Vodafone India Ltd’s financial results for the June quarter have come as a big positive for Indian telecom investors. The country’s second-largest mobile operator reported a 4.5% sequential increase in its voice revenue per minute (RPM), as well a 3% increase in volume.
Most analysts had factored a 1-1.5% increase in voice RPM for Idea Cellular Ltd’s and Bharti Airtel Ltd’s domestic operations. They are now expecting these companies to beat Street estimates by a handsome margin. Also, in the past, a sharp increase in realizations has typically led to a drop in volume.
“Smaller operators have continued to scale back their activities... We’ve also seen less price discounting, enabling outgoing voice prices to rise, in turn driving higher Arpu (average revenue per user),” Vodafone’s management said in a conference call with analysts.
Vodafone India’s results suggest that the benefits of consolidation are finally becoming visible. Indian mobile operators had been increasing voice tariffs gradually since late last year, and it looks like much of the impact of these price moves will be visible in the June quarter. What’s more, an increase in realizations results in a big jump in profit margin, as the incremental revenues flow straight to the profits. For perspective, analysts at Kotak Institutional Equities had factored in a 70-90 basis points improvement in profit margin for Bharti Airtel and Idea on the back of a 1.3% increase in revenue per minute. One basis point is one-hundredth of a percentage point.
Interestingly, only Bharti Airtel shares have risen by about 3% since Vodafone’s results were announced last Friday. Idea shares have remained flat at around the Rs.150 levels, while shares of Reliance Communications Ltd (R-Com) have fallen. This, of course, is because valuations of both these companies had already risen to high levels. According to an analyst with a domestic institutional brokerage, at Rs.150 levels, Idea was already factoring in a 5% increase in voice RPM for the year.
Some of the impact of the tariff increases taken this year may be visible only in the September quarter; however, considering the government’s ruling on national roaming charges, overall realizations may remain flat vis-à-vis the June quarter. Vodafone’s management said on the call, “We have had three regulatory small hits—national roaming, SMS termination, VAS—which might drag us about 1.5% growth, going forward, from quarter two onwards.”
Even so, the elusive increase in tariffs is finally here, and the fact that volumes are rising in tandem should cheer telecom investors. Meanwhile, R-Com’s recent price cuts for 3G data usage could result in a drop in realizations in the data segment, even though the major incumbent companies haven’t yet responded to the move. Besides, if Bharti Airtel’s Africa operations continue to disappoint, it will take away much of the sheen off its India results.
So while the increase in price realizations is good news, investors need to also watch out for high valuations, competition in data pricing, and company-specific problems.