Options for Airtel

What strategic options Airtel has, in the wake of Vodafone-Idea merger and JIO aggressive pricing? Which one they should pursue and why?

The proposed merger of Idea and Vodafone India will create an entity with combined revenue of Rs78, 000 crore in a market, with a market share of 42%, that has been hitherto dominated by Bharti Airtel, which reported annual revenue of Rs50, 008 crore from local telecom operations in the last financial year.

Also Reliance Jio is using Predatory pricing for the last couple of years to drive out the competitors and have had successes to a certain extent that it has driven out small competitors which could not match the given proposition of Reliance Jio.

For Airtel, it has two hurdles in front of it, losing its leading position due to the new market share of Vodafone and Idea and on the other hand stiff competition because of price wars initiated by Reliance Jio.

Airtel needs to solve both these problems in parallel.

Due to this merger, both Idea and Vodafone will have to let go some of its customers as regulations do not allow a telecom company to have more than 50% revenue market share in any circle.

Revenue of the combined entity will exceed 50% share in circles such as Gujarat, Haryana, Kerala, Madhya Pradesh, Maharashtra and Uttar Pradesh (West), where it will have to reduce its market share to below 50% within a period of one year as specified by the regulations.

This will lead to reduction in RMS by 240 basis points and effective RMS will stand at 39.6%, according to Edelweiss Securities Ltd.

These six circles together constitute 41% of the combined revenues. To comply with the regulations, the combined entity will have to cede quarterly revenues of Rs180 crore (350 bps of gross revenue) or 8% of overall revenue, according to a 15 February note by JP Morgan Asia Pacific.

Bharti Airtel can make the most of the revenue leakage from the potential merger. And due to this merger at least for the short term, it will create losses which will be an opportunity for Airtel to strengthen their hold in this short term and to create loyalty among customers.