The illogically costly 3G auction, evidently, has strategic implications for both Bharti and Reliance Communications. B&E does a snapshot 'dummies guide' competitive analysis primer on the two by Virat Bahri
The market for data will remain restricted to specific markets and not be uniform like voice. In terms of subscriber numbers, Bharti is at around 130.6 million users (COAI, April 2010), while RCom has crossed the 100 million mark fairly quickly; with subscriber numbers at 105.15 million (April 2010, COAI). ARPU data confirms that Bharti has more of a high value customer mix, a consequence of its pioneer advantage. That also means a better shot at 3G, which is more about high value customers in the initial phase. On the other hand, Reliance has a great momentum going for it and will rely on volumes. The company’s decision to enter GSM space has helped it widen its customer base. By April 2010, the company had won 16.11 million GSM subscribers (COAI), a span of just 16 months since launch, and company officials from RCom are quick to point out how they were able to build a pan-India GSM network in such a short time. RCom’s strategy would now be to aggressively expand GSM presence in its key circles and play on higher volumes to gain revenues from its 3G services. Rahul Jain, Research Analyst, Angel Broking, says to B&E, “Value addition in form of VAS only works with small section of the subscriber base... The only differentiator to acquire and sustain subscribers is ‘price’.” That has been more RCom’s area of competence. The other critical aspect will be how they pull the customer towards using their VAS and both players are strong here. RCom has associated with the world’s second largest application store GetJar to enable it to provide around 65000 offerings for its subscribers. Bharti launched its mobile app store with 1250 apps across 25 categories in February 2010.
Besides, it is true that the ROI on the 3G investment will not come easy for either company. Bharti will be stretched due to its $10.7 billion deal to acquire Zain (it has taken $8.3 billion in debt), while RCom is already stretched with its investment into the pan-India GSM network (where it made an initial investment of Rs.100 billion). The net debt to EBITDA ratio will be stretched post the 3G investment to 0.69x for Bharti and 3.64x in terms of RCom, as per a report by Religare (assuming the investment will be financed via new debt). Goldman Sachs has revised its FY11E/FY12E/FY13E EPS estimates for Bharti & RCOM by 9%/-12%/-11% and -10%/-13%/-15% respectively. Also, it predicts that restriction in import of Chinese equipment could result inBharti and RCom investing an additional $1 billion and $800 million respectively for 3G capex. According to Macquarie, “India is unlikely to see meaningful uplift to data revenues in next two years as 3G will have a cannibalising effect on existing 2G led data revenues.” Also, only 5% of Indian subscribers currently have 3G enabled mobile handsets.
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Source : IIPM Editorial, 2010.
An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).
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