Telecom: Telecommunication companies engage in give and take
Q3 results represented a form of give and take, with Reliance Jio gaining at the expense of the incumbents—Airtel, Vodafone and Idea Cellular
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Reliance Jio Infocomm Ltd’s big regulatory win on interconnect usage charges (IUC) turned the tables in the telecom industry. Before the cut in IUC, it had a share of only 16% in the Ebitda reported by the country’s top four telcos. In the December quarter, Jio’s share nearly doubled to 30%. Ebitda is earnings before interest, taxes, depreciation and amortization.
In one sense, the results represent a form of give and take, with Jio gaining at the expense of incumbents—Bharti Airtel Ltd, Vodafone India Ltd and Idea Cellular Ltd. Put together, the four telcos reported a sequential decline of only 1.75% in Ebitda in Q3, which isn’t bad in the backdrop of an intense battle for subscribers.
More importantly, the cumulative cash burn of Airtel, Jio and Idea Cellular fell to around Rs9,200 crore, from around Rs10,900 crore in the September quarter. Of course, this is nothing much to cheer about, but it does point to a slight recovery. Jio’s cash burn reduced largely because of the IUC cut, while incumbents cut capex to conserve cash. It was also a quarter when Jio raised tariffs and some small telcos shut operations. Of course, cash flow metrics tend to be lumpy, and it’s premature to get excited about the lower cash burn.
In any case, the joy will be short-lived. Jio has stepped up its aggression on pricing this year, which means the levels of cash burn will worsen for the industry in the March quarter.
Coming back to the previous quarter, while the incumbents reported a 12-13% decline in revenues, Jio’s revenues grew 12% sequentially.
Nearly 90% of the increase in Jio’s operating profit was on account of the IUC cut. The Telecom Regulatory Authority of India (Trai) cut IUC by 57% from 1 October, which also resulted in a sizeable revenue loss for incumbents. The industry might have had a marginal recovery, but things have gone from bad to worse for incumbents.
Airtel reported a pre-tax loss of Rs933 crore for its India wireless business; in Q2, it made a profit of Rs38 crore. Idea was already deep in the red and losses rose to 30% of revenues.
To be sure, Jio’s accounting policy differs significantly from peers, which analysts point out understates costs. As such, it makes more sense to look at cash flow trends. As it turns out, Jio is burning way more cash than others. Thanks to increase in profits, cash outflow reduced from ~Rs6,200 crore in Q2 to ~Rs5,000 crore last quarter. Even so, this is more than the combined cash outflow of Rs4,200 crore of Airtel and Idea.
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