The Second Coming.


     At the dawn of the millennium, India’s telecom sector was a different place. The customer base was small albeit growing, market penetration was low and call rates were almost outrageously high. The sector was considered to be a sunrise sector and the market, at that time, was dominated by Bharti Airtel. The company pioneered the ‘minutes factory’ business model (a volume-centric strategy) and it ruled the market in terms of customer base and revenues. In fact, Bharti was virtually unchallenged in the marketplace for several years. All that, however, changed with the arrival of Mukesh Ambani.
     In 2002, Mukesh Ambani flagged off Reliance Infocomm and his newest baby went head-to-head with Bharti in a slugfest. Reliance, over the course of the next two years, slashed call rates to rock-bottom levels and tied up with handset manufacturers to launch mobile handsets that even the hoi polloi could afford. Soon enough, Reliance found itself at the top of the telecom market in India and it was Bharti that was being forced to play the catch-up game. Reliance Infocomm’s sheer size and scale, backed by its parent company’s strong financial muscle, had captured the market and literally sounded the death knell for Bharti. The situation was so grave that, as far as Bharti was concerned, the Street had even begun to raise survival questions.
     However, in 2005, Bharti got a fresh lease of life when a bitter family feud saw the Ambani brothers carve the colossal Reliance empire between them. The oil-and-gas business went to Mukesh Ambani and Reliance Infocomm fell under the aegis of Anil Ambani, subsequent to which it was rechristened Reliance Communications (RCom). Moreover, the brothers signed a non-compete agreement to ensure that their feud would not spill over into their business groups. Reliance Industries Limited (RIL) invested heavily into its core business and diversified into retail, while the Anil Dhirubhai Ambani Group (ADAG) grew its telecom business and diversified into the power and financial sectors.
     With the exit of Mukesh Ambani from the telecom space, Bharti Airtel was back in business and business was about to pick up. Over the course of the next 5 years, the entire sector grew exponentially, both in terms of voice and data. The customer base witnessed explosive growth to a figure of over 750 million and call rates dropped like hot potatoes, even as price wars erupted in several circles. Foreign companies ventured into the market and Indian telcos went in for multi-billion dollar acquisitions around the globe. The sector witnessed its fair share of controversies in the form of the 2G scam, licence cancellations and the exit of a couple of companies from the market. RCom, over the course of these 5 years, saw its profits falling with each passing quarter and debt levels peaking at Rs. 35000 crores. The company’s caller base had virtually stagnated and its scrip, once a market favourite, was persistently breaking all its support levels. Anil Ambani’s RCom had turned into a mere shadow of his brother’s Reliance Infocomm but it wouldn’t be long before circumstances would change and the telecom sector would beckon Mukesh Ambani’s return.
     In 2010, the Ambani brothers decided to bury the hatchet and scrapped their non-compete agreement. This meant that Mukesh Ambani was once again free to enter the lucrative Indian telecom market. The elder Ambani wasted little time in signalling his intent to return to and capture the market by acquiring Infotel Broadband for a consideration of around Rs. 4900 crores. Infotel had already bid for and won pan-India 4G licences and RIL later revealed its plans to launch 4G services in the market, on a nationwide scale.
     Reliance Jio Infocomm, as Ambani’s latest telecom foray is christened, is a $10 billion business venture of RIL. Initially, Reliance Jio only intended to enter the data and broadband space but a recent Supreme Court and TRAI ruling that allows 4G operators to add voice facilities, for a paltry sum (in Reliance terms) of a little under Rs. 1700 crores, has thrown the entire market open to RIL. Reliance Jio intends to kick-start its operations in December 2013 and expand nationwide within a couple of years or so. The company may even choose to piggyback on RCom’s existing tower base but for now, that looks unlikely. Reliance Jio is expected to break even in 3 years’ time but that may be easier said than done. After all, the telecom business happens to be a capital intensive one and 4G technology, which Reliance Jio is banking on, has been a failure in several countries worldwide.
     Today, India’s telecom market is dominated by the trio of Bharti Airtel, Vodafone and Idea. RCom and Tata Teleservices happen to be major players as well and there are half a dozen other companies in the crowded market. The sector, however, is bogged down by a plethora of problems. In the wake of the 2G scam, several companies have had their licences cancelled in multiple circles and upcoming licence renewals are set to cost the sector leaders billions of dollars in the next few years. Foreign majors such as Etisalat and Batelco have already beaten hasty retreats and spectrum refarming (wherein telcos have been forced to surrender 900MHz spectrum in exchange for a weaker 1800MHz spectrum) is bound to hit the sector as well. Furthermore, debt and cascading profit margins are proving to be major constricting factors for companies such as Bharti and RCom. Vodafone is plagued by a Rs. 11000 crore capital gains tax dispute with the tax authorities and for now, Idea seems to be the only company that finds itself on a firm footing.
     This entire set of issues boils down to the glaring fact that India’s telecom sector is wide open for a deep-pocketed player with size and scale to saunter in, capture and dominate the market. And that is exactly what Mukesh Ambani intends on doing. With RIL already being debt-free on a net-cash basis and with its core oil-and-gas business spurting out copious amounts of surplus cash, Reliance Jio isn’t likely to encounter any funding bottlenecks. Moreover, Ambani is already said to be in talks with AT&T to offload a 26% stake in Reliance Jio for a consideration of close to $3.5 billion, which would peg the company’s valuation at a mindboggling $14 billion. Bharti Airtel, on its part, is gearing up for the return of its bête noire, by launching 4G services in many of its circles. Indeed, with Reliance Jio’s launch looming large on the horizon, the entire Indian telecom sector would do well to be on high alert. For, the second coming of Mukesh Ambani is upon it.      
     

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