A combination of government policy changes and market consolidation have improved the dynamics of the telecom service sector. The three major private players could all be beneficiaries of this. But Bharti Airtel and Reliance Jio are more likely to be the major winners because they already have a far higher market share and better 4G penetration in a market that does still have growth prospects.
Reliance Jio and Bharti Airtel have far better financials than Vodafone Idea (Vi) and this latter factor will enable these two companies to pull further ahead in the race. For example, the launch of the new JioPhone and the counter-offer of cashback from Airtel on a variety of smartphone-related schemes may help convert 2G feature-phone users to 4G smartphone users.
Vi does not have the resources to compete by launching a similar scheme; hence, it is likely to lose some of its customer base, which will migrate to Airtel or Jio. However, Vodafone Idea could also get a new lease of life if it can use the four-year moratorium on adjusted gross revenue (AGR)/spectrum dues to shore up its finances and maintain enough of its current market share.
The quarterly (July-September 2021) and half-yearly (April-September 2021) results are indicative of improvements in the sector’s financial position. All three operators have been able to improve their ARPUs, which indicates that pricing power is returning slowly to the sector. Policy reforms have eased the pressure of debt servicing, and will play a beneficial role further down the line as well.
It is hard to make financial comparisons with the past because of the extreme circumstances of the last year when the pandemic affected everything, and also the legal tangles specific to the telecom sector. The adverse outcomes of the AGR case meant that a huge debt burden was suddenly imposed on Vi and Airtel. The AGR burden meant net losses for both these companies, even though they were managing to register operating profits.
In the quarter ended September 30, 2021, Reliance Jio, the telecom arm of Reliance Industries, reported a consolidated net profit of Rs 37.28 billion, which was an increase of 23.5 per cent over the same period a year ago, when it posted Rs 30.19 billion. Jio’s profits were up sequentially as well, compared to the April-June 2021 quarter profits of Rs 36.51 billion. Revenues rose to Rs 197.7 billion versus Rs 189.5 billion in the first quarter and
Rs 185 billion a year ago. ARPUs grew to Rs 143.6 from Rs 138.4 in the first quarter. Jio ended the second quarter with 429 million users, a drop of about 11 million users from the first quarter.
Bharti Airtel had India revenues of Rs 199.8 billion in the second quarter of 2021-22, versus Rs 189 billion a quarter ago and Rs 181 billion a year ago. The net profits were Rs 34.7 billion versus losses in the previous quarter, and losses a year ago. ARPUs moved to Rs 153, which was a gain over the Rs 143 registered in the previous quarter. The 4G customer base was at 192 million (Jio’s entire base is 4G), which is a gain of 40 million 4G customers compared to a year ago. In an interaction with investors, the company said that it is targeting ARPUs of “Rs 200 in the near term and Rs 300 in the longer term”.
Vodafone Idea reported net losses of Rs 71 billion for the second quarter, which was lower than the Rs 73 billion reported in the first quarter. The narrowing of losses was better than industry analysts were expecting. Revenues rose 3 per cent over the first quarter, to Rs 94 billion, which was also better than expectations. The company registered a consolidated operating profit of Rs 38.6 billion before cost of finance, with the net losses being due to the huge debt overhang. It had an ARPU of Rs 109, better than the Rs 104 registered in the first quarter.
In terms of current revenue market share, Vi holds approximately 19 per cent while Airtel and Jio hold roughly 40 per cent each. The long-term market dynamics are positive, given smartphone user penetration is around 50 per cent of the total mobile subscriber base and the total subscriber base is around 70 per cent of the population. Even now, over 40 per cent of mobile users are on 2G networks.
Teledensity can be expected to rise, especially in rural areas, which are still under-served by the networks. In addition, a shift to 4G can be expected from 2G users, while 4G users are also likely to start upgrading to 5G once those networks are commonly available. This would mean rising ARPUs across the board and, in addition, operators are now in a position to gradually increase tariffs as they have indeed started doing.
Policy reforms have set the stage for better sector economics. The crucial changes are a four-year moratorium on AGR/ spectrum dues; a change in AGR definition to exclude non-telecom revenues; rationalisation of interest and penalty on spectrum usage; the option to surrender spectrum, with spectrum usage charges removed in the future and the option to convert deferred amounts (post moratorium) to equity. This set of policy changes not only removes some of the urgency in paying off AGR dues, it also reduces the future burden and clarifies the position with respect to future AGR dues.
The amount payable on moratorium can be converted to a net present value (NPV), with some choices. Payouts may be deferred to the end of the four-year period, or they could be paid every year during the anniversary period, or converted to equity. While the decision to covert to equity has to be taken by January 2022, the flexibility on payouts (if conversion to equity is not done) will reduce the pressure on balance sheets. Jio’s AGR dues are relatively negligible, but Vi owes about Rs 504 billion, and Airtel has a commitment of about Rs 260 billion.
Both Airtel and Vi have opted for the moratorium. Airtel will probably be able to service its dues out of its internal resources, or raise the resources comfortably if it decides not to go with the equity conversion option.
Vi is in a more difficult position financially. It needs to raise funds of about Rs 187 billion if it is to service its dues and, furthermore, to also invest in sufficient capital expenditure to compete for 4G market share. Jio and Airtel can afford capital expenditures of about $3 billion per annum each, and Vodafone Idea is slated to spend less than $700 million on capex in this fiscal year. Vodafone Idea will need to double its capex at the least if it wishes to hold on to its current revenue market share.
Given the current trends, we can expect to see the following developments over the next couple of years. There will be very cautious bidding for 5G spectrum, and network roll-outs will be measured rather than full speed ahead.
Jio and Airtel will aggressively try to convert 2G feature-phone users to 4G smartphone users with the help of schemes such as offering low-end smartphones or cashbacks. This could impact Vodafone Idea’s user base (and that of Bharat Sanchar Nigam Limited) and see a migration from Vi to the other operators, since it does not have the resources to launch similar competitive schemes. Given the consolidation, tariff hikes can also be expected, especially at the low end of the 2G prepaid segment, as well as hikes in data rates. All three operators need to hike ARPUs. Vodafone Idea is likely to see a further erosion in market share and revenue market share, albeit in a market that is likely to deliver better growth rates.
By Devangshu Datta