Mobile services

Indian M&A: And Then There Were 5?

After growing every year since 2008/9, revenues in the Indian telecom market fell in 2016/17 following the market entry of Reliance Jio in September last year. With its aggressive promotions and promises of "free" services, the 4G upstart has wreaked havoc in the sector, triggering a spate of consolidation that has yet to run its course. From 1.93 trillion rupees ($30 billion) in 2015/16, telco revenues fell to INR1.88 trillion ($29 billion) in 2016/17 according to brokerage firm CLSA.

The outlook is not promising, either. According to CLSA, operators are likely to record revenues of about INR1.8 trillion ($28 billion) in 2018/19, only marginally more than they made in 2014/15.

Reliance Jio has already signed up more than 100 million customers on the back of its disruptive offerings, forcing existing players to cut prices or lose subscribers. Predictably enough, the big guns of Bharti Airtel Ltd. (Mumbai: BHARTIARTL), Vodafone India and Idea Cellular Ltd. recorded declines in both sales and profitability following the launch of RJio's commercial services.

But while its predatory pricing has eroded industry profitability, RJio is confident that revenues in India's telecom market will rise to about INR3 trillion ($46.6 billion) by 2021. Growing demand for data services will drive this growth, it insists, hoping to capture at least 50% of these new data revenues. (See RJio & the Profitability Challenge.)

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The consolidation now underway could certainly help to restore growth in the next few years. Circles (service areas) that used to have between ten and 12 operators now feature just five. A mega merger between Vodafone India and Idea Cellular, the country's second- and third-biggest telcos, will have a dramatic impact. Other noteworthy deals have included Airtel's acquisition of Tikona Digital Networks Pvt. Ltd. and the Indian subsidiary of Norway's Telenor Group (Nasdaq: TELN), as well as the takeovers of Sistema Shyam TeleServices Ltd. and Aircel Ltd. by number-five player Reliance Communications Ltd. (See Vodafone, Idea Strike $23B Deal to Form India's Biggest Telco, Airtel Acquires Tikona to Fill 4G Gaps , Airtel to Acquire Telenor in India, India's RCom, Aircel in Mobile Merger and MTS India Merges With RCom.)

By the end of the year, the Indian telecom landscape may have changed beyond recognition, leaving just five big players in control of the market. With almost 400 million customers, the new-look Vodafone-Idea is likely to have a market share of more than 30%, making it the country's biggest player. Airtel will follow closely behind with a similar share of the market, while RJio looks set to become India's third-biggest operator -- a remarkable feat given its immaturity.

That will leave Reliance Communications in fourth place, and a possible tie-up between state-backed operators Bharat Sanchar Nigam Ltd. (BSNL) and Mahanagar Telephone Nigam Ltd. (MTNL) as the number-five operator. (See A BSNL-MTNL Merger: The Pros & Cons.)

All of this could pave the way to profitability growth in subsequent years, as competition becomes more restrained. If anything, the hyper-competitiveness that is currently on display has shown operators that having deep pockets and national scale is the only way to guarantee survival. Being able to speedily modernize their networks, and offer competitive rates to customers, are prerequisites in the fast-evolving Indian market. The companies that cannot meet those requirements are likely to get swallowed.

— Gagandeep Kaur, contributing editor, special to Light Reading

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