India has made significant progress in the telecommunications sector, bringing connectivity to a significant portion of its population. While old challenges persist in many parts of rural India access to healthcare and reliable electricity, the majority of rural communities now have telecom services. Around 75% of rural households have a smartphone. According to Deloitte, the Indian telecom industry’s market size is expected to reach $125 billion by the end of 2023 and grow by $12.5 billion every three years.

As the second largest telecom market after China, India boasts a subscriber base of 1.1 billion and a teledensity of 84.5%. The growth in telecom services has picked up in the past five years, driven in part by the entry of Jio, which has spurred investments and reduced competition. 

Technological advancements like 4G and 5G have improved the Indian user experience. India also boasts of affordable connectivity - the average cost of 1GB of wireless data in India is around Rs 14, much lower than around Rs 460 in developed nations like the US.

Increase in income levels, access to cheaper handsets, and better coverage have made telecom services popular in the country. The volume growth in the sector has mostly saturated at 1,140 million subscribers as of last year. However, two major service providers, Bharti Airtel and Reliance Jio, have been gaining market share at the expense of others.

Reliance Jio gains Vodafone’s share and adds new customers

Reliance Jio has been attracting customers from Vodafone and BSNL by offering better accessibility. In rural areas, it has gained many new customers, while in urban areas, customers switching from Vodafone India and BSNL/MTNL have opted for both Jio and Airtel. Jio has been adding an average of 2.25 million customers per month for the past 13 months, while Airtel has added 0.81 million customers per month. Vodafone, on the other hand, lost 2.07 million customers per month in the same period. 

The result of this can be seen in Jio’s market share, which increased from 35.6% in April 2022 to 38% by April 2023. In contrast, Vodafone’s market share declined by 220 bps in the same period.
 

Vodafone’s limited investments (Vodafone bid for only 11.8 MHz 4G network compared to Airtel’s 355 Mhz and Jio’s 488 Mhz in FY21) have worsened service quality, resulting in the loss of its customer base. News of its financial woes has also led to a customer exodus. 

Airtel keeps its hold on premium customers and commands pricing power

Airtel’s customers are reluctant to shift to other service providers despite higher tariffs. For instance, Airtel's annual plan offering unlimited calls and daily 2.5 GB data costs around Rs 3,359, while Jio offers a similar plan with 388 days validity for Rs 2,999. Airtel has consistently undertaken price hikes while holding on to its customer base. This premium and loyal customer base has helped Airtel’s pricing power. The Average Revenue Per User (ARPU) for Airtel increased by 8.4% in the past year, compared to Jio’s 6.5%.
 

Telecom service providers avoided major tariff hikes in the second half of FY23 as they focused on maximizing the 5G rollout and attracting more customers. However, the increased expense from the 5G rollout forced them to undertake a tariff hike in Q1FY24. 

Margin expansion anticipated owing to tariff hikes

The increase in customer base and rate hikes are likely to improve the margins of telecom operators. Airtel’s tariff hike is expected to increase its ARPU by 3.1% QoQ in Q1FY24, leading to a margin improvement of 30 bps QoQ.

In contrast, Reliance Jio's increase in ARPU has remained stable, resulting in minimal margin impact. However, Airtel’s net profit margin is expected to decline QoQ to 6.5% (from 8.3% in Q4FY23) due to higher finance costs. Reliance Jio is expected to maintain the net profit margin levels at 20.2%.

Reliance Jio leads Bharti Airtel in 5G rollout

Since the initiation of the 5G rollout in October 2022, the data usage levels of Jio and Airtel customers have increased by 4% and 2.7%, respectively, between October 2022 and March 2023. The growing data consumption and penetration of 5G will aid telecom operators' efforts to raise tariffs and increase customers who are under the 5G network. 

Airtel’s 5G rollout has been slower compared to Jio. Jio's users are connected to 5G 37% of the time, against just 14% of Bharti Airtel. Jio’s 5G network connectivity is rated at 4.2, surpassing Airtel’s 3.4. Jio is leading the penetration in 21 circles. 

The higher capex for the 5G rollout requires service providers to raise ARPU to around Rs 250-275. However, based on previous trends where ARPU dropped to Rs 100 from Rs 190 during the 4G rollout (FY17-19), the ARPU is not likely to increase significantly in the near term.

5G spectrum spend will add more debt to the books

The 5G auction conducted in August 2022 generated record revenues of Rs 1,50,173 crore for the government. However, this will add more debt to the books of service providers. As per initial estimates, the debt in the telecom sector is pegged at Rs 6 lakh crore by the end of FY23. The telecom sector accounts for 3-4% of Indian banking sector debt.
 

Fortunately, the industry has gotten some relief with relaxed terms for spectrum payment. The spectrum charges will be a deferred payment spread over 20 years, with an annual interest rate of 7.2%. Service providers invested Rs 5 lakh crore in capex during the 4G rollout (FY17-FY21). 

The annual payments for spectrum charges are projected to be around Rs 13,365 crore in 2023, increasing to Rs 19,600 crore for both 2024 and 2025, and escalating to Rs 65,500 crore from 2026 onwards. 

Reliance Jio adds more revenue verticals

Reliance Jio is trying to export its indigenously developed 5G stack technology to the US. Jio has developed a complete ecosystem for 5G, including a radio access network, cloud infrastructure, platforms, related hardware, and technology solutions. However, it needs to be first implemented in India and is still waiting for necessary clearances.

Jio’s recent launch of entry-level and  5G phones will add another layer of revenue for the company. These budget-friendly smartphones are specifically targeted towards rural households. It partnered with Qualcomm, Samsung and other players in China and Korea to reduce the cost of these devices. This strategic move will also attract customers to its 5G network. 

The telecom sector is now dominated by a duopoly consisting of Reliance Jio and Airtel. They are playing a different game of balancing revenue streams and customer acquisition. The complete 5G rollout will give them an upper hand, but it will also require significant capex. 

According to Jefferies, the telecom sector is expected to grow at a 13% CAGR, with an estimated revenue collection of $35 billion in FY25. This is enormous potential for growth, but both Jio and Airtel will have to spend significantly to outcompete each other in getting a slice of the pie.