighted average cost of capital) of 12.1% and terminal growth rate (TGR) of 2%. Increasing competitive intensity is a downside risk.
Where we differ from Idea’s expectations
Our expectation for the medium-term market outcome for the Indian telecom sector is in line with Idea’s. However, we are less sanguine about the availability of spectrum, particularly at reasonable prices. Idea believes it has sufficient spectrum for coverage and capacity to meet the data demand in the current phase of data growth. Further, it believes spectrum will be abundantly available in the medium term, especially from the harmonisation exercise in 1800Mhz that is currently under way. This should necessitate the government to lower the prices in future. We note that Telecom Regulatory Authority of India (the regulator) in its last report only indicated sporadic availability of spectrum in the 1800MHz band.
Auctions will have to fail for reserve prices to come down
Past precedents indicate that auctions will need to fail for the government to consider lowering spectrum prices. We note that there were auction failures in 2012/13, which led to lower prices for the 1800MHz spectrum in the 2014 auction.
Idea expects its above-par execution to drive its competitive position We believe Idea has executed admirably over the past four years. It has gained c460bps market share to 18.9%, at the expense of weaker players. We note that its incumbent peers have also gained but significantly less than Idea.