After a prolonged lull, the Indian telecom sector has finally started to look up. The industry’s financial and operational performance in the last few quarters bears testimony to the fact that a big turnaround may be at hand. Following a good performance in the quarter ended September 2020, telcos have posted even better financial results for the quarter ended December 2020.
For Bharti Airtel, the quarter marked the telco’s return to profitability after reporting losses for six straight quarters. In the quarter ended December 2020, the company reported a net profit of Rs 8.53 billion, as against a loss of Rs 7.63 billion in the preceding quarter and Rs 10.35 billion a year ago, owing to a one-time gain from the merger of Bharti Infratel and Indus Towers Limited. Even in the absence of this exceptional item, the telco’s net loss stood at Rs 2.98 billion during the quarter ended December 2020, a marked improvement over the preceding quarter and over analyst estimates of Rs 5 billion. Further, according to Airtel, its quarterly revenue, at Rs 265.18 billion, has been the highest ever.
Vodafone Idea (Vi) too managed to bring down its net loss to Rs 45.4 billion during the quarter ended December 2020 compared with Rs 72.03 billion in the preceding quarter, and Rs 64.38 billion in the quarter ended December 2019.
Meanwhile, Reliance Jio continued on its profitability trajectory and reported a net profit of Rs 34.89 billion during the quarter ended December 2020, registering a sequential growth of 15 per cent and a year-on-year growth of 158 per cent.
At the industry level, the aggregate revenue of the three telcos increased 4.8 per cent sequentially and 20.5 per cent year on year during the reported quarter. The combined mobile revenues increased 22 per cent year on year to Rs 442 billion. Both Airtel and Jio reported 32 per cent on-year revenue growth while Vi’s revenue dipped 1.8 per cent on-year. Meanwhile, the cumulative EBITDA (earnings before interest, taxes, depreciation and amortisation) of the three telcos grew 7.6 per cent sequentially and 37.8 per cent on-year.
Exploding data usage across both wireless and wireline channels has translated into stronger ARPUs for all telcos. Airtel’s ARPU stood at Rs 166, Reliance Jio’s at Rs 151 and Vi’s at Rs 121 during the quarter ended December 2020.
A look at the key trends in telcos’ financial and operational performance, and their future priorities amidst signs of a sector revival…
Airtel gains ground on Jio
Over the past many months, Airtel has been consistently trumping market leader Jio across key operational metrics such as ARPUs, net additions and data usage. As per latest numbers from the Telecom Regulatory Authority of India (TRAI), Airtel stole a march on Jio in terms of mobile user additions for the fifth straight month in December 2020. Airtel gained 4.05 million wireless subscribers against Jio’s 0.47 million, while Vi lost nearly 5.7 million users in December 2020. This indicates that Airtel has managed to wean away a bulk of customers from Vi’s networks and ensure they do not go Jio’s way. The TRAI data further shows that between November and December 2020, Airtel’s subscriber market share grew by 0.39 per cent as against Jio’s, which rose by merely 0.09 per cent. In contrast, Vi’s share narrowed by 0.46 per cent.
Further, as per details of the visitor location register (VLR), a key metric reflecting the number active subscribers on a mobile network, Airtel had 97.1 per cent of active users as against Vi’s 90.26 per cent and Jio’s 80.23 per cent during December 2020.
Operationally, Airtel has been on a growth streak for some time now. For three months ending December 2020, Airtel added a record 13 million 4G users. Most of the additions have been for higher-paying plans, which has driven up ARPUs to a three-year high of Rs 166. Even in terms of data consumption, Airtel reported average monthly data usage at 16.8 GB per user in the December 2020 quarter, much higher than its rivals Jio and Vi at 12.9 GB and 12.3 GB per user respectively.
According to Gopal Vittal, chief executive officer, India and South Asia, Airtel, the company’s strategy of focusing on winning quality customers is paying off. Analysts agree and believe that Airtel’s market execution has been better than expectations. Its consistently higher 4G-related capex spends compared to its rivals is starting to bring in benefits, as is evident from its data usage and subscriber addition numbers.
Vi needs to pull up
Brokerage firm CLSA terms Vi’s performance during the quarter ended December 2020 as “unsatisfactory” and draws attention to the telco’s enormous debt burden. “With Vi’s third quarter FY2021 results miss, we cut our FY2021-23CL revenue forecast by 1-6 per cent. Besides adjusted gross revenue (AGR), Vi is reeling under enormous debt, led by spectrum payment liabilities,” the firm noted in its report.
Vi’s net debt stood at a whopping Rs 1,171 billion as of December 2020. This includes Rs 942 billion in deferred spectrum payments, but excludes AGR and lease liabilities. The AGR dues, which add up to about Rs 504 billion, need to be paid over the next 10 years.
Operationally too, Vi has been losing subscribers at a fast pace. In December alone, the company lost close to 6 million users. Its ARPU, at Rs 121, is the lowest in the industry, despite the price hikes it undertook in December 2020.
To stay in the telecom game, Vi would have to push the pedal on its Rs 250 billion fund-raising plans. It has been reported that the telco is in talks with a consortium backed by Oak Hill Advisors; however, nothing binding has emerged from it. A capital raise is crucial for better capex spends amidst high competition. The telco’s capex spend during the quarter ended December 2020 stood at Rs 9.7 billion, lower than the Rs 10.4 billion spend in the preceding quarter.
Jio continues on a profit path
During the quarter ended December 2020, Jio achieved an annualised revenue run rate of over $10 billion, with strong revenue and EBITDA growth. Consolidated revenues grew by 5.3 per cent sequentially and 38.8 per cent year on year to Rs 228.58 billion on the back of higher ARPUs and FTTH expansion. The consolidated profit grew by 15.5 per cent sequentially and 158.44 per cent year on year to Rs 34.89 billion. Its operating expenditure was largely in line with analyst expectations. The company’s net debt reduction in the first half of 2020-21 has led to a substantial decline in interest expenses.
Jio’s ARPU for the quarter stood at Rs 151 and while this is lower than Airtel’s, it is the highest for Jio in the past 12 quarters. The telco’s recent focus on the post-paid segment will help it improve ARPUs further.
User churn has been an area of concern for the operator. Owing to Covid-19, net subscriber additions during the quarter stood at 5.2 million, half of the last three-quarter average of 11.87 million. As per Jefferies, Jio may be susceptible to further churn as it may see the expiry of quarterly contracts of 8-10 million JioPhone users from the fourth quarter.
Signs of recovery and telco priorities
According to BNP Paribas, currently only 69 per cent of industry subscribers use 4G services, and there are still over 300 million users who are yet to adopt these services. Telcos are aware of this big opportunity and have been expanding their 4G coverage to remote corners of the country. The Covid-induced spike in demand has also given a fillip to 4G usage.
At the end of December 2020, Airtel added 13 million 4G users on its networks, taking the total count to 165.6 million. Even the beleaguered Vi witnessed 3.6 million 4G subscriber additions, as compared to 0.6 million in the past three quarters. Most of these users have been upgraded from 3G to 4G. The telco is aiming to shut down its entire 3G network by end-2021, moving all 3G customers to 4G services. It currently has around 11 million 3G subscribers, and moving them all to 4G will help the company increase revenues in the near term.
Meanwhile, for the upcoming auctions, it is being predicted that most of the action will take place in the 1,800 MHz and 2,300 MHz spectrum bands, which are most suited for 4G services. As per the Department of Telecommunications, Jio has made an earnest money deposit (EMD) of Rs 100 billion, Airtel Rs 30 billion and Vi Rs 4.75 billion. According to industry observers, an EMD of this size would allow Jio to buy 4G spectrum worth Rs 500 billion-Rs 700 billion, which would take care of its spectrum renewal and some additional spectrum as well. Meanwhile, Airtel’s deposit would allow it to buy 4G airwaves worth Rs 150 billion–Rs 250 billion, and Vi to buy spectrum worth Rs 25 billion-Rs 30 billion.
Inevitable tariff hike
The telcos’ payment obligations necessitate an expansion of their ARPUs. Which means they would need to start the process of increasing tariffs in the immediate future. As per analysts, a tariff hike can be expected in the sector soon. “In light of the higher funding requirements arising from payouts towards AGR liabilities, spectrum purchase, regular revenue sharing with the government and auction installments (which start from 2022-23), it is imperative for the players to embark on sustainable and sizeable expansions in ARPU. The last few quarters have witnessed an ARPU improvement, initially on the back of tariff hikes implemented in December 2019. Future tariff hikes are expected to result in an improvement in ARPUs to around Rs 220 in the medium term,” says Ankit Jain, assistant vice-president, ICRA. A report by ICICI Securities states that a telecom tariff hike can be expected as early as March 2021. Vi is likely to raise tariffs first in order to improve cash flows.
Promise of home broadband
The current times are best suited for fixed broadband, a traditionally under-penetrated segment. Airtel recorded the highest ever customer addition of 215,000 in the home business segment in October-December 2020. In a big move, it now plans to replace all its copper assets with fibre.
Jio, though a late entrant in this space, already has fibre reaching homes across 1,500 cities. As per Motilal Oswal, industry ARPU in the home broadband market has touched Rs 700-Rs 800 for fibre-to-the-home (FTTH) packages. FTTH connections grew from 0.7 million in 2014 to 4 million in 2020 and are forecast to reach 10 million by 2025, as per Nokia’s MBIT report.
New growth avenues
To strengthen themselves financially, telcos must also look at new avenues of growth, says Dr Mahesh Uppal, director, ComFirst. Further, as per ICRA, the sector is moving towards an inflection point where the next phase of growth will be driven by non-telco businesses, including the enterprise business, cloud and digital services. In the last few quarters, the industry has seen the three telcos flexing their muscles to expand and grow in verticals such as data centres, cloud, cybersecurity and videoconferencing. The pandemic has accelerated the digital journey across enterprises of all types and sizes. Airtel Business, the enterprise arm of the telco, witnessed a 9 per cent year-on-year growth in revenue during the quarter ended December 2020, driven by demand for enterprise connectivity solutions. Besides higher margins, the enterprise segment ensures better customer stickiness than the retail segment.
Road to recovery
With hypercompetition taking its toll, profits have been elusive for Airtel and Vi in the past few years. However, in 2020, despite the unprecedented volatility across most sectors of the economy, telecom has delivered a strong quarter-on-quarter performance so far. The surge in data traffic amidst the pandemic has been a silver lining for the sector, operationally and financially, putting it on the road to recovery.
As per rating agency, Ind-Ra, the sector is moving towards a higher-ARPU regime. A combination of an imminent Vi-led tariff hike and more customers moving to 4G will augur well for ARPU growth. Fitch Ratings expects industry monthly ARPUs to grow by 5-10 per cent in 2021-22 as 2G and 3G customers gradually upgrade to 4G.
Overall, Fitch expects the Indian telecom industry’s mobile segment EBITDA to increase by at least 40 per cent in 2020-21, compared to 25 per cent in the previous financial year. ICRA estimates also show that industry revenues will grow by 11-13 per cent over the next two years, with operating margins improving to around 38 per cent for 2021-22.
By Akanksha Mahajan Marwah