Graphic: Mint
Graphic: Mint

For telecom operators, there is a strange light at the end of the tunnel

As to the question of when and if Jio will relent, it must be noted that its revenue market share is still only around the halfway mark of its target

“We feel the machine slipping from our hands, as if someone else were steering; if we see a light at the end of the tunnel, it’s the light of an oncoming train," wrote Robert Lowell in the poem Since 1939. It’s a sentiment incumbents in India’s telecom industry have identified with since September 2016. In the June 2016 quarter, before new entrant Reliance Jio Infocomm Ltd started steering the ship, Bharti Airtel Ltd’s India wireless unit boasted annualized revenue of more than 60,000 crore with Ebitda (earnings before interest, tax, depreciation and amortization) margin of as high 42.4%.

Revenues and profits have fallen almost every quarter since. In the September 2018 quarter, analysts at Kotak Institutional Equities estimate Airtel’s India wireless business to post annualized revenue of 40,650 crore, a 32.5% drop from pre-Jio levels. With margins falling sharply as well, the fall in Ebitda is expected to be as high as 64%.

Idea Cellular Ltd, which completed its merger with Vodafone India Ltd in end-August, has fared far worse. On a stand-alone basis, analysts at Kotak estimate its revenue and Ebitda to fall 42% and 86%, respectively, in the September 2018 quarter from pre-Jio levels.

For now, the only light at the end of the tunnel seems to be from a train called the Jio Juggernaut.

Not long ago, some industry executives and analysts were predicting that the worst is over for the telecom industry. The price war in the prepaid, smartphone segment seemed to have abated and the scope for market share gains for Jio also seemed relatively limited, compared to the first two years of operations. But with the company attacking the post-paid as well as the feature phone segments this year, incumbents have had to deal with further losses in revenues.

This July, Jio relaunched its feature phone called JioPhone, with the facility to exchange other feature phones owned by customers. The move has proved to be a double whammy for incumbents. Not only did the product give Jio an entry in this segment, the exchange offer also meant that incumbents lost some existing subscribers.

“Given that this plan involves the exchange of the customer’s old feature-phone for JioPhone, it means that spend on the incumbent SIM goes straight down to zero. Impact on incumbents will likely increase from the December quarter onwards as the impact in 2Q was limited to less than half a quarter," analysts at Kotak wrote in a note to clients.

And while Jio’s market share gains in the post-paid segment may be limited thus far, its entry into the segment has forced incumbents to reduce tariffs, which has hit revenues as well. While both Airtel and Idea were running huge losses and cash burn in the June quarter itself, the fact that revenues are continuing to slide and losses are widening have come as a negative surprise.

In Idea’s case, estimated Ebitda is at about a third of its interest costs; while Airtel is far better off with estimated Ebitda more than enough to cover interest costs, there is not much left to meet burgeoning capex needs. In terms of cash burn, therefore, all telcos are deep in the red. Of course, Jio burns far more cash than all other telcos put together; but the big difference is that no one is forcing it to do so, and its investors don’t seem to mind.

As to the question of when and if Jio will relent, it must be noted that its revenue market share is still only around the halfway mark of its target. Its aggression isn’t likely to reduce anytime soon.

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