vada pav,” roared Mukesh Ambani in September 2016 on the launch of Reliance Jio, the newest telecom entrant in an overcrowded market. One gigabyte of knowledge used to price about Rs225 in these days, and vada pav, Rs12.
Quick ahead a couple of years – inflation has caught on to
vada pav (it now prices Rs15), however information now prices lower than Rs10 a GB. In right now’s article, we go down reminiscence lane on how predatory pricing revolutionised telecom, and the way the incumbent, Bharti, nonetheless got here out stronger on the opposite finish. And why the identical ways can’t be deployed in different sectors (like cement) to make it stronger for longer.
India’s trendy telecom saga started in January 2008 with the Division of Telecommunications issuing 122 licences to 9 firms. By October 2010, two of these awardees (Swan Telecom and
) offloaded stakes to overseas gamers, elevating billions of {dollars} every. In November 2010, nevertheless, the Comptroller and Auditor Common of India raised irregularities within the situation of licences and tabled a report citing large losses to the exchequer.
By February 2012, the Supreme Courtroom got here down laborious on the difficulty and cancelled the 122 licences. A number of gamers like Uninor with 36 million subscribers, Sistema (15million), Videocon (5million), S Tel (3.5million), Loop Tele (3.2million) and Etisalat (1.7million) had been affected. Wi-fi subscribers in 2012 had been simply over 900 million and grew solely at a sluggish tempo to over 1 billion by August 2016 till Jio began operations. On the time, Bharti held a 25% market share, Vodafone 20%, Concept 17%, Aircel 9%,
8% and Tata and Telenor about 5% every.
Then, on September 5, 2016, got here the Jio Welcome Supply – providing free information, SMS, calls and apps. Initially, the provide was to remain in impact for the primary three months, however Jio saved extending it below new names (Comfortable New 12 months, Dhan Dhana Dhan, and so forth.). Successfully, telecom customers loved free Jio for over 10 months, and incumbents realised that the “distinction between 2 cents and 1 cent was giant, however the one between 1 cent and Free was insurmountable”. Within the first month alone, Jio gained 16 million subscribers. By December 2016, Jio had over 6% market share, which rose to over 11% inside one yr of launch.
Whereas the big incumbents had been distraught, the smaller ones discovered it troublesome to outlive as the common income per person monthly (Arpu) fell over 40% over the subsequent three years. Aircel-Maxis shut down in 2018 after a failed merger with
. Telenor in 2017 introduced plans to merge with Bharti, the identical yr when Vodafone and Concept introduced a merger, and the smaller gamers (Loop, Sistema, , Etisalat, Videocon and ) simply wound up.
At present, the image is kind of completely different: Jio has a 36% market share, Bharti 31% and Vodafone-Concept 22%. Bharti’s India Arpu, whereas rising over 80% (to Rs183 in 1Q23 vs. Rs100 in 2Q19) from lows, just isn’t but again to pre-Jio ranges. Regardless, bigger variety of subscriptions, managed prices and higher operations now end in Bharti incomes extra EBITDA in six months in comparison with its 2016 annual India EBITDA. No matter doesn’t kill you makes you stronger, proper?
That obtained us considering – why can’t cement firms deploy the identical playbook? Capability has crossed 550 million tonne (mt) however the demand just isn’t even 350mt. On common, cement firms’ return ratios are decrease than their price of capital. Per tonne EBITDA right now (cRs800/tonne) is decrease than in 2008 (over Rs1,000). When cement sells for below Rs6 per kg and gamers earn not even 1 rupee per kg, why wouldn’t, say, an
(the most important participant, among the many most effective ones, and one with a robust steadiness sheet) not simply go for the kill? Scale back costs by 25% for 3-4 years, gobble up the weaker and debt-laden ones in mergers and acquisitions, thereby rising market share to extra respectable ranges (from present c20%) and emerge stronger on the different finish of the struggle. Jio did it in spite of everything, why can’t Ultratech?
Properly, there are lots of the reason why we haven’t heard of the struggle bugle but. Earlier than we go there, allow us to briefly have a look at the historical past.
Part 1 (pre-2008): Cement is an ideal hub-and-spoke mannequin with South and West comfortable to produce to Central and Jap areas. At 190mt capability and c167mt consumption, utilisation charges are within the mid-90% and per tonne EBITDA between 2005 and 2008 has doubled.
Part 2 (2008-2022): Holcim Group (c24% of capability in 2008), given the overcapacity, pronounces that it has just about no plans to develop. On this part, its incremental capability market share fell to below 6% (vs 24% in 2008), which allowed the then smaller gamers like
to develop capability from 15mt to 50mt and Dalmia from 9mt to 40mt, in addition to permitting Ultratech to turn into the most important participant by a margin.
Part 3: This part of the Indian cement sector begins now. With Adani shopping for Holcim India and saying plans to triple capability, everybody desires to develop now – the battle for capability and quantity market shares will now start. Giant gamers have deep pockets, so why not go for predatory pricing? Properly, for a number of causes.
One, logistics play a big half; demand should be serviced from close by cement crops. It implies that even the most important firm is preventing a number of completely different gamers (greater than 30) in numerous markets. It’s troublesome to open that many fronts in any struggle scenario. Two, the energy of many smaller regional firms lies past simply cement; they’ve land banks and actual property. Additionally, many such promoters have deep pockets in a person capability. Maintaining costs low sufficient for them to fold is hard. Three, when you promote a sim card to a buyer, he stays a buyer for a very long time. Not like that, every bag of cement bought is a brand new choice. Buyer stickiness in telephony is approach greater than that in cement. And final, shutdown and restart prices in cement are too little (in contrast to, say an aluminium smelter). If a frontrunner follows predatory pricing, the smaller firm may simply shut down for a bit and are available again as soon as costs choose up. Telecom firms couldn’t try this given excessive debt and buyer stickiness.
Properly then, what actually is in retailer for the cement sector? The capability utilisation charges, right now within the mid-60% vary, will seemingly keep put regardless of greater demand (as new capability is available in). That may seemingly maintain the pricing energy for the incumbents elusive and the return ratio low. Company managements seeking to purchase a cement capability at round $175 per tonne will observe that EBITDA per tonne wants to extend to over Rs2,500 per tonne (vs. present Rs800) to generate 15% ROE. The ask for secondary shareholders paying near Rs200 per tonne for prime gamers is even greater.
Cement is a phenomenal enterprise – one with regional flavours, many transferring components, clear steadiness sheets and the place many firms make first rate cash. There shall be years when the sector makes some huge cash, which is then adopted by a lull. It has the traits of a commodity enterprise – and arguably, we are actually coming into a brand new part within the cement cycle. Provided that (a) predatory-pricing-driven consolidation just isn’t an possibility and (b) capability utilisation will seemingly keep low limiting pricing energy, the administration and buyers alike should suppose afresh concerning the truthful worth of listed cement belongings over the long run.
(Disclaimer: Suggestions, strategies, views and opinions given by the specialists are their very own. These don’t characterize the views of Financial Instances)