Telecom Sector16th April 2018

Introduction

Snapshot

Industry Analysis

Major Players

Opportunities

Threats

Budget Analysis

Why to choose Telecom sector?

Peer Comparison

Index

Introduction• India will be among the top five economies in the world by 2020. Home to over a

billion mobile subscribers and the second largest Internet user base in the world,it will become a key force of reckoning for global business, policy, and technologyadvancement.

• Wireless connectivity will become ubiquitous over the next five years. RuralInternet users will grow by 40% annually for the next three years, and videoconsumption on the Internet will grow five-fold by 2020. In addition, the IoTmarket in India will grow to $16.7 billion by 2022.

• The government has enabled easy market access to telecom equipment and a fairand proactive regulatory framework that has ensured availability of telecomservices to consumer at affordable prices.

Air and Water for Telecom sector

• The two key variables that drive competitive position in the telecom market arenetwork capability and financial wherewithal.

• Bharti and Vodafone-Idea’s accelerated spectrum portfolio and capex spends inthe next 12 months would allow them to match RJio’s network capability.

• Secondly, the players may require strong financial wherewithal to match RJio’saggressive pricing and extensive capex to create a strong competitive position.

• Mittal-controlled Bharti Airtel Ltd has approval to raise Rs 16,500 crore throughBonds and also Reliance Jio Infocomm Ltd. announced that it plans to sell asmuch as Rs 20,000 crore of notes

Snapshot

KPI Telecom Subscribers WLS Subscribers WLN Subscribers

Total Subscribers 1,190.67 Million 1,167.44 Million 23.23 Million

% change over the previous quarter -1.33% -1.32% -1.84%

Urban Subscribers 688.25 Million 668.44 Million 19.81 Million

Rural Subscribers 502.42 Million 499.00 Million 3.42 Million

Market share of Private Operators 89.31% 90.45% 31.97%

Market share of PSU Operators 10.69% 9.55% 68.03%

Teledensity 91.90 90.11 1.79

Urban Teledensity 168.29 163.44 4.84

Rural Teledensity 56.66 56.28 0.39

Total Wireless Data Usage during the quarter 6,521,893 TB 6,521,893 TB -

No. of PCO and village public telephone 595,878.00 - 595,878

Industry Analysis

Source – TRAI Report

• 2G technology is likely to be in existence for 5-6 years more, as 500m+subscribers are still on feature phone.

• In 3G auctions, players had bid assuming they would harvest the investments incoming years. But because of RJio (which has hastened 4G technology), they arenot able to reap the anticipated benefits, leading to distress in the sector.

• Spectrum cap likely to be removed: Earlier, when the cap was levied, the intentwas to avoid concentration in a few hands. But now, with only three majorplayers, there seems no requirement of such a cap.

• Now, Telcos will have to invest in networks to survive. Competition will movefrom pricing to quality of service. This will be done by increasing towers. (IfBharti has issues on 4G calls, it can fall back to 3G or further down to 2G, butRJio has no option (except ICR).

Industry Trends

Consolidation in the sector continues• The price wars have already compelled second and third-ranked Vodafone

India and Idea Cellular to merge, while Bharti Airtel bought out Telenor Indiaand Tata Teleservices’ consumer mobility business. Reliance Communicationssold its wireless business to Rjio and Aircel shrank its operations, leavingBharti Airtel, Jio and the emerging Vodafone-Idea combine as the dominantprivate telcos.

• There would be only four major players (3 private and 1 government).

Declining ARPU

• Since the launch of RJio, industry gross ARPUs have crashed 30% to INR121 in3QFY18 from 1QFY17.

• There is strong ARPU increase potential once the market is normalized. In a three-player market in which each player has strong network and financial capabilityprice undercutting would no longer be an effective tool for market share gains.

• Operators would have to prioritize ARPU accretion over market share gains todrive growth.

Trends in Telephone subscribers and Teledensity in India

Further breakup

YoY – 3.55%

Operator wise Subscriber baseOperators

QE

Dec'16

QE

Mar'17

QE

Jun'17

QE

Sep'17

QE

Dec'17

YOY %

Change

QOQ %

Change

CAGR for Last

four QuartersMarket share

Bharti 269.7 277.5 284.5 286.0 294.0 9.0% 2.8% 2.2% 24.7%

Tata 54.7 50.7 45.5 46.8 38.6 -29.5% -17.6% -8.4% 3.2%

Telenor 54.5 50.5 47.3 46.0 41.9 -23.1% -8.9% -6.3% 3.5%

Bharti 378.9 378.7 377.4 378.7 374.5 -1.2% -1.1% -0.3% 31.5%

Vodafone 204.8 209.2 212.1 207.6 212.7 3.9% 2.5% 1.0% 17.9%

Idea 190.5 195.4 196.3 190.2 196.5 3.1% 3.3% 0.8% 16.5%

Voda Idea 395.3 404.6 408.4 397.8 409.2 3.5% 2.9% 0.9% 34.4%

Reliance Jio 72.2 108.7 123.4 138.6 160.1 121.9% 15.5% 22.0% 13.4%

Reliance 87.7 84.7 82.5 73.3 34.3 -60.9% -53.2% -20.9% 2.9%

Sistema 5.9 5.0 4.2 3.6 -100.0% -100.0% -100.0% 0.0%

Reliance 165.8 198.3 210.1 215.5 194.4 17.2% -9.8% 4.1% 16.3%

BSNL 110.5 114.7 117.4 118.6 120.4 8.9% 1.5% 2.2% 10.1%

Aircel 90.9 90.9 90.3 88.8 85.0 -6.5% -4.3% -1.7% 7.1%

Others 10.3 7.4 7.3 7.3 7.2 -30.3% -0.8% -8.6% 0.6%

Total 1,151.8 1,194.6 1,210.8 1,206.7 1,190.7 3.4% -1.3% 0.8% 100.0%

*M/s Sistema Shyam has been merged with M/s Reliance Communications during the quarter Sep-Dec, 2017

Rural Urban bifurcation

KPIQE

Dec'16

QE

Mar'17

QE

Jun'17

QE

Sep'17

QE

Dec'17

YOY %

Change

QOQ %

Change

CAGR for Last

four Quarters

Subscriber Base 1,151.8 1,194.6 1,210.8 1,206.7 1,190.7 3.4% -1.3% 0.8%

Rural 468.6 501.6 509.9 501.8 502.4 7.2% 0.1% 1.8%

Urban 683.1 693.0 701.0 704.9 688.3 0.7% -2.4% 0.2%

Teledensity Numbers of Telephone connections for every hundred individuals living in an area

Rural 53.27 56.91 57.73 56.71 56.66 6.4% -0.1% 1.6%

Urban 170.15 171.8 172.98 173.15 168.29 -1.1% -2.8% -0.3%

Traffic and ARPU per subscriber

Subscriber's BaseQE

Dec'16

QE

Mar'17

QE

Jun'17

QE

Sep'17

QE

Dec'17

YOY %

Change

QOQ %

Change

CAGR for Last

four Quarters

Traffic(minutes of use/subscriber/month)

GSM 360 405 428 437 495 37.5% 13.3% 8.3%

CDMA 255 250 246 206 112 -56.1% -45.6% -18.6%

ARPU (Rs/sub/ month)

GSM 103.92 82.68 79.58 83.89 79.39 -23.6% -5.4% -6.5%

CDMA 141.42 131.34 124.49 125.24 110.62 -21.8% -11.7% -6.0%

•Prepaid MOU per subscriber for GSM service increased from 419 in QE Sep'17 to 481 in QEDec'17, however postpaid MOU declined from 818 in QE Sep'17 to 786 in QE Dec'17.

•Prepaid ARPU for GSM service per month declined from Rs.71 in QE Sep'17 to Rs.67 in QEDec'17, and Postpaid ARPU per month also declined from Rs.361 in QE Sep'17 to Rs.348 inQE Dec'17.

Trend of Internet subscriber base

Internet/Broadband Subscribers

Total Internet Subscribers 445.9 Million

% change over previous quarter 3.9%

Narrowband subscribers 83.1 Million

Broadband subscribers 362.9 Million

Wired Internet Subscribers 21.3 Million

Wireless Internet Subscribers 424.7 Million

Urban Internet Subscribers 313.9 Million

Rural Internet Subscribers 132.0 Million

Total Internet Subscribers per 100 population 34.4

Urban Internet Subscribers per 100 population 76.8

Rural Internet Subscribers per 100 population 14.9

Subscriber's Base(in million)QE

Dec'16

QE

Mar'17

QE

Jun'17

QE

Sep'17

QE

Dec'17

YOY %

Change

QOQ %

Change

CAGR for Last

four Quarters

Wired Internet Subscribers 21.5 21.6 21.7 21.4 21.3 -1.1% -0.3% -0.3%

Wireless Internet Subscribers 370.0 400.6 409.6 407.9 424.7 14.8% 4.1% 3.5%

Total Internet Subscribers 391.5 422.2 431.2 429.2 446.0 13.9% 3.9% 3.3%

No. of Internet Subs per 100 Population 30.6 32.9 33.5 33.2 34.4 12.6% 3.6% 3.0%

Increasing Data Usage per subscriber

Data Usage of Mobile Users

Average Data Usage per subscriber per month – GSM (2G+3G+4G) 1,955 MB

Average Data Usage per subscriber per month - CDMA 292 MB

Average Data Usage per subscriber per month – Total(GSM+CDMA) 1,945 MB

Average outgo per GB data for GSM including LTE (2G+3G+4G) Rs.18.85

Average outgo per GB data for CDMA RS. 125.86

Wireless Data Usage

24

43

7

19

71

3

16

27

0

12

84

5

60

44

10

33

11

93

10

3

10

03

90

11

04

30

10

68

53

31

17

31

38

24

39

59

07

43

95

05

69

10

88

774

24

30

569

29

67

319

33

99

012 4

35

62

02

53

18

122

QE Dec'16 QE Mar'17 QE Jun'17 QE Sep'17 QE Dec'17

Trend of technology wise wireless data usage (in Terabyte)

CDMA

2G

3G

4G

Total wireless data usage increasedfrom 5,430,046 terabytes duringQ.E. Sep'17 to 6,521,893 terabytesduring Q.E. Dec'17. Out of total datausage, 2G data usage was 108,953terabytes, 3G data usage was1,088,774 terabyte, 4G data usagewas 5,318,122 terabytes and CDMAdata usage was 6,044 terabytes.

The contribution of 3G and 4G data usage in total data usage are about 16% and 82%respectively during the Q.E. Dec'17.

1.6%

16.7%

81.5%

Internet Subscriber Base and MarketShare

OperatorNo. of Subscribers

(in million)Share %

Bharti 99 22%

Tata 7 2%

Telenor 9 2%

Bharti 115 26%

Reliance Jio 160 36%

Reliance Com 2 0%

Vodafone 70 16%

Idea 43 10%

BSNL 32 7%

MTNL 2 0%

Aircel 16 4%

Total 440 100%

Reliance Jio holds the topposition with 36% of marketshare of internet subscribersfollowed by Bharti and voda-ideawith 26%. Top 3 operators holdaround 93% of total marketshare.

37%

26%26%

Reliance Jio Bharti Voda-Idea

Wireline Service

Rural subscriber base hasshown decline of 3.55%, from3.55 Million at the end ofSep'17 to 3.42 Million at theend of Dec'17. Urban wirelinesubscription also recordeddecline rate of 1.54%, from20.12 million to 19.81 millionduring the same period.

Service Provider wise growth in Wireline Subscriber base(in million)

Operator QE Sep'17 QE Dec'17Market share

Sep'17

Market share

Dec'17

Bharti 3.90 3.91 16% 17%

Tata 1.85 1.86 8% 8%

Bharti 5.75 5.77 24% 25%

Reliance Com 1.15 1.14 5% 5%

Vodafone 0.18 0.20 1% 1%

BSNL 12.80 12.43 54% 54%

Others 3.72 3.62 16% 16%

Aircel 0.07 0.07 0% 0%

Total 23.67 23.23 100% 100%

Net AdditionsSep-17 Dec-17 Net Adds

Bharti 285.95 294.03 8.08 2.8% 23.7% 24.7%

Tata 46.76 38.55 (8.21) -17.6% 3.9% 3.2%

Telenor 46.01 41.91 (4.10) -8.9% 3.8% 3.5%

Bharti 378.72 374.49 (4.23) -1.1% 31.4% 31.5%

Reliance Jio 138.62 160.09 21.48 15.5% 11.5% 13.4%

Reliance Com 73.31 34.30 (39.01) -53.2% 6.1% 2.9%

Vodafone 207.63 212.73 5.10 2.5% 17.2% 17.9%

Idea 190.16 196.50 6.34 3.3% 15.8% 16.5%

BSNL 118.61 120.35 1.74 1.5% 9.8% 10.1%

MTNL 7.01 6.96 (0.05) -0.7% 0.6% 0.6%

Others 3.83 0.25 (3.59) -93.5% 0.3% 0.0%

Aircel 88.82 85.00 (3.82) -4.3% 7.4% 7.1%

Total 1,206.71 1,190.67 (16.04) -1.3% 100.0% 100.0%

Service

Provider

Subscriber base (millions) Rate of

Growth%

Market

Share in QE

Sep'17

Market

Share in QE

Dec'17

Reliance Jio Infocom Ltd. recorded the highest net addition of 21.48 million subscribershowever, Reliance Communications Group showed maximum decline of 39.01 millionsubscribers during the QE Dec'17

Public Call Offices and Village public telephone

PCO Service provider Sep'17 Dec'17 Rate of change Market share

BSNL 2.46 2.36 -4.1% 60.02

MTNL 1.23 1.21 -1.6% 30.78

Bharti 0.27 0.13 -51.9% 3.21

Quadrant 0.02 0.01 -50.0% 0.36

Tata 0.2 0.22 10.0% 5.62

Total 4.18 3.93 -6.0% 100

At the end of Dec'17, only two serviceproviders BSNL and Tata Teleservices wereproviding VPT in the country. BSNL holds99.37% market share of total number ofVPT in QE Dec'17.

Internet Telephony

Internet Telephony services, the total outgoing minutes of usage for internettelephony is 322 million during the Q.E. Dec-17 as compare to 283 million inprevious quarter. Up by 13%

Broadband Service

The total number of broadband subscribers increased from 324.89 million at the end ofSep-17 to 362.87 million at the end of Dec-17. Out of which wired broadband subscribersare 17.86 million and wireless broadband subscribers are 345.01 million

160.09

71.09

52.44

34.81

21.95

Relaince Jio Bharti Vodafone Idea Cellular BSNL

Top Five Broadband service providers

Industry Revenue and ARPU

Monthly Average Revenue per User (ARPU) for Access Services based on AGR, declined fromRs.88.09 in QE Sep'17 to Rs.80.77 in QE Dec'17

Declining Revenue and ARPU

Revenue & Usage Parameters

Monthly ARPU GSM Full Mobility Service including LTE Rs. 79

Monthly ARPU CDMA Full Mobility Service Rs. 111

MOUs per subscriber per month - GSM Full Mobility Service including LTE 495 Min

MOUs per subscriber per month - CDMA Full Mobility Service 112 Min

Total Outgoing Minutes of Usage for Internet Telephony 322 Million

Monthly ARPU for GSM servicedeclined by 5.37%, from Rs.84 inQE Sep'17 to Rs.79 in QE Dec'17.Monthly ARPU for CDMA fullmobility service declined by11.68%, from Rs.125 in QE Sep'17to Rs.111 in QE Dec'17. In YoYterms GSM ARPU is down by23.6% and CDMA ARPU is down by21.8%.

Subscriber's BaseQE Dec'16 QE Mar'17 QE Jun'17 QE Sep'17 QE Dec'17

YOY %

Change

QOQ %

Change

CAGR for Last

four Quarters

Gross Revenue (in Crs) 66,532.4 63,315.2 64,889.5 66,361.7 61,088.7 -8.2% -7.9% -2.1%

Adjusted Gross Revenue (in Crs) 45,905.3 40,831.3 39,777.6 41,668.8 38,536.2 -16.1% -7.5% -4.3%

Access Adjusted Gross Revenue (in Crs) 37,283.7 31,594.9 30,082.3 31,968.0 28,967.9 -22.3% -9.4% -6.1%

ARPU per month (AGR/ Average subscribers/3) 111.6 89.3 83.4 88.1 80.8 -27.6% -8.3% -7.8%

Gross Revenue Market Share %Circle Aircel Airtel Vodafone Jio Idea

A.P 1 39.8 8.1 18.6 20.1

Assam 18.7 34.4 18.6 19 4.2

Bihar 5 42.7 11.3 21.2 11.8

Delhi 3 39.6 26.5 13.8 10.6

Gujarat 0.1 18.1 33.1 21 18.2

H.P 3 46.6 7.9 21.8 10

Haryana - 23.1 26.9 21.2 20.9

J&K 15.9 42.6 7.8 23.7 5.5

Karnataka 1.3 47.5 14.6 13.5 9.8

Kerala 0.2 15.2 23.7 12.2 34.3

Kolkata 5.2 30.3 31 20 5.7

M.P - 24.8 8.1 21.7 37.4

Maharashtra 0.6 19.2 24.9 15.8 29.5

Mumbai 4.1 28.3 34.2 12.8 8

North East 15.4 42 17 15.3 3.3

Orissa 5.1 41.6 13.7 24 4.8

Punjab 0.8 33.9 13.1 21 21.1

Rajasthan 3.1 40.8 20.7 19.8 10.4

Tamil 14.1 33.2 22.9 15 5.4

U.P East 2.5 31.4 27.9 16.8 11.2

U.p West 0.4 21.7 21.5 19.4 26.5

West Bengal 3.4 32 35.1 18 7.2

All Circles 3.5 32.1 21.6 17.4 15.9

MAJOR PLAYERS

• Reliance Jio Infocomm Limited, is a wholly owned subsidiary of Relianceindustry headquartered in Mumbai, that provides wireless 4G LTE servicenetwork and is the only 100% VOLTE operator in the country.

• The service was first launched to Jio’s partners and employees in Dec’15 on83rd Birth anniversary of late Dhirubhai Ambani and commercially launchedin Sep’16.

• Mukesh Ambani’s acknowledges the fact that globally consumers pay foreither texts and calls or Data – they don’t pay for both and thus he used thesame strategy i.e. Data with Voice

The Big O.. Reliance JIO

Mergers and Acquisitions• Reliance Jio Infocomm Limited (RJIL) signed a Rs. 12000 Cr deal with

RCOM and will acquire towers, optic fiber cable network or OFC, 4GSpectrum.

• Thirty-seven per cent of the towers in the network arefiberised, through which data traffic can travel at very high speed. Italso helps keep the wireless network less congested. In the areaswhere Jio might have most of its data traffic, it is said that 65 per centof the towers are fibre connected.

• RCom has debt of around Rs. 38000 Cr. The deal with Reliance Jio willbring in an upfront payment of an estimated Rs 1,000 crore and ayearly rental of Rs 800 to 1,000 crore for the next decade or a bit more

• Recently announced that its music streaming unit would mergewith SaavnIndia, creating a new entity deemed to be worth $1 billion.

Jio's latest deals with technology and gear vendors

• Reliance Jio is working with Samsung on a “massive” 4G LTE network expansionproject in rural areas of the country, besides working to bring 5G services in India

• With the Cisco All-IP network, the telecom operator will help transform thedelivery of citizen services from transportation, utilities and financial inclusion toentertainment, agriculture, education, and healthcare in the country.

• The AirWire connected car device is being manufactured in partnership withReliance Jio in India.

• Reliance Jio has also partnered with Samsung to provide Jio apps on theSamsung's Android and Tizen smartphones.

Interesting Facts • Reliance Jio entry in September 2016 led to $10 billion in annual savings for

India.

• Jio has made data accessible and affordable, with average prices per GB ofdata dropping to Rs 10 from Rs 152,

• “Within six months of Jio’s launch, India became the highest mobile data userin the world, consuming over 1 billion GB of data every month compared to200 million GB earlier.

• “India has surpassed the US in terms of app downloads, making it second onlyto China,” following Jio’s launch.

• A 10% increase in internet penetration led to per capita GDP rising by 3.9%, ifall else remains constant. According to IFC, Jio will help expand India’s percapita GDP by about 5.65%, if everything else is kept constant in the economy.

Data more affordable: Price per MB Down >90% in five years

[Source – MOSL]

Performance Analysis• RJio has gained a strong 14% active subscriber market share and 15% revenue

market share in just five quarters of launch (as at December 2017).• It posted a net profit of Rs 504 crore for the third quarter, its first within 15

months of start of commercial operations, buoyed by strong subscriber additionsand cost efficiencies, including sharply lower payments on account of interconnectcharges and posted a revenue of Rs 6,879 crore, up nearly 12% on quarter.

• The new telecom entrant’s average revenue per user (ARPU) - a key performanceparameter - stood at Rs 154, the same as in the fiscal second quarter.

• Earnings before interest, tax, depreciation and amortization (Ebitda) was Rs 2,628crore in October-December period, with an Ebitda margin of 38.2%, compared with23.5% in the previous quarter

• RJio has huge asymmetry in traffic, with ~85% of outgoing calls and only 15% ofincoming calls. A net payer of interconnection usage charges (IUC), which werereduced by the telecom regulator by 57% from October. In the latest thirdquarter, Jio’s paid nearly Rs1,082 crore as IUC, less than half of the nearly Rs2,140crore it paid in the previous quarter. These savings will continue as IUC rates havebeen slashed.

• Network operating expenses was at around Rs1,737 crore, compared with nearlyRs1,372 crore in the second quarter, while depreciation & amortization costs rose atad to Rs1193 crore from 1184 crore. Total expenses fell nearly 7% sequentially toRs6,109 crore.

• RJio continues to add the highest chunk of MBB (mobile broadband)subscribers, with 8.3m net addition. It accounted for 48% of the incrementalsubscriber market share; RJio’s MBB market share expanded 35bp to 46.8%.

OutlookRJio gaining active SMS % primarily from smaller players %

RJio to gain gross RMS % primarily from smaller players and Voda-Idea%

[Source – MOSL]

• It is expected that RJio will achieve revenue market share of 24% by FY19and 27% by FY20 through undercutting, triggered by strong capacity andfinancial wherewithal.

• It is likely that RJio takes advantage of the industry turmoil in the next 12months to reach 35% market share.

• The feature phone market is a sizeable 500m, constituting nearly two-thirdof the 750m-800m overall devices in the market. We expect RJio toachieve at least 10% share in the next 6-8 months, translating into 6m-8mmonthly Jiophone additions.

Bharti Airtel• It is an Indian multinational telecommunication service company headquartered

in New Delhi. It operates around 20 countries and provides 2G, 3G and 4Gservices depending upon the country of operation.

• Sunil Mittal led Bharti Airtel remains the leading service provider with 313millionsubscribers which is around 30.9% of total market share.

• Bharti’s recent acquisition deals with TTSL and Telenor, which are likely toconclude by 1HFY19, should provide a buffer for the sharp India wireless EBITDAdecline triggered by the fresh round of price-based competition .

• Bharti Airtel is the fourth largest mobile operator in the world.

Performance Analysis

• Bharti has taken the top spot in terms of active subscriber addition. It added10.3m subscribers in January and expanded its market share by 110bp to 30.9% bycontinuing to eat into the market shares of smaller operators

• In January’18 TTSL saw the largest drop of 16m to 9.3m. On the contrary, Bhartigained 10.3m of the subscriber churn, potentially implying significant organic shiftaway from TTSL prior to its acquisition.

• Airtel added 4 million MBB subscribers as against total addition of 17million in MBBcustomers, leading to a share of 20% in MBB Subscriber market.

Bharti Africa

Turnaround in Africa Business Africa Margins to reach new highs

[Source – MOSL]

Total cash flow generation capacity

Bharti Telemedia

Bharti Africa

Bharti Infratel

Rs. 40,100 crores

[Source – MOSL]

Outlook• Bharti's completion of TTSL and Telenor acquisition by 1HFY19 should cushion the

impact of recent low ARPU plans. Including the contribution from the merger, itsIndia wireless EBITDA estimates stand at INR134.7b for FY19 (a 11% decline) andINR173.5b for FY20 (a 29% growth), contributing 45% and 49%, respectively ofoverall EBITDA.

Total Indian Wireless business (incl. TTSL and Telenor estimates)(in million)

[Source – MOSL]

Idea-Vodafone – Merger Insights• Voda-Idea will create India's largest mobile phone company with about 405

million customers, 40% customer market share and 39% revenue share.• Idea Cellular and Vodafone will continue to operate as independent brands in

India• Prior to completion of the transaction, Vodafone and Idea intend to sell their

standalone tower assets and Idea’s 11.15% stake in Indus Towers to reduceleverage in the combined company.

• Vodafone will own 45.1% in the combined entity after and Kumar MangalamBirla and other promoters of Idea Group will hold 26% and the rest will be ownedby the public.

• Promoters of Idea have the right to acquire up to a 9.5% additional stake fromVodafone with a view to equalize shareholding overtime. If both Idea andVodafone do not have equal shareholding by the end of the 4th year, aftermerger is completed, Vodafone will have to reduce its holding to equalise itsownership over the 5th year.

• Idea-Vodafone is well-funded to meet the heavy capex needs in the coming year.However, beyond FY19, it might need further fund infusion, as ARPUs remaindepressed, limiting the cash generation potential.

• Net debt of INR990b on day zero of merger could potentially increase (due tocapex) to INR1.2t by FY19-end, with net-debt-to-EBITDA at ~11x.

• Market recovery and cost synergies (INR84b by FY21/22) remain the silver lining.

well-funded for first year of merger

Performance Analysis• Vodafone-Idea added 2.2 million subscribers in Jan’18 v/s 6 million in Dec’17.

Market share expanded marginally by 30bp to 40.2%.

• After recovering strongly by 140bp in Nov’17, the combined entity activesubscriber market share has continued to grow but at much slower pace.

• Combined entity added only 2.2 million subscribers in Jan18 as compared toAirtel (+10.3m) and Jio (+5.2m) out of total 17.7million subscriber base addedin Jan’18 by top 3 players.

• It has around 92 million of Mobile Broadband subscriber base as compared toAirtel(73m) and Jio(168m) out of total 360million subscriber base.

• It added 4.9million MBB subscribers in Jan’18 leading to market share of 25.6%as compared to Airtel(3.9m) and Jio(8.3m) out of total 17.1million subscriberbase added.

Mobile phone

4G devices constitute ~20% of total handsets Share of Smartphone shipments trending up

496

113

150

2G

3G

4G

6% 7%

17%

30%

39%

43% 43%

172

206205

180152

149164

11 1542

77 97 113 122

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

0

50

100

150

200

250

300

350

1 2 3 4 5 6 7

Featured phone Smartphone Smartphone % share

Digital India• Technology is being used to impart information, educationskills, healthcare, financial inclusions, small and villageenterprises, opportunities for women i.e. entire new set of possibilities tochange the developmental model. Therefore Digital Literacy is of utmostimportance now. The aim here is to make technology more accessible andaffordable and something that adds value. Modi has a vision to connect allschools and colleges with internet and is also teaming up with Google toprovide wifi at around 500 railway stations and also 5lacs public hostpots.•The Indian telecommunications sector has been at the core of social andeconomic development of this country and telecom infrastructure sector hasbeen the bedrock for a Digital Economy. Telecommunication and itsInfrastructure are the backbone of ‘Digital India’, where future technologies likemobility, analytics, cloud, Internet of Things (IoT), Machine to Machine (M2M)Communications are playing a key role in implementing the Digital India vision.

Threats• The need for high investment required. The initial investment for businesses to

add devices on to the IoT network is quite high.• Lack of infrastructure planning• Disparities between policies from state to state. Example License fees charged

by government is different across states.• Cloud exposes stored confidential data to data leakage and fraud. Security, data

privacy, and integrity concerns are inhibiting certain verticals from participatingin IoT.

• Having too many apps are being perceived by many consumers as inconvenient,thereby leading to poor usage of apps and limited ROI.

Budget Highlights• Giving push to the Digital India initiative, Budget 2018 proposed to set up 5

lakh hotspots to provide broadband to 5 crore Indians. For this, thegovernment has allocated Rs 10,000 crore under the telecom infrastructure.

• The telecom department (DoT) will support a 5G technologies test bed thatwould be anchored out of IIT Chennai. Jaitley's 5G-related budget proposalindicates India seeks to be at the forefront of development as well as localmanufacturing of 5G devices, going forward. The government is aiming to tollout 5G in 2020, in line with global markets.

• The government expects around 58 per cent increase in revenue at Rs 48,662crore from the stressed telecom sector in 2018-19 against the revised revenueestimate of Rs 30,736 crore for the current fiscal.

• To enhance research in technologies like Artificial Intelligence (AI), Internet ofThings (IoT) and Robotics, Arun Jaitley said that Niti Aayog will establish anational programme to direct research efforts in new-age technologies.

• However, the telecom industry is disappointed that none of its key asks havefound mention in finance minister Arun Jaitley’s budget. There is no reductionin the high levies and taxes, and an urgent intervention for reviving thesector, which is currently experiencing its worst financial health and hypercompetition.

• Domestic handset companies including Micromax, Lava, Intex have lauded thegovernment’s move to increased custom duty on handsets to 20% from earlier15% while also imposing a 15% duty on some components along with animposed 10% import duty on printed populated circuit boards for chargers andincreased duty on lithium-ion batteries used in mobile phones to 15% from7.5%.

• 99 cities were selected under the ambitious Smart City mission at an outlay ofRs 2.04 lakh crore. Currently, there are more than 2,500 projects worth over Rs1.35 lakh crore underway under the mega program while 189 projectsamounting to close to Rs 2,235 crore have already been completed.

Why to choose Telecom Sector ?

Key Points• By 2020, Deloitte believes industries such as utilties

manufacturing, automotive, transportation and logistics are expected to seehighest adoption levels of IoT in India. The government’s planned investment ofabout $1 billion for 100 Smart Cities, over the next five years, is expected to be akey enabler for IoT adoption across these industries. In addition, industries suchas healthcare, retail, and agriculture are also expected to make significantprogress in IoT adoption.

• Deloitte predicts that in the next two years, telecom operators would unveilnew IoT strategies or stretch the existing one to have higher level ofparticipation in the overall end-to-end IoT ecosystem and economy than merelybeing satisfied with providing SIMs and connectivity.

• Telcos will have to gear up and develop new strategies with rising popularity of OTT. They may have to take the approach of being an OTT enabler and support the exiting OTT player with more capabilities and functionalities that will in turn help in growing telco’s Direct to Consumer business.

• The major trend that will impact telecommunications is the explosion ofconnected devices. This internet of things, or Thingification, will add billions ifnot trillions of new connected data sources globally by 2020. The upswing of allof these devices will be an astronomical growth in data volumes; we will quicklypush through exabyte volumes and enter the world of zettabytes per year.

• With increase bandwidth demand, 4G launch and fibre optics reachinghomes, India is witnessing bandwidth revolution. Currently India is the 2ndlargest telecom market in the world with 1.05 billion subscribers out of which1.03 billion use wireless means to communicate.

• In the present business context, large scale technology investments for thecountry’s digital infrastructure envisioned under Digital India and Smart Citiesprogram, along with private sector technology investments to support thebooming e-commerce and consumer internet market. The government of India isexpected to invest $19 billion by 2020 for establishing the digital infrastructure.

• A 10% increase in Digital penetration would lead to 1.4% growth in GDP, but incase of India it would lead to 3-4% growth in GDP.

Peer Comparison

RJio’s price plan 13% cheaper than Peers

91 days price plan 84 days price plan

What is Spectrum and Cell site?• “Spectrum” is the range of radio frequencies through which technology works.

Eg. Light is also a wave, but a visible wave. We cannot see or touch radio wave.Waves used for cellular are called as Cellular band. Eg for 2G 800-900 Mhz bandis used, for 3G 1800 Mhz and for 4G around 2300-2400 Mhz band is used. All theEquipments like Remote, wifi, phones are designed according to there allocatedband. Eg In Radio, FM uses 88-110mhz. If the spectrum band is not allocatedthen all devices will start using common band which will definitely createproblem.

• A cell site or cell tower is a cellular-enabled mobile device site where antennaeand electronic communications equipment are placed. Higher the cell site betterthe call and data quality and also higher rent, power, repair and maintenancecost.

Spectrum Share

Bharti and RJio hold most of the current spectrum

Operator-wise/band-wise spectrum holdings

34

2022

28

21%

12% 13%

17%

10%

12%

14%

16%

18%

20%

22%

0

5

10

15

20

25

30

35

40

Bharti Idea Vodafone Rjio

Avg. Spectrum/circle(Mhz) Spectrum share (%)

[Source – MOSL]

Cell Sites

*Higher the cell site better the call and data quality

[Source – MOSL]

Player-wise MBB subscriber net adds and market share

Net adds

Market share

[Source – MOSL]

Bharti‘s RMS to rise (%)

[Source – MOSL]

Bharti poised to gain SMS (%)

[Source – MOSL]

SMS Share

Bharti’s active SMS on continuous uptrend Vodafone-Idea’s active SMS has recovered

[Source – MOSL]

FCF and FCF Yield

BHARTI: FCF and FCF yield to increase IDEA: FCF and FCF yield to remain under pressure

[Source – MOSL]

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Source : TRAI and MOSL report.