Telecom sector: Next six months crucial

There are only three private sector telecom players left standing, namely Vodafone-Idea (VIL), Bharti Airtel and Reliance Jio Infocomm (RJIL). These three hold 90 per cent of the mobile subscriber base of 1.16 trillion, with RJIL claiming 307 million subscribers, while VIL has 395 million and Airtel, 325 million (March 2019). 

The trio earned 2018-19 revenues of roughly Rs 2.3 trillion. Their outstanding debt is Rs 5 trillion with another Rs 3 trillion for spectrum charges and licence fees. Revenue market share (ex long-distance) favours RJIL with 39.8 per cent, while VIL has 28.9 per cent and Airtel, 24 per cent.  In broadband, VIL has 19.57 per cent market share, Bharti Airtel has 20.35 per cent and RJIL has 54.45 per cent. 

VIL and Airtel must improve their respective Average Revenue Per User (ARPU) to survive and ideally, they will convert all subscribers into committed data-users. Data usage has been driven by lower costs and higher smartphone penetration on the supply side. The demand drivers include online public services, rising e-commerce options, entertainment consumption in the form of news, music videos, movies and sports, social media usage and gaming. Service providers are pushing fibre-to-home segment and as and when 5G networks rollout, there should be faster, more efficient broadband at lower costs. 

About 45 per cent of VIL’s subscribers aren’t on data plans. While RJIL users consume 10. 8 GB of data per month, and Airtel users consume 10.5 Gb, VIL’s subscribers consume 6.2 Gb. This is both a threat and an opportunity for VIL.

The ARPU may have stabilised and started trending up in Q4 in a sign of recovery. VIL and Airtel have consciously reduced their subscriber bases. The mobile subscriber base dipped by 22 million in Q4, 2018-19. Airtel and VIL lost close to 30 million subscribers, while RJIL gained 9.5 million. 

Airtel and VIL have also raised huge sums and monetised fibre and tower assets to pay down debt.  RJIL’s financials are in better shape due to the deep pockets of its parent. While RJIL is cash-flow negative, the revenue market share and ARPU indicate it’s the sector-leader. 

In Q4, 2018-19 (Jan-Mar 2019), VIL registered a net loss of Rs 4,881 crore. It incurred a net loss of Rs 5,005 crore in Q3, (Oct-December 2018), which was the first quarter post-merger. VIL posted marginal quarter-on-quarter rise in revenue to Rs 11,775 crore in Q4 over Rs 11,765 crore in Q3. The merged entity shed 88 million subscribers over six months. ARPU rose substantially, to Rs 104 in Q4, from Rs 89 in Q3. 

In April 2019, VIL raised Rs 25,000 crore through a rights issue. The company has outstanding debt of about Rs 1.15 trillion. Merger synergies should lead to savings of Rs 8,400 crore by 2020-21. Opinion is divided as to whether the infusion will be enough to sustain operations and capex until VIL hopefully, turns profitable. 

Airtel reported consolidated net profit of Rs 107 crore for Q4, 2018-19.  It had reported a net profit of Rs 83 crore a year ago, including extraordinary items. Consolidated Q4 revenues stood at Rs 20,600 crore, up 6.6 per cent on year-on-year (YoY) basis. The consolidated EBITDA came in at Rs 6,806 crore, while consolidated earnings before income, tax, depreciation and amortisatoin margin was 33 per cent, down 3.2 per cent year-on-year (YoY). 

Airtel’s rights issue of Rs 250 billion will pay down debt. An initial public offering by listing the Airtel Africa arm in London for a targeted $750 million seems achievable. India’s wireless ARPU improved from Rs 104 in Q3, to Rs 123 in Q4.

RJIL reported a 64.7 per cent YoY increase in net profit at Rs 840 crore for Q4, compared to a net profit of  Rs 510 crore, a year ago. The Q4 revenue rose 55.8 per cent to Rs 11,106 crore versus Rs 7,128 crore a year ago. ARPU during Q4 was Rs 126.2, down from Rs 130 in Q3.  RIL is set to raise another Rs 20,000 crore, and it's hiving off fibre and tower assets, which it could monetise. 

Policy support will be critical in clarifying several tax-related areas, and reducing Goods and Services Tax rates, as well as offering infrastructure status, and others. There are also concerns about the base-prices for the next spectrum auction; analysts claim the base prices for 5G spectrum are six times higher than global rates. The sector is showing early signs of a turnaround but the next six months will be crucial.