Reliance Jio Infocomm Ltd’s free services wreaked havoc on the December quarter financial statements of India’s leading telecom companies. Idea Cellular Ltd reported losses, and Bharti Airtel Ltd reported a 16% sequential drop in operating profit for its wireless business.
Airtel generated barely enough cash flow from operations to cover increased capital expenditure (capex). Idea’s cash profits weren’t enough to meet enhanced capex needs and, as a result, its debt has gone out of whack.
Analysts at Kotak Institutional Equities wrote in a note to clients after Airtel’s results announcement, “We could be down to as low as Rs20,000-25,000 crore in annualized Ebitda (ex-Jio) for an industry sitting on an aggregate net debt in the vicinity of Rs3 trillion (ex-Jio). This is as distressed as it gets, in our view." Ebitda is short for earnings before interest, taxes, depreciation and amortization—an indicator of operating profitability.
Customers who availed themselves of Jio’s free services simply stopped using paid data services of incumbents, leading to a drop in revenue and profits. Things are likely to be far worse in the March quarter as Jio’s free services have continued over this period and were used by a far higher number of customers. The silver lining is that Jio will start charging customers from 1 April, although that doesn’t reduce the pressure on incumbents much.
Already, they have been forced to bring down tariffs substantially to try and match Jio’s offers to their subscribers. Yet, while it’s clear that revenues and profits will be under pressure for some time to come, it’s anybody’s guess how long the pain will continue and to what extent profits will fall.