Airtel Q4 results: Challenging times ahead for Sunil Mittal-owned company

Bharti Airtel
The next 12 months will be challenging times for Bharti Airtel, as the Reliance Jio pricing assault continues unabated to gain market share. The company, of course, was able to show some profit this quarter, though some analysts had predicted that they will make losses for the first time in decades.    


Jio has three advantages over Bharti Airtel. One, it has a brand new only 4G network with an operating cost which is far lower. Two, because of this advantage it can play the pricing game much more effectively than Bharti Airtel without a similar squeeze in their margins. It wants to grab 40 per cent revenue share. Currently, it is at 15 per cent. Three, Reliance Industries can leverage its balance sheet with profits from its oil and gas business to raise funds from its own internal accruals as well as raise debt at low interest. It’s a luxury which Bharti does not have. And if Jio goes for an IPO, it could substantially deleverage the company.


Airtel is clearly concentrating on neutralising the first two advantages. It is investing over Rs 240 billion this financial year to upgrade its network (2G, 3G ) to 4g LTE as well as enable VOLTE which is trail stages in various metros. And this comes on top of an investment of Rs 160 billion last year. However, most analysts expect that it will take them around anything between 12 months before Airtel can increase its coverage of 4G from 66 per cent as determined by OpenSignal, a research company, to come closer to Jio which is at 96 per cent as well as roll out VOLTE.


That will help them in substantially closing the gap of lower cost of producing minutes by rival Jio. But this investment, say telecom watchers, will not lead to any incremental increase in its revenues, especially with ARPUs going down. It will only help them in retaining their customers by upgrading their 2G and 3G customers to their 4G network without impelling them to shift to that of Jio.


Bharti has already announced that it will close its 3G network by two years, though it still will have to maintain the 2G play until all its customers graduate to new technology. So there will always be a slight difference in their cost of operations with that of Jio even if they close in.   


The second weapon which Jio has unleashed is its rock-bottom tariffs coupled with its feature phones for free. Sure, many telcos like Bharti had assumed that the initial price offer would be introductory in nature and limited for the first three to six months and Jio would also have to bring tariffs up to sustain the business. Instead of matching them they went to the regulator to take action against what they considered predatory pricing.


But they faced a double whammy: the regulator refused to intervene, and Jio continued with its aggressive pricing even after March 31 2016 before which it was giving the services free to customers. Realising clearly that Jio was not going to bring down tariffs at all, Airtel also hit back and after a few months has been able to close in the pricing gap between the two, even if it means a further erosion of margins. “With Jio planning an IPO the pricing pressure will continue for 12-18 months as Jio would want to grab a larger share of the revenues before that,” says a telecom watcher.


It is, however, a matter of debate whether Airtel could have bridged this gap by going for upgradation of its network earlier, rather than wait for Jio and handing them the advantage. But to be fair to Bharti, most of Jio’s customers have come from smaller players, especially the ones which have closed operations or mergers like Rcom or Aircel to name a few. Airtel, on the other hand, has been able to retain its own subscriber base.  


The third advantage of Jio, of course, cannot be matched. But Bharti with a net debt to EBIDTA of just under 3 is positioned very comfortably. So it has a lot of leeways to borrow more money to take Jio on. And this is why last month it approved a plan to raise Rs 165 billion through a combination of overseas bonds and through issuance of non-convertible debentures.


It also can raise substantial sums from monetizing its tower assets-its stake in Bharti Infratel as well as in Indus Towers. Based on conservative estimates it can raise over $5 billion by selling its 42 per cent stake in Indus Towers. It has already raised nearly Rs 130 billion by reducing its stake in Bharti Infratel, in which it still has an over 50 per cent stake.       


Telecom watchers say it also has some other key advantages-it has a vibrant 4G network currently, and according to OpenSignal has download speeds, which are higher than that of Jio, but disputed by one of the competitors. It also has consumer insights which Jio might take long to match.


Sure, don’t expect any miracles in Bharti’s balance sheets. But clearly, it has a solid plan to emerge from this challenge-even if it is with a few bruises.

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