Indian Telecoms:4G new entrant expects to gain 50%market share

4G new entrant Jio ( not listed) in its updated presentation suggested it sees theIndian wireless market growing at CAGR of 9% over the next four years to USD44bn byFY21. Jio is of the view that India wireless voice revenues will decline sharply fromUSD23bn currently to USD8bn over the next three years and see data consumptiongrowing 6x from the present levels of 1bn GB per month. The company estimates getting50% revenue market share and expects 50% EBITDA margins by FY21 and is of theview that it can support 60% of the forecast 2020-21 data demand. Jio sees incumbenttelcos struggling with re-farming their 3G spectrum for 4G and believes that it is 3-4 yearsahead of competition on fibre backhaul with 60% of its sites backed by fibre versus 20%in case of incumbent telcos.

    Our thoughts: We see the Indian telco market growing at a CAGR of 4% to USD43bn byFY25. We believe the 50% market share assumption of Jio assumes rapid sectorconsolidation and less than 5% market share with GSM new entrants in our view.

    Additionally it assumes that market share of the top three telcos may fall from c75%currently to 45%. If we assume Bharti maintains a 30% market share given that it isahead on 4G spectrum and coverage versus other incumbents, Jio would then seem tobe assuming that Vodafone India (not listed) and Idea Cellular which are discussingmerger, may see their market share fall from 44% currently to less than 20% over thenext four years. We note that mergers are difficult to execute and if both telcos were to cutcapex spending pre-merger they may be more vulnerable to competition. We see Ideacutting its capex by as much as 40% in FY18e. That said, it is possible Idea andVodafone India get into pan India active infra sharing agreements and if executed wellsuch an arrangement may improve their ability to participate in data growth. To sum up alot depends on how Idea and Vodafone execute pre-merger as the overall approvals forthe merger may take at least 12-15 months. We also think that an assumption of INR500ARPU looks optimistic, however it may be possible if Indian telcos were to be dominatedby two large players.

    Maintain Buy on Bharti with a TP of INR385: We think that Bharti is likely to focus onmarket share in coming days and retain subscribers. We dont expect Bharti to cut itscapex spends in the medium term and continue investing in 4G. This should allow Bhartito benefit from sector consolidation and data growth and drives our positive view. Wecontinue to value Bharti using DCF. Key downside risks include losing more than 10% ofits high end subscriber base to competition.