Telcos face Jio heat in March quarter, but market may bottom out soon

The fourth quarter earnings of Indian telecom firms for fiscal 2016-17 point to the fact that each company has begun choosing its own battle and fine tuning operational strategy to deal with the competitive onslaught brought forth by Reliance Jio Infocomm (Jio), the new entrant in the world’s fastest growing mobile telephony market.

Though incumbents such as Bharti Airtel and Idea Cellular saw an expected decline in earnings, their investors will find some solace in the fact that the rate of such decline was much lower than the preceding third quarter of FY2017, despite Mukesh Ambani-led Jio continuing to offer free services in a bid to woo subscribers to its new data-led network.   

While Idea Cellular, the mobile telephony arm of the Aditya Birla Group, managed to cushion the fall in its Ebitda (earnings before interest, tax, depreciation and amortization) margin by sharpening focus on controlling costs; Vodafone India, the local arm of the British telecom major, made it clear that it will only focus on markets where it is among the top three service providers with a market share of at least 15 percent. Incidentally, Vodafone and Idea have also agreed to merge their respective wireless operations, in the hope that their collective financial and operational muscle will help them survive the intense price war in the Indian telecom market.

Telcos and analysts are unanimous that the bottom of the market may be near, unless any unexpected disruptions change the scenario again. While incumbents like Airtel and Idea have been able to grow their voice and data services volume in the March quarter, such growth has come at the cost of realisations due to the discounts that these companies have had to offer to retain subscribers.

For the January-March quarter, Bharti Airtel, India’s largest telco by subscribers posted a consolidated turnover of Rs21,935 crore, down 12 percent year-on-year (y-o-y) and 6 percent quarter-on-quarter (q-o-q). The decline in revenue was majorly led by the wireless services business in India, which was down 11 percent y-o-y and 6 percent sequentially. The company’s consolidated Ebitda of Rs7,860 crore was down 14 percent over the year earlier and 7 percent q-o-q as well. Airtel’s Ebitda, however, was 2.5 percent more than what domestic brokerage Kotak Institutional Equities expected it to be, due to focus on cost control.

The Kotak Institutional Equities report dated May 10 noted that Bharti’s March quarter earnings were better-than-expected with a “sharp surge” in voice (up 16 percent q-o-q) and data (up 31 percent q-o-q) volumes “in a quarter where Jio continued to offer everything free.”

Like Airtel, Vodafone India managed to grow its subscriber base and voice and data volumes as well, but the decline in its earnings was steeper than that of its larger rival. Despite adding 4.4 million subscribers and registering a sequential increase of 23 percent and 11 percent in data and voice volumes respectively, the telco’s wireless revenue declined 8 percent q-o-q (15 percent y-o-y) to Rs8,840 crore in the March quarter. Data revenue declined 11 percent q-o-q to Rs2,120 crore (compared to an 11 percent drop for Airtel).  

The company, which reports its operating profits on a half-yearly basis, saw its Ebitda for the six months ended March 31 drop a sharp 24 percent over the first half of fiscal 2017 to Rs5,000 crore on a turnover of Rs20,370 crore, which was down 10 percent in the same period.  

For the first time, Vodafone India generated negative free cash flow (FCF) of Rs300 crore for the October-March period, compared to a positive FCF of Rs3,300 crore in the six months between April and September.

With an Ebitda margin that came in 430 basis points ahead of an earnings estimate put out by JM Financial, Idea was the best of the pack when it came to protecting its margins to the extent possible. The Kumar Mangalam Birla-led telco reported revenues of Rs8,126 crore for the March quarter, down 6.2 percent sequentially and 14.3 percent y-o-y. The firms’ Ebitda of Rs2,196.5 crore was actually 1.4 percent higher than the operating profits reported in the October-December quarter, albeit 34.1 percent below what it earned in the same period of fiscal 2015-16. Idea managed to trim its operating expenses by 8.7 percent q-o-q, majorly by closing down unprofitable 2G sites, reversing excess provisions made in the preceding quarters and reducing discretionary spending on advertising and promotions.

Unlike Airtel and Vodafone, which sacrificed revenue for volume growth, Idea appears to have taken a contrarian call. Though the telco lost 6.4 million subscribers in the last quarter of fiscal 2017 (compared to the preceding quarter), it managed to hold on to a data ARPU (average revenue per user) level of Rs110. On the other hand, Airtel saw is data subscriber base rise by 3.5 million in the same period, but data data ARPU decline 7 percent to Rs162.

ARPUs in general declined for telcos, as they were compelled to bring down rates in the face of stiff competition from Jio, which had managed to notch up 100 million (unpaid) subscribers on its network by the last week of February. Airtel’s ARPU stood at Rs158 per month, down 8 percent q-o-q and 18.5 percent y-o-y; Vodafone’s ARPU stood at Rs142, down 10 percent sequentially and down close to 20 percent over the year-ago period.

The respectable performance of the three telecom firms notwithstanding, sector experts are wary of calling the bottom on financial and operational performance. The biggest potential disruptor that the market is anticipating is the launch of 4G-enabled feature phones by Jio, which will allow it to tap the entire telecom subscriber base in India (smartphone users and feature phone users), across ARPU bands. A Bank of America Merrill Lynch report dated May 16 says that industry participants expected Jio to launch a low-cost VoLTE phone, priced Rs1,800-2,000 by August. “We expect this to lead to increased competitive intensity, as Jio, a subsidiary of Reliance Industries Ltd, would poach the mid-to-low end subscribers of incumbents,” the report stated.

Some telcos like Bharti Airtel also smell an opportunity in the current state of pitched competition that the sector finds itself in currently. A Credit Suisse report says that Airtel’s management saw the “current turmoil in the mobile market as an opportunity to grow market share.”

Idea’s management, on the other hand, believes that the market has bottomed out and expects earnings to improve in FY18.

The fact that Jio has started charging for its services from April 1 is expected to reduce the intensity of pressure on rivals’ financials over the next few quarters, but further disruption through cheaply priced offering of bundled packages with heavy volume of data and voice services cannot be ruled out.

(Reliance Industries is the owner of Network 18, publisher of Forbes India)