By Deeksha JanianiIndia registered strong double-digit GDP growth in the first quarter of FY23. But the 13.5% growth rate is lower than RBI's estimate of 16.2%. India faces multiple speedbumps - rising interest rates, uneven monsoons - but is better placed than developed countries that are struggling with high inflation, and China with its self-goals of city-wide Covid lockdowns.
A rebound in the services sector has helped deliver India's Q1 growth. Within services, a Big Two rivalry in a key industry - telecom - is driving a big cycle of spending.
In this week’s Analyticks:
- Reliance Jio v/s Bharti Airtel: Who will win the 5G war?
- Screener: Companies outperforming their industry in returns on capital, and growth
Let’s get into it.
Will Reliance Jio's 5G launch help it gain over Bharti Airtel?
For businesses, the rise of a new technology is a fresh chance to win market share. And it looks like Reliance Jio is counting on its 5G rollout to build a massive lead over its competitors. Reliance Chairman Mukesh Ambani announced a special Diwali present for Indians in the 45thannual general meeting of Reliance Industries. If you are a Reliance Jio user living in any of the four metros or major cities like Bangalore, Ahmedabad and Pune, you will be able to access 5G technology by this Diwali.
5G opens the door to much faster data. While 4G gives us a download speed of upto 150 mbps, 5G offers speeds of upto 10 gbps, nearly 67 times higher. The upload speed is also 20 times higher than that of 4G. People living in smaller cities and towns are expected to get Jio 5G by December 2023.
This ambitious plan comes at a hefty price tag for Reliance.
The company will incur a capital expenditure of Rs 2 lakh crore via its telecom arm Reliance Jio Infocomm, to roll out 5G services. The planned capex spend includes Rs 88,078 crore spent on the 5G spectrum auction held recently. The remaining amount is earmarked for setting up 5G network infrastructure.
Notably, the spectrum cost is evenly spread out over a period of 20 years. So including two spectrum installments, Reliance Jio is set to spend over Rs 1.25 lakh crore on the rollout of 5G services in the next 18 months. This is 20% more than the last three years of combined capex for Jio.
Meanwhile, Bharti Airtel is also focusing on its 5G rollout plans. The telecom major plans to cover the entire country with its 5G services by the end of March 2024, at half the cost Reliance is spending.
According to its recent earnings call, Bharti will incur a capex for the next three years similar to what it spent between FY20 and FY22 - which is around Rs 75,000 crore. The majority of the capex will be spent in the next 18 months itself.
Now, the key question is: which of these telecom majors will emerge as the more successful 5G service provider?
Throwing money at the problem, and winning: Reliance Jio’s lightning fast growth in the last five years
Thanks to its parent company’s deep pockets, Reliance Jio witnessed massive network expansion as well as revenue growth (which jumped 4X) in just five years. This growth was fueled by the doubling of its total subscriber base, which crossed the 40 crore mark in FY21. In fact, Jio surpassed Airtel on this metric by FY20, within three years of its 4G launch.
However, this blockbuster growth came at a high capex cost for Reliance Jio. The subsidiary saw negative free cash flows of over Rs 1.10 lakh crore between FY18 and FY20, backed by higher investments. It finally generated positive free cash flows in FY21, only to see them fall materially in FY22.
Now Jio is embarking on another capex cycle, which may once again strain its free cash flows.
At the consolidated level, Reliance Industries generated operating cash flows of around Rs 1.10 lakh crore in FY22. This should give some comfort to investors for planned 5G investments if we assume a similar level for FY23.
However, there are also other competing investments. The company announced fresh investments of Rs 75,000 crore in the oils to chemical business. There are more long-term commitments on the new energy side which are over Rs 6.5 lakh crore. So there is a good chance that the company may see negative free cash flows for FY23 and look for external sources of funding.
Reliance Jio is going for a costlier 5G approach. But is the price tag worth it?
Bharti Airtel and Reliance Jio have chosen two different approaches to deploy 5G technology. Airtel is going for the cheaper, and globally accepted non-stand-alone approach while Jio is opting for the stand-alone approach.
In Airtel's non-stand-alone (NSA) approach, a telecom operator delivers the 5G radio signal over existing 4G network infrastructure. A standalone (SA) 5G network on the other hand, runs on an entirely new network infrastructure (say new radio towers) which requires higher capital investments.
Jio will develop this new infrastructure in-house and leverage its partnership with Qualcomm. The advantage of going for the SA structure is that it offers ultra-low latency which basically means minimal time lag in data transfer. This makes it suitable for applications in remote surgeries, gaming and robotics.
However, the challenge here is that the ecosystem for this structure is not yet developed. Very few mobile phones can actually support a 5G SA structure.
To enable the new structure, Jio acquired the highly expensive 700 MHz frequency waves along with the 3.3 GHz waves in the recent spectrum auction. This may not give Jio much of an advantage. According to Nokia, the 700 MHz band does offer better area coverage but the speed is only a little bit better than 4G. The same sentiments were echoed by Gopal Vittal in the recent earnings call.
The difference in these approaches explains why Airtel will roll-out 5G services at half the capex cost of Reliance Jio. Airtel can always opt for the advanced SA structure later on once the ecosystem is well established and there is evidence of higher revenue per user (ARPU).
Currently, none of the global telecom operators are making any incremental ARPU on the service, and it does make sense to wait and watch before going all out for an expensive architecture.
We won't know right away which strategy will pay off. Will Jio grab a higher share in the subscriber base and better ARPU with 5G, or will Airtel, the more 'sensible' player, win out? Analysts, meanwhile, anticipate a higher jump in Bharti Airtel’s net profits in next two years.
Screener: Sector outperformers in capital returns and revenue growth
This screener reflects stocks which outperformed the industry on annual return on capital employed (ROCE), return on equity (ROE), annual net profit growth and revenue growth.
It is dominated by stocks from the pharmaceutical industry and also includes stocks from auto parts and equipments and footwear. Major stocks featured in this screener are Divi’s Laboratories, Tube Investments, Ajanta Pharma and Metro Brands.
Divi’s Laboratories outperformed the pharmaceutical industry annual ROCE by 9.4 percentage points as well as surpassed the annual revenue YoY growth of the industry by 18.5 percentage points. Growth in the custom synthesis segment and efforts towards backward integration and debottlenecking aided this outperformance.
Tube Investments outperformed the auto parts industry in annual ROCE by nearly 10 percentage points and in annual revenue growth by over 80 percentage points. Its revenue growth was primarily driven by its engineering business which did well owing to market share gains and doubling of exports.
Metro Brands outperformed the footwear industry in annual revenue growth by 18.1 percentage points. This is helped by the growth in sales volumes due to reopening of offices , festive and the wedding season. Its annual PE TTM is also lower than the industry average. This has helped the stock to outperform the industry returns by 18 percentage points.
You can find some popular screeners here.
