The quarter ended September 2020 has brought some tailwinds for Indian telcos that have been grappling with scathing competition, a huge debt burden and low ARPUs. The quarter, which is traditionally a weak one for the industry, saw telcos record some improvement in their key financial and operational metrics. While Reliance Jio has continued on its profitability track, Bharti Airtel and Vodafone Idea (Vi) have managed to narrow their losses significantly, both sequentially and on an annual basis.

Meanwhile, revenues for all three telcos have improved over the previous quarter with the easing of lockdown restrictions, the consequent increase in recharges and a surge in data usage. The increasing proliferation of work-from-home, videoconferencing and other forms of online business communication, along with the massive uptake of over-the-top streaming services, has led to a surge in data consumption, which, in turn, has translated into ARPU growth. On an annual basis, Airtel’s ARPU has grown by 26.6 per cent between the quarters ended September 2019 and September 2020, much higher than that of both Jio (13.3 per cent) and Vi (11.2 per cent). During the reported quarter, Airtel recorded the highest ARPU in the industry at Rs 162, with Jio following at Rs 145 and Vi trailing at Rs 119. Even in terms of subscriber additions, Airtel has gained 14 million users during the period under consideration as against around 7 million by Jio. Vi, however, has lost over 8 million users.

For Airtel, the reported quarter has been particularly good. Exceeding industry estimates, it posted its highest-ever quarterly consolidated revenue. The company also managed to bring its losses under control, reducing them from Rs 230.45 billion in the quarter ended September 2019 to Rs 7.63 billion in the corresponding quarter in 2020. Sequentially, its losses narrowed by half from the Rs 159.33 billion reported in the quarter ended June 2020. The EBITDA margin stood at 46 per cent as of end September 2020, up 366 basis points year on year. Revenues also recorded a healthy growth of 18 per cent year on year, from Rs 211.31 billion to Rs 257.85 billion.

Meanwhile, Jio posted a threefold jump in its net profit to Rs 28.44 billion from Rs 9.9 billion a year ago. Its revenue from operations increased 33 per cent year on year to stand at Rs 174.81 billion. Vi too witnessed stability during the quarter after a tumultuous period of about 10 months following the Supreme Court verdict on the adjusted gross revenue (AGR) issue. The apex court’s most recent decision to allow Vi and other telcos to make staggered payments of their AGR dues has given a breather to Vi, creating some room for future growth. The telco has already embarked on a major rebranding exercise to arrest customer churn and announced that it will undertake a fundraising of Rs 250 billion over the next few months. However, industry experts believe that only a significant and sustainable increase in ARPU will ensure Vi’s survival in the long term.

In fact, the rationalisation of ARPUs will be extremely crucial for the long-term sustainability of every player in the telecom sector. Intense competition, heavy capex for rolling out 4G networks and pending AGR liabilities have weakened company balance sheets. An increase in ARPU will be essential to strengthen their credit profiles. Industry analysts believe that each of the three private telcos needs an ARPU hike – Vi for survival, Airtel for deleveraging and Jio for justifying its high valuations in recent investments.

Focus on high-value customers

Traditionally, the telcos have vied for a larger share of the prepaid user base. These are highly price-sensitive customers and thus, it is easier to sway them and acquire them as compared to their post-paid counterparts. However, prepaid users also spend three times less than their post-paid counterparts on average and, despite their huge numbers, they contribute significantly less than post-paid subscribers to telco revenues. For instance, post-paid users form 5 per cent of Airtel’s total subscribers, but account for 16 per cent of its India mobile revenues.

At an industry level, the post-paid segment accounts for 5 per cent active subscribers in the Indian telecom industry, but contribute to around 20 per cent of the industry’s revenues. Currently, Vi has the highest share of 43 per cent in the post-paid market, followed by Airtel at 28 per cent. The post-paid user base of Airtel and Vi has remained resilient despite Jio’s disruptive entry in the telecom market.

That said, the need for higher and stable ARPUs has brought the post-paid segment into the spotlight. Jio too is now shifting its focus from prepaid to post-paid plans to capture this segment. According to India Ratings and Research, Jio’s move indicates a shift towards higher earnings and reduced competition in the telecom space. With its post-paid plans, Jio is taking steps towards improving industry-level ARPUs. Its post-paid plans are typically priced at a 12-20 per cent premium over its prepaid plans.

Inevitable tariff hikes

In an unprecedented move, Indian telcos had initiated a tariff hike in December 2019. In a note, CRISIL has stated that had the AGR liability scenario not panned out as it did, the December tariff hikes could have improved the industry’s return on capital employed (RoCE) to 7 per cent and 9 per cent in 2020-21 and 2021-22 respectively, from lows of 3 per cent in 2019-20. Post the Supreme Court’s final judgment on the AGR case, the telcos have to bear AGR liabilities of Rs 1.15 trillion, which is expected to erode the benefits from the tariff hikes implemented in December 2019 and bring the RoCE back to 4-5 per cent this fiscal.

Data and voice service prices need to be increased as the current levels are unsustainable for the industry’s long-term success. As per Nitesh Jain, director, CRISIL Ratings, the debt-to-EBITDA ratio for the industry will remain high, at above 4, during 2020-21 as the AGR liabilities will continue to weigh on the credit profiles of telcos. He adds that sizeable tariff hikes, amongst other factors, will be crucial to support the credit profile of telcos.

Gopal Vittal, chief executive officer (CEO) and managing director (MD), India & South Asia, Bharti Airtel, in a recent post-earnings conference call, expressed confidence over a price hike in the future, though he did not commit to a timeline. Vi’s MD & CEO, Ravinder Takkar, has also been pushing for an urgent tariff hike, though this alone cannot change the operator’s fortunes. It would also need to seriously reduce the subscriber churn from its network to realise the benefit of any price hike. As per industry reports, in the earlier round of tariff hike conducted in December 2019, a 25 per cent increase in price had increased the telco’s EBITDA by Rs 14 billion as against estimates of Rs 43 billion, since it was not able to control the user outflow from its network.

That said, analysts at Kotak believe that Vi will continue to push for price hikes despite losing subscribers. “Price hikes remain key to sustainably fixing the network gap challenge, as the way to do so is to step up capex and a price hike is the only route to generating a higher EBITDA,” reads a Kotak note.

Some industry analysts suggest that telcos are likely to hike tariffs by about 20 per cent before the year end or early next year in order to improve their revenues. A report by Motilal Oswal has stated that a 20 per cent tariff hike could drive up Vi’s ARPU to Rs 140 in 2021-22. Meanwhile, a 20 per cent hike could increase the ARPUs of Bharti Airtel and Jio to Rs 178 and Rs 167 respectively. CLSA also factors in a 10-15 per cent annual hike for the three telcos, starting January 2021.

For a tariff hike to be effective, it must take place across the board. While Airtel has stated that it would immediately follow any price rise by its rivals, Jio has not made any similar announcement. In fact, the general view is that Jio will not raise prices, and Airtel and Vi might have to ultimately roll back their hikes for damage control.

The magical number

According to Sachin Gupta, senior director, CRISIL Ratings, ARPU growth will lead to non-linear growth in profitability due to the high operating leverage of the telecom business. “Our analysis indicates that a Re 1 increase in ARPU adds about Rs 10 billion to the industry’s EBITDA, indicating a high operating leverage of the industry.”

So what is the ideal ARPU number that would put an end to the industry’s woes? Sunil Bharti Mittal, chairman, Bharti Airtel, has been vocal about this and has stated that ARPUs should cross Rs 200 in the next six months. He had said that an ARPU of Rs 300 was required to make the industry sustainable.

As per various industry estimates, telcos should strive to push ARPUs up by at least 25 per cent over the next 6-12 months to achieve a sustainable RoCE of 10 per cent, given their abysmally low returns at present and increased liability on account of AGR dues.

Looking into the future

The industry is finally seeing some structural green shoots owing to clarity on the regulatory side and moderation in competitive intensity. That said, there is still a long way to go for the sector to be completely out of the woods. The long-term survival prospects of Vi remain uncertain. High taxes, regulatory levies and fees, and spectrum prices continue to plague the sector. The surge in data consumption is a silver lining, but will have to translate into higher ARPUs for telcos to realise its benefit.

Going forward, tariff hikes, a focus on the post-paid segment and the adoption of content-led bundled pricing strategies could spur ARPU growth. This, in turn, will brighten the profitability prospects of telcos, which will ultimately lead to better investments in networks and new technologies. Analysts at JM Financial have stated that with the consolidation of the Indian telecom industry largely complete, the wireless industry’s revenue is expected to double to about Rs 2,600 billion by 2024-25. An ARPU hike looks inevitable given the industry’s future investment needs. The industry requires an ARPU of Rs 230- Rs 250 by 2024-25 for a pre-tax RoCE of 12-15 per cent to justify capex, and to avoid the emergence of a duopoly market. Vi would need an APRU of at least Rs 190 by 2022-23 to survive.

By Akanksha Mahajan Marwah