Bharti Airtel, Vodafone Idea put the brakes on costs in September quarter

Sharp reduction in capex and an increase in operating profit led to a 49% jump in operating free cash flows on a sequential basis
Bharti Airtel and Vodafone Idea saw some improvement in the September quarter, led by a fall in operating and capital expenditures.

Airtel reported a steep 51 per cent dip in consolidated capex over the year-ago quarter. Even on a sequential basis, capex was down by a quarter. The sharp reduction in capex and an increase in operating profit led to a 49 per cent jump in operating free cash flows on a sequential basis.

The savings on the capex front was largely because of India operations where capex is down by over 60 per cent from Rs 7,000 crore a year ago to less than Rs 2,800 crore in the September quarter (Q2). Vodafone Idea’s India capex decline was similar. The company’s capex at Rs 2,140 crore in the quarter is down 35 per cent from the year-ago levels.

Vodafone Idea has revised its capex guidance downwards to Rs 13,000 crore in FY20 from the earlier guidance of Rs 17,000 crore for the financial year. The cut in guidance is because of better pricing, supply chain efficiencies, and reduction in planned 4G footprint in non-priority areas. The telco has also deferred some capex to FY21 as it believes that capacity requirement in the current financial year would be lower than estimated earlier.

The other gains came from operational improvement, especially for Airtel. While revenues came in line with expectations, a 35 per cent reduction in sales, general, and adminstration expenses in India operations led to 7 per cent sequential gains in consolidated operating profit. Even as average revenue per user at Rs 128 was flat, it was the subscriber base, which grew 1 per cent sequentially that helped the top line. The subscriber numbers went up after four consecutive quarters of decline.

Vodafone Idea’s opex has been coming down for each of the past four consecutive quarters. On the user front, the management indicated the performance in September and October is encouraging with strong momentum on 4G and newer additions that is boosting revenues.

While the capex and opex cuts have helped Airtel and Vodafone Idea in the Q2, analysts believe with incumbents trailing Jio in their 4G roll-outs, curtailing capex may increase the gap between Jio and the incumbents further. Analysts at Jefferies say Jio has twice the 4G base transceiver stations as that of Airtel, which in turn has twice that of Vodafone. The (AGR) payments will put further pressure and may force incumbents to curtail 4G roll-outs, which will impact additions and long-term profitability, they say.

For now, the sector is awaiting policy steps, which could alleviate the stress both on account of a competitive environment as well as its debt load. A government panel is expected to recommend reduction in licence fee by 3 per cent, stagger the AGR payment over the next 5-10 years and offer a two-year moratorium on spectrum auction payment. Analysts at Credit Suisse believe a two-year moratorium on spectrum payment would significantly help Vodafone Idea, as the company would be able to sustain with existing and annual operating cash flow for the next 18-24 months. 

The reduction in licence fee would also help sector profitability improving the medium- to long-term sector outlook, they add. Maintaining the interconnect usage charge (IUC) at 6 paise per minute for off net calls will also help the incumbents as they are net gainers in IUC. 

However, if a package does not materialise, Vodafone with a net debt to operating profit of over 24 times is at a risk of closing down. Analysts at SBICAP Securities say even if a package is announced, subscriber loss for Vodafone Idea is unlikely to stop any time soon. Even as Jio and Airtel added 24 million and 2.6 million subscribers in the September quarter, respectively, Vodafone Idea lost nearly 9 million users.

Most analysts say the sector is headed for a duopoly. Experts at Emkay believe that anticipated weakening of Vodafone Idea’s financial viability after AGR penalties offers an opportunity for Airtel and Jio to gain market share. Eventually, two large players controlling the market could result in tariff rise from FY22, they add.



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