For a telecom network operator, capital expenditure (capex) typically comprises huge expenses incurred on building and deploying physical infrastructure such as towers, optical fibre network and base stations to enhance service coverage and capacity. These help in carrying out future expansion and adopting new technologies. In India, the bulk of telecom operators’ capex has traditionally been directed to­wards ensuring service quality and reach.

With the entry of Reliance Jio Info­comm Limited (RJIL) in September 2016, operators have been compelled to boost capex to remain competitive in the market and withstand pricing pressures. Despite dec­lining profitability and losses, operators have continued to invest significantly in new technologies such as 4G/long term evo­­lution (LTE) and voice over LTE (VoLTE). Bharti Airtel has increased its capex to retain its revenue market share and expand its broadband coverage. Mean­­while, Idea Cellular and Vodafone India are working aggressively on their proposed merger to reduce their capex requirements. RJIL, on the other hand, continues to engage in huge capex to strengthen and expand its network in order to capture a big share of the wireless market and expand into new areas such as fibre-to-the-home, content and devices. A look at the factors guiding the capex of different operators…

Bharti Airtel

Over the past few years, Bharti Airtel has substantially increased its capex for its Indian operations. In November 2015, the company announced its network transformation programme, Project Leap, which was aimed at improving network quality and customer experience. As part of this project, an investment of Rs 600 billion was proposed over the next three years. During this period, Bharti Airtel has successfully undertaken a capital expenditure of more than Rs 550 billion. It undertook a capex of Rs 240 billion in 2017-18 and plans to invest Rs 270 billion-Rs 280 billion during 2018-19.

As part of its capex, a large amount of money is being spent on providing better broadband facilities, increasing broadband coverage, expanding direct-to-home (DTH) facilities, meeting data demand, im­proving the efficiency of high-speed 4G data networks and capturing a greater market share. The operator plans to incentivise its distributors and offer attractive tariff plans in order to target the subscribers of operators that are shutting shop, or users of Idea and Vodafone networks who may face net­work issues and technical constraints ari­sing out of the proposed merger. In­ter­net of things (IoT) and cybersecurity are other areas where investment is planned to generate higher revenue streams.

Bharti Airtel is undertaking investments to maintain its market holding, even though revenues have been sluggish. It has experienced an erosion in revenue in the past quarters, but has succeeded in maintaining its market share, cash and margins. The gap between capex and cash flows can be bridged via the sale of assets, raising of debt or equity, or a combination of both. Over the past few years, Bharti Airtel has sold towers owned by its tower arm – Bharti Infratel – to generate funds. The proposed merger of Bharti Infratel and Indus Towers is also expected to generate additional funds for the service provider.

Idea Cellular and Vodafone India

As a result of the ongoing merger between Idea Cellular and Vodafone India, the two major service providers have lowered their capex during financial year 2017-18. The capex undertaken by Idea amounted to Rs 70 billion (nearly 11 per cent lower than 2016-17) and that of Vodafone India amounted to Rs 72.51 billion (a decline of approximately 13 per cent).

This merger, once approved by the Department of Telecommunications (DoT), will reduce the duplication of infrastructure, which will, in turn, yield cost savings on account of synergies. Ac­cording to a report, Idea Cellular and Vodafone India could achieve cost synergies worth nearly Rs 84 billion and capex synergies of Rs 56 billion within three to four years of the merger. The elimination of towers as well as tower sharing and leasing can also help lower costs for the combined entity. Idea, which has around 134,000 sites, and Vodafone India, which has around 140,000 sites, could collectively eliminate 55,000 to 60,000 sites post the merger. This is likely to result in opex and capex savings of approximately 15 per cent to 20 per cent.

The pressure to catch up with other operators in terms of 4G and VoLTE technology is immense for the two operators, which will be their biggest driver for capex.

Reliance Jio

RJIL’s capex stood at Rs 140 billion in the last quarter of financial year 2017-18,  which was double that of its previous two quarters’ combined capex of Rs 70 billion. Reliance Industries has proposed to un­dertake a capex of Rs 180 billion for RJIL in the first quarter of 2018-19 , which will bring up the total amount invested in RJIL till date to Rs 17.9 trillion.

RJIL has plans to raise over Rs 130 billion in debt to fund its capex. It has also raised Rs 32.5 billion in the form of loans from Japanese banks. The operator has further capex plans to add another 100,000 towers to its existing network of 100,000 towers and also launch its optic fibre cable-based home broadband services under the brand Jio Fibre, trials for which have already begun. This would likely trigger a price war with Bharti Airtel, which has been raising funds to expand its broadband coverage in India. RJIL is also working to augment its wireless capacity to support growth. The company’s capex is expected to remain high in line with its plans to add more base stations.

Conclusion

With the market consolidating into three major network operators – Bharti Airtel, RJIL and a merged Vodafone-Idea entity – competition will heat up in the years to come, with each operator trying to capture additional market share and earn higher revenues. This increased competition is expected to drive operator capex further as better quality of service will emerge as the key differentiator. With the launch of VoLTE technology, all operators would have to boost their capex in order to stay competitive. The disruption and erosion of cash flows and revenues due to RJIL’s pricing policy is expected to continue in the next few quarters, forcing operators to increase their capex via debt, equity or the sale of existing assets.

By Akanksha Mahajan Marwah and Rashi Gupta