According to the telecom report of Motilal Oswal Financial Services, India’s Home Broadband market has a minuscule USD2b market size, accounting for a meager 9% share of the country’s INR1.7t Wireless market. Subscriber growth has been modest in the last five years, with annual CAGR of just 5%. It has largely been an urban product, with low penetration of 7% – due to limited network connectivity with just 80–100m estimated home passes – which has restricted subscriber growth. This has given way to increased wireless consumption in India, which has a far easier and convenient installation/activation.

India’s Wireline market penetration very low v/s global levels

Wired broadband is well-established and significantly utilized for data consumption globally as it is cheaper than wireless. On the other hand, in India, the need for data consumption is fulfilled through wireless as it is cheaper. India’s wireline subscriber penetration stood at just 7%, with 20.5m connections (i.e., 1.45 per 100 inhabitants). This is far lower than global peers – subscriber penetration for US/UK/China is 35/40/31 per 100 inhabitants. FTTH penetration is even lower at 1%, v/s 92%/78%/76% in Singapore/China/South Korea, as most service providers use a copper-based network. The lower penetration is attributable to poor network connectivity (evident from the minuscule number of 80–100m estimated home passes) due to significantly high FTTH deployment cost/subscriber in India (USD1,580) v/s global peers. Furthermore, channel check by Motilal Oswal Financial Services indicates tower fiberization in India is <25% v/s 70-80% in developed markets.

Large players turning aggressive, Smaller players benefitting from lockdown and still growing

With RJio’s entry into the Home Broadband space in 2019 and its huge target, other players such as Bharti have increased their focus in this space in a bid to gain ground. Telcos are currently present in metro / tier 1 cities, especially in high-rise. buildings, owing to a large number of potentially high-paying households and lower incremental cost to acquire additional customers in the same building. Furthermore, these players largely target 20–30% high ARPU customers through bundled plans, including a) broadband, b) linear TV through DTH, c) entertainment and content offerings, and d) home automation and security solutions. This allows them to charge higher and also increase customer stickiness with longer term plans.

In addition to expanding the base in metro / tier 1 cities, telcos are looking to make inroads into smaller towns through a) aggressive pricing and b) acquisitions and partnering models. RJio recently launched an INR399 starting price plan and Bharti followed suit with an INR499 plan. RJio has acquired the Hathway and Den networks to increase its reach. Bharti, on the other hand, seeks to partner with local cable operators (LCOs) to gain ground in smaller towns and alleviate the concern of high capex requirement in rural areas (2–3x metro areas), coupled with low home pass to subscriber conversions and lower margins. This offers huge opportunity for the larger players in both urban and rural areas.

Exhibit: Key takeaways from channel check of broadband players operating in Mumbai

Although larger players are increasing their focus on the Home Broadband segment, smaller players are continuing to grow. This is evident from their increasing market share during the lockdown – to 43.2% in Aug’20 from 40.5% in Apr’20 (in wired broadband). Smaller players generally have a regional presence (in case of metro cities such as Delhi and Mumbai) and contain many LCOs (which provide broadband services along with cable services). Unlike larger players, these target low ARPU paying customers and offer pure data connectivity services. Moreover, they offer lower speed due to copper-based connectivity and thus the price points are lower.

There is an opportunity for both large and smaller players to operate in parallel and grow the market.

Steep operating leverage offers room for aggressive pricing

Industry ARPU in the Home Broadband market has remained fairly stable at an ARPU of INR400–500 for purely connectivity and INR700–800 for FTTH packages. Motilal Oswal Financial Services analysis of the Home Broadband business (with INR400 ARPU and 1m subs) indicates 30–35% margin potential, with similar 35% semi-variable as well as fixed cost. Bharti, with ~INR799 ARPU, garners 50% margin. This presents the opportunity a) to take sharp ARPU cuts to expand its share of the pie in the market, similar to wireless or b) improve margins to 45–50% even at a low INR400–500 ARPU with a healthy growth trajectory. RJio’s recent move to cut ARPU by ~40% with starting price plans at INR399 is on similar lines. However, the aggressive pricing may be restricted by the number of home passes, which is often plagued by regulatory and execution woes, thus limiting new connections, unlike Wireless market growth. As a result, RJio may have limited JioFiber to 1600 cities with the requirement to pre-apply for new connections.

RJio – Home Broadband an INR240b EBITDA opportunity within three years; high prospects for Bharti too

RJio’s target of achieving 50m wireline subscribers, 2.5x the prevailing market size, is not inconceivable. At ARPU of INR799 and a subscriber base of 50m, RJio’s aggression is understandable, with revenue/EBITDA opportunity of INR480b/INR240b – which is larger than its current Wireless business, with EBITDA of INR216b in FY20. To achieve exponential growth, it needs to first make the product/network available and then offer attractive pricing.

To increase its reach, RJio may have to aggressively ramp up home passes – it requires 150m home passes (50% of the total households), assuming a 33% conversion ratio (against the industry standard of 15–20%). RJio’s acquisition of the Hathway and Den networks is a positive move and the first step to increasing its network reach.

Exhibit: EBITDA opportunity of INR240b at RJio’s current target

RJio’s aggressive push toward Home Broadband may pose limited threat to Bharti given the segment’s single-digit contribution to Bharti’s consolidated numbers. In line with the Wireless business, Bharti’s plans could remain at a premium to RJio, targeting quality customers. Subsequently, its home passes may also be at a lower scale v/s RJio. Assuming 60m home passes, benchmarking about two-thirds of RJio, along with a 25% home pass to subscriber conversion ratio, Bharti could achieve 15m subscribers by FY25. Note that this indicates massive growth, at ~75% of the prevailing subscribers in the industry. Its ARPU may soften to INR600 from INR779 currently as it prioritizes subscriber growth. Bharti’s EBITDA margin, already at 50% as of FY20, could be sustained at FY20 levels in the longer term. This is because despite softening ARPU, an increase in subscribers could offer healthy operating leverage on sizeable fixed cost in the business. Thus, it could generate EBITDA of INR45b with 50% margin.