BofA Sec: Telecom - India: A FOMO factor? India telcos drawing interest from FB, Google & Amazon

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BofA Sec: Telecom - India: A FOMO factor? India telcos drawing interest from FB, Google & Amazon

Key takeaways
* Per unconfirmed media articles, Google is looking to buy 5% in VIL & Amazon looking for $2bn stake in Bharti post FB-RIL deal
* If true, we believe Google & Amazon are looking to fortify their positions by telco partnerships to better monetize subs base
* Amazon-Bharti could be a positive with collaboration on payments/content & places Bharti well for 5G rollout; Maintain Buy

Why are Indian telcos attractive to US tech companies?
After Facebook acquired a 9.99% stake in Indian telco Jio (a subsidiary of RIL), media articles have suggested that the two other Indian telcos are could also attract interest from US tech giants. As per recent media articles (unconfirmed), Google is looking to buy a 5% stake in VIL and Amazon is looking to buy a stake worth $2bn in Bharti Airtel. How is India different? Tech giants like FB, Google and Amazon are very focused on India as the fastest-growing internet market with 650mn users (the second highest in the world). With fixed broadband penetration at only 6.6%, most of these users are serviced by cellular telcos. By partnering with telcos, tech cos would be better placed to offer unique digital offerings and potentially monetize them in a win-win scenario. For Internet companies, getting access to users is likely a priority (i.e., Google has encountered some obstacles on Apple phones and with certain carriers). There is also the potential that direct investment in India could accelerate 5G rollout (aiding Internet usage).

Jio-FB deal: Incremental pressure on Google/Amazon?
In our view, the Jio-FB partnership focuses on two core areas: (1) create a WeChat equivalent Super-App in India on the WhatsApp platform and hence monetize via payments and commerce along with higher ad revenues; and (2) online ordering of grocery and other items like medicines, etc. by establishing a commercial agreement between FB and Reliance Retail. The former has the potential to impact Google (as it is FB's biggest competitor in India on ad & payments) and the latter could impact Amazon (as it could make Reliance-FB a direct competitor to Amazon India). If media articles are correct, we believe both Google & Amazon could also be looking to fortify their positions by partnering with other telcos with an intention of not "missing the bus" in a scenario in which FB-RIL monetization gains traction, or the FOMO (fear of missing out) factor.

Potential Amazon/Bharti deal: A number of positives in theory; Maintain Buy on Bharti
Bharti in last 12-15 months has fortified its balance sheet with two capital raises and is now well-positioned to gain market share. Like Jio, it is also focusing on the digital opportunity for incremental revenues. In theory, a potential Bharti-Amazon partnership would (1) help Bharti further improve its balance sheet and position it well for 5G rollout; (2) collaboration on payments and content (a focus area for both); and (3) Amazon could leverage its vast offline distribution network in rural areas. VIL shares are up 48% in 5 trading sessions (vs Sensex up 6%) since press articles have suggested that Google might look to buy a 5% stake in VIL. This is despite company mgmt saying that there is no proposal before the board. In our view, the market is assuming, in line with the media article, that the deal is in early stages (and hence has not yet gone to VIL board). We believe that a c. $100 mn investment by Google (as implied based on a 5% stake) may not be material to help the company turn around given its higher leverage. We find risk-reward unfavorable for VIL and maintain our Underperform rating. We maintain our Buy rating on Bharti on market share gains.
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