Bharti vs Reliance: Market gets ready for Big Fight

New Delhi: The potential entry of Reliance Industries (via Infotel Broadband) into the 4G telecom market and even possibly the 2G market, has sent equity analysts to predict a long downhill road for industry leader Bharti Airtel. This, when Bharti claims to have wrested 0.8 percent more value share of the industry in the last quarter-which means incremental revenues between Rs 2,000-2,500 crore-and analysts themselves agree that despite all the negatives in store Bharti remains their top pick in the telecom space.

So is it then a case of analysts crying wolf, at least with respect to the threat Reliance may pose to Bharti’s business? Or is some other factor at work here? In recent weeks, Bharti shares have been going downhill while Reliance has gained buoyancy. While the Bharti share is near its 52-week low (around Rs 250), Reliance’s is 20 percent above it’s own 52-week low (over Rs 804).

[caption id=“attachment_427578” align=“alignleft” width=“380”] Is the market calculating that it is Advantage Reliance right now? Reuters[/caption]

Is the market calculating that it is Advantage Reliance right now? Only two things are known with certainty right now: Reliance is the only pan-India licensee for 4G services and has still not said if it will refrain from bidding in the upcoming 2G auctions.

No one, till now, has a clue about how much Reliance will invest in 4G or in 2G auctions, whether it will enter voice services along with data in 4G, and whether it will put up its own towers or lease them from existing tower companies. In short, very little is actually known about Reliance’s game plan.

Market insiders told Firstpost say the company is still evaluating whether to participate in 2G bids (the auction is due in November-December) and a decision will be taken only when the government comes out with details of the auction and other issues related to it. Also, it seems Reliance could do a mixed model on putting up towers - it plans to put up “low-cost” towers for the telecom business so that it gains a cost advantage over the towers currently being used by Bharti or other telcos. But in some geographies, it could also rent existing towers.

These sources said that not only will the telecom towers be low cost, they will be also be used for non-telecom services like providing security solutions. A Reliance-led IT service provider consortium has already bagged a contract for putting up 1,200 CCTV cameras across Mumbai and the company’s telecom towers could double up as CCTV points too. Does this mean RIL is planning to install 1,200 telecom towers in Mumbai itself or will this be done along with other consortium partners (which includes MTNL)?

The market sources quoted above also made it clear that to keep costs to end-consumers down, Reliance will not outsource network management services - which is the management of towers, optical fibre, signal quality, etc-but do it in-house. It has already begun laying down the optical fibre network for telecom services but there is little likelihood of beginning anything before the June quarter of FY14.

So all in all, Reliance will perhaps bring a cost-effective model to the telecom market. But is cost effectiveness enough to survive in a cut-throat business where Bharti has been a long-term player and already has the first mover advantage over Reliance in 4G?

A Credit Suisse report, which created a furore about Reliance’s potential threat to Bharti and led to a fall in the latter’s share prices over the last few days, itself has based its findings on a whole lot of assumptions. It has assumed that Reliance will offer voice with data since without voice the addressable market would be just “$750 million to start with, given current device prices. “Not enough to build a viable business case since Reliance has paid $2.5 billion for 4G spectrum in 2010.

Credit Suisse says in case Reliance does offer voice with data, the addressable market becomes $8 billion. It goes on to make many more assumptions about the company’s business model and its cost economics.

But Morgan Stanley’s Vinay Jaising, Anirban Roy and Vanessa A D’Souzasaid in their 20 August report that Bharti still remains their top pick in the telecom space.

“Though we do not expect fresh buying of the stock from new investors, we expect the existing investors who are overweight will trim their positions to be equal-weight. Though Bharti still remains our top pick in the industry due to its strong cash flows and balance sheet, we do not foresee any positive catalysts in the next six months.”

Sachin Gupta of Nomura said in his report yesterday that in the domestic market, Bharti averaged 3 percent sequential domestic wireless revenue growth over the four quarters in FY12, translating to about 11 percent y-y growth. Bharti added Rs 38-39 billion (Rs 3,800-3,900 crore) in incremental wireless revenues in FY11-12, and for FY13-14 “we model in a rise of Rs 39-42 billion in wireless revenues which is in-line with past trends. There are still (and will likely be) 4-5 viable players and hence we believe it is difficult to see many surprises on prices or volume. We expect data take-up to pick up, and expect this to rise 2-3 percentage points ever year to contribute 21 percent of revenues by FY15.”

Against this backdrop, the trends in Bharti’s and Reliance’ share prices indicate not so much about what will happen in the telecom space, but non-telecom variable. In Bharti’s case, it could be the weight of debt incurred to buy Zain’s Africa operations; in Reliance’s case, the buoyancy may relate to more friendly news from government on KG-D6 gasfield investments.

What no one is ruling out that 2013 will see a clash of these two giants in the telecom space.