India’s telecom companies were expected to be hit badly by the double whammy of demonetisation and Reliance Jio Infocomm Ltd’s free services. The time for guesstimates is more or less over. Bharti Airtel Ltd has reported weak results, with revenues and operating profit declining by 5.3% and 9.5%, respectively, on a quarter-on-quarter basis. More importantly, free cash flow dried up completely as the company generated barely enough cash flow from operations to cover increased capital expenditure (capex).
Free cash flow stood at Rs1.5 crore last quarter, down from Rs3,547 crore in the September quarter and Rs3,953 crore (ex-dividend receipts) in the June quarter. While profits are falling, telcos are forced to increase capex to enhance data capabilities and compete effectively with Reliance Jio.
But note that Bharti Airtel is far better placed than Idea Cellular Ltd because of a fairly large contribution from non-mobile businesses, a lower exposure to rural customers, and most importantly, relatively lower leverage.
If Bharti Airtel’s results are an indication, Idea Cellular can be expected to report large losses. According to an analyst at a domestic institutional brokerage firm, “It is a simple equation; the smaller you are, the bigger the trouble.”
Some analysts have already estimated losses for Idea Cellular, although now that Bharti Airtel’s results are worse than estimates, things could be far worse than anticipated. Besides, as analysts at JM Financial Institutional Securities Ltd point out, Idea Cellular’s debt levels have reached alarming proportions. “Given the recent auction spend (Rs12,800 crore) and near-term Ebitda collapse, Idea’s financial leverage is set to touch alarming levels—net debt to cross Rs55,000 crore by Mar 2017, which is 5.5 times FY17 Ebitda and 2.5 times equity, on our revised forecasts,” they said in a note to clients. Ebitda is short for earnings before interest, tax, depreciation and amortization.
But while deleveraging is the need of the hour, Idea Cellular has been raising debt. While it has the option of selling its tower assets, it may even need to consider radical steps such as a merger with Vodafone India Ltd. Of course, it’s still not clear how the two companies will tackle the regulatory restriction that limits market share of a merged company to 50%. The Vodafone-Idea combine has a far higher share in five important circles. Even so, desperate times might entail desperate measures.
Bharti Airtel’s mobile services business reported a 6.1% sequential drop in revenues, with the data segment reporting a 13.7% fall. Ebitda of the mobile segment fell 15.9%, higher than Kotak Institutional Equities’ estimates of a 10.9% decline. And as pointed out earlier, capex rose by around 20% sequentially to Rs4,410 crore.
Data, which used to be a relatively fast growing segment, witnessed a decline in customer base as well as usage by those who remained on the company’s network. After all, if a competitor is offering free services, some amount of migration would be natural. Bharti Airtel’s mobile broadband customer base fell by 8.8% sequentially to 37.7 million customers. Voice revenues fell 4.4% compared to the seasonally weak September quarter. They have declined nearly 8% in the past two quarters.
The big question for incumbents such as Bharti Airtel and Idea Cellular is how customers react when Reliance Jio starts charging for its services— expected in March this year. In the interim, however, it’s evident that Jio’s free services have wreaked havoc.