Rising data consumption and “gentle” price hikes are expected to drive Average Revenue Per User (ARPU) recovery, while upgrade to smartphones by subscribers and access to high-speed internet will be industry growth catalysts, according to a report.
Consolidation is expected to continue in favour of Reliance Jio and Bharti, as Vodafone Idea “keeps bleeding market share”, JP Morgan said in a note on Wednesday.
“Low marginal costs of data provision imply significant operating leverage from traffic growth and continued polarisation in favour of the leaders (Reliance Jio and Bharti),” it said.
This, in turn, means sharp EBITDA (Earnings Before Interest Tax Depreciation and Amortisation) growth for Bharti and Reliance Jio and continued marginalisation of VIL, it added.
Indian telcos have the lowest ROICs (Return on Invested Capital) among Asian peers operating in similar market structures, suggesting that true market repair is still due, it said and pointed to expected ARPU recovery, led by consumption and gentle price hikes.
Upgrade to smartphones by subscribers and access to high-speed internet given low penetration (below 50 per cent) should be key industry growth drivers, the report added.
“Bharti should win at the premium end of the market, driving superior ARPU, and Jio at the scale end, with superior share gains in revenues and subscribers,” it noted.
The Indian telecom industry underwent significant consolidation over the last three years, with the top three private operators now accounting for more than 90 per cent of subscribers, revenues and traffic.
“This has driven destruction of sector economics and return ratios. However, consolidation is now likely to drive a secular recovery in ARPUs and return ratios for the sector,” it said.
The market structure is likely to become further polarised due to “significant regulatory penalties and the weak balance sheet” of Vodafone Idea, which can further benefit Reliance Jio and Airtel.
“Our analysis of industry structure and return ratios shows a strong correlation, especially as a market gets consolidated with 2-3 players controlling significant spectrum, subscribers and revenues,” it said.
