Graphic: Mint
Graphic: Mint

With Reliance Jio in no mood to relent, losses to mount for Indian telcos

Analysts estimate revenues of Bharti Airtel and Idea Cellular will decline between 2.5% and 3% in the June quarter on an organic basis

The June quarter was fairly eventful for Indian telecom companies, at least as far as disruptive announcements by Reliance Jio Infocomm Ltd go. In May, the company announced post-paid tariffs that were less than half of prevailing offers from incumbents, coupled with far cheaper international calling rates. It also considerably increased the data allowance on its flagship plans.

But the impact of these moves is expected to have been minimal in the June quarter, with the new post-paid services being available for only about half of the period. It was also the first full quarter of operations after the exit of Aircel Ltd, resulting in gains for incumbents. At the same time, downtrading by subscribers continues to cost-effective bundled plans, which means the decline in Arpu (average revenue per user) and revenues should continue for incumbents.

Not all smartphone users have migrated to bundled plans yet. According to analysts, Arpu of smartphone users remains higher than what Arpu of bundled plans imply, leaving room for downtrading still. Of course, the pace at which this migration occurs has reduced, which should result in a drop in the rate at which revenues are declining.

In the March quarter, revenues of Bharti Airtel Ltd and Idea Cellular Ltd’s India wireless operations had declined sequentially 3.7% and 5.7%, respectively. Analysts at Kotak Institutional Equities estimate their revenues will decline between 2.5% and 3% in the June quarter on an organic basis.

Of course, the lower rate of decline is hardly any comfort to investors. Both Airtel and Idea were running losses at the Ebit (earnings before interest and tax) level in the March quarter, and losses are expected to increase in the first quarter of this fiscal year.

Idea, for instance, is estimated to report losses of 1,331 crore, according to Kotak’s estimates, far higher than the loss of 193 crore a year ago. The company’s estimated Ebitda (earnings before interest, tax, depreciation and amortization) of 817 crore amounts to only two-thirds its estimated interest cost of 1,200 crore. Vodafone India Ltd’s financial position isn’t expected to be far better, and the merged Vodafone-Idea entity will be heavily banking on a recovery in Arpu for avoiding breaches on their debt covenants.

But Jio’s move in the post-paid segment shows that it is no mood to relent. If anything, Arpus will be under downward pressure for some time to come. The company itself is expected to report a drop in Arpu in the first quarter, since it has waived the Prime subscription fee. Besides, subscribers who availed of cashback offers will also generate lower Arpus. Whether Jio also reports a drop in Ebitda will depend on how much of its expenses remain capitalized.

The company has also stepped up competition in the feature phone segment, after a somewhat muted response to its JioPhone offering. In July, it lowered the initial outgo for owning a JioPhone to a third of existing levels. The company also said it has set a target of 100 million users for the feature phone, compared to around 25 million in early July.

In the smartphone segment, Jio continues to report decent growth rates, with its overall base having risen to 215 million subscribers in early July, compared to 186.6 million in end March. As long as new subscribers are being added at a fast clip, Jio can be expected to maintain current tariff levels. After all, why unnecessarily rock the growth engine? Those hoping for a recovery in tariffs may need to wait much longer.

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