Reliance Jio Infocomm Limited’s (RJIL) “freebie” effect was quite marked in the quarter ended December 2016 while demonetisation too had some negative impact. Even as RJIL offered free voice calls and data services and garnered over 72 million users by the end of the quarter, other telecom operators struggled to maintain profitability. In fact, it is likely that most telecom service providers would have ended up with reduced revenues and lower profits. Many may have ended up in the red.
Given that RJIL will continue to offer free services through the January-March 2017 quarter, lasting out this six-month period will be difficult for those operators who do not have very deep pockets. To add to the problems of the industry, massive investments are required going forward and all operators have taken debt to pay for spectrum.
This period of stress has already sparked talks of further consolidation, with Vodafone India (the second largest operator in terms of subscribers) and Idea Cellular (the third largest operator) exploring merger possibilities. The fourth largest operator, Reliance Communications (RCOM) is also in merger negotiations with Aircel, though there are legal hurdles. Meanwhile the largest operator, Bharti Airtel is locked in a bitter conflict with new entrant RJIL about points of interconnection.
The results for the third quarter indicate that Idea Cellular and RCOM suffered heavy losses, while Airtel saw a drastic reduction in profitability. Meanwhile, Reliance Industries has already invested around Rs 1.7 trillion in RJIL and it intends to raise another Rs 300 billion for RJIL via a hybrid instrument (optionally convertible debentures), to take investments in the new operator to well over Rs 2 trillion.
The dynamics of the industry will change again in April when RJIL finally starts charging for data (it has committed to never charge for voice calls). At that stage, we may see another round of massive churn. There are 9 or 10 serious operators in business at the moment. There could be sharp consolidation over the next 12-15 months as the less well-heeled operators are either forced out or compelled to look at mergers. However, analysts believe that the telecom industry will continue to see revenue growth roughly in line with GDP growth, or running slightly higher at around 8-9 per cent compounded annually for several years, or even for the next decade.
The three major operators that have released their results so far have all suffered a deterioration in financials.
Airtel registered a 3 per cent decline in its operating income to Rs 233 billion in the quarter ended December 2016 compared to Rs 240 billion in the same period a year ago. However, it added 14 million subscribers globally between December 2015 (when it had 350 million) and December 2016 (364 million). The operator suffered an absolute decline in its data customer base by 7.7 million for the first time. Data usage was down 3.5 per cent quarter on quarter compared to the July-September 2016 quarter and data ARPUs were down 13 per cent. Mobile revenues in India declined 6.1 per cent quarter on quarter and earnings before interest, taxes, depreciation and amortisation (EBITDA) declined by 15.9 per cent.
The operator saw net profits dropping by 55 per cent to Rs 5 billion from Rs 11 billion year on year. It did, however, manage to maintain operating margins and indeed, managed to generate marginally higher operating profits (EBITDA) on the back of cost-cutting and downsizing. But interest costs surged to Rs 19.36 billion from Rs 14.17 billion year on year. Airtel had Rs 48.3 billion worth of depreciation and amortisation in the quarter.
Idea added 10 million subscribers in the first three quarters of 2016-17, taking its base from 175 million in March 2016 to 185 million in December 2016. It registered a 3.8 per cent drop in total revenues, from Rs 90 billion to Rs 86.6 billion year on year. It registered an operating profit of Rs 2 billion, which was 85 per cent lower than the EBITDA of Rs 13.3 billion registered in the third quarter of 2015-16.
Net losses amounted to Rs 3.84 billion, which is significant compared to the net profits of Rs 6.59 billion registered year on year. However, Idea had substantial depreciation and amortisation of Rs 19.6 billion, which means that it did register cash profits. Finance costs for the operator jumped to Rs 9.7 billion from Rs 4.4 billion year on year.
RCOM also registered very poor results. Revenues dropped 10.3 per cent to Rs 48 billion from Rs 53.75 billion a year ago. The company registered operating losses (EBITDA) of Rs 590 million compared to operating profits of Rs 9.45 billion a year ago. It registered net losses of Rs 4.9 billion compared to profits of Rs 3.15 billion a year ago. Finance costs rose to Rs 9.6 billion from Rs 6.99 billion a year ago. RCOM had depreciation and amortisation of Rs 11.65 billion in the reported quarter.
Vodafone India reported a 1.9 per cent year-on-year decline in “organic service revenues” and a 5.5 per cent year-on-year decline in overall revenues. This was attributed to the heightened competitive pressure following free services offered by the new entrant and the adverse impact of demonetisation on prepaid top-up volumes. Overall, data pricing declined by 11 per cent year on year, while voice pricing declined by 4 per cent. The total number of mobile customers increased by 4 million over the quarter to 205 million, but the active data customer base declined to 65 million from 69.6 million in the second quarter. Vodafone also confirmed that it is in discussions for an “all-share merger” with Idea Cellular (excluding Vodafone’s 42 per cent stake in Indus Towers). Any such merger would be effected through the issue of new shares in Idea to Vodafone and lead to Vodafone India being spun off (deconsolidated) from the parent.
All the three listed companies have worsening debt-equity ratios. Airtel has a net debt of a little over Rs 14 billion and shareholder equity of Rs 9.3 billion for a debt-equity ratio of 1.54. RCOM has a debt-equity ratio of 1.49 while Idea has the most healthy debt-equity ratio at 0.93.
Payments banks make a lot of sense for mobile operators. They are already used to dealing with customers at scale in rural/semi-urban areas where a payments bank needs penetration and these companies possess much of the requisite infrastructure and back-end already. Both Idea and Airtel have opened payments banks, which should help them create alternative revenue streams. Vodafone also has a payments bank (it is unclear if the payments bank would be merged with Idea if the merger takes place). RJIL also has a payments bank.
Analysing the situation in the industry, Gopal Vittal, chief executive officer, Bharti Airtel, said in an interaction with investors, “The continuation of free pricing by a new operator has led to a tsunami of traffic to its network, impacting the overall data revenues and voice realisations. This dramatic traffic skew towards incoming minutes has been enabled by the anomaly in mobile termination charges (MTC), wherein MTC rates are well below the cost of producing and hosting such minutes. This, coupled with predatory pricing, has led to an unprecedented drop in industry revenue, jeopardising the financial health of the ‘poster child’ of the telecom industry.”
Vittal also alluded to the demonetisation, saying, “Along with the larger impact of free offers, there has been a temporary impact due to demonetisation in the quarter. In the short to medium term, these free offers will impact all stakeholders including government levies and taxes, lenders (with a debt exposure of Rs 4 trillion to the industry) and finally customers, as operators struggle to invest in networks.” Data will be the game changer going forward, even as voice revenues remain flat or fall. Over 80 per cent of new handsets are smartphones, with users phasing out feature phones. Data usage is driven by news, entertainment, e-commerce and social media usage.
The rapid growth of the data segment is guaranteed. Analysts estimate that data tariffs may stabilise somewhere in the Rs 50 per GB zone for 4G. RJIL’s tariffs will set the floor and the indicative tariffs seem to be in that range. Data usage and hence data ARPUs are likely to rise across the board as consumers develop a surfing habit. RJIL is the only operator with a “pure” 4G network. Other operators will have to maintain their legacy 2G networks and work with a mix of networks. But the bulk of the traffic is clearly moving to 3G and 4G, and that is where the focus will be.