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Sector Analysis

Indian Telecom Sector: Duopoly Or Hefty Tariff Hikes?


Bharti Airtel Ltd. – India’s second-largest mobile operator has significantly consolidated its position in the financial year 2021. The Sunil Bharti Mittal and SingTel controlled company has not only been able to grow its subscriber base but has also been able to outperform its peers in most of the parameters.

Here’s a look at how the Q4FY21 and the entire financial year panned out for the telecom operators.

In Q4FY21, all the three operators witnessed a drop in their reported revenue for the first time, as inter-connect usage charges were nil from the earlier ₹ 0.6 per minute. A telecom operator pays IUC charges for connecting calls of its subscribers to a rival network. For instance, Jio will have to pay a fee for every call its subscriber makes to Airtel users, and vice versa.

This means that now operators can keep whatever money they collect from consumers without having to keep a tab on where the call is terminating. IUC was introduced at a time when some operators had a larger network footprint compared to new players. In such a scenario, the larger operators had to be compensated for the investments it had to enable call completion. However, over the years this gap between operators has reduced. All the remaining operators have identical network footprints when it comes to voice calls.

However, adjusting for IUC in the previous quarter, Bharti Airtel reported the highest revenue growth. ARPU – which measure average revenue per user per month – adjusted for IUC, remained stable for Airtel and Jio. Vodafone Idea reported a drop probably due to a falling customer base and downtrading – customers opting for lower price packs.

Indian Telecom Sector: Duopoly Or Hefty Tariff Hikes?

For the full financial year, Vodafone Idea was the only outlier. Once India’s top telecom operator has continued to lose ground as its subscribers migrated to peers. The company lost close to 2.3 crore subscribers. Thus, despite a tariff hike, its total revenue fell by 7% for the entire year.

Vodafone Idea’s loss has been Airtel and Jio’s gain. Both the operators gained subscribers which aided their financials. Bharti Airtel witnessed strong growth in its subscriber numbers in FY21, after reporting a drop for the last two financial years. Reliance Jio reported some moderation in subscriber growth, while Vodafone Idea continued to lose subscribers in FY21.

For Jio, all its subscribers are on the 4G network, but for Bharti Airtel and Vodafone Idea, 56% and 42% of its subscribers are 4G users, respectively. 4G users are primarily data users and generate high ARPU. Bharti Airtel’s 4G subscriber addition gathered momentum as it has been adding more than one crore 4G users for the last three consecutive quarters. For Vodafone Idea the pace has been very slow.

Reliance Jio in Q4 reported its highest quarterly subscriber addition in the last year aided by the launch of JioPhone – low ARPU generating subscribers.

Indian Telecom Sector: Duopoly Or Hefty Tariff Hikes?

Though the pace of customer losses slowed down for Vodafone Idea in H2FY21, the risk persists. Recently, Jio announced the launch date (September 10, 2021) of its new smartphone – Jiophone Next. It is yet to announce the pricing, but it aims to capture the 2G users with e these smartphones. Pricing remains the key when it comes to 2G users, and if Jio gets that right, then Vodafone Idea could continue to face customer churns as it has the highest 2G customer base.

On the profitability front, among operators, Bharti Airtel reported the highest growth at 3.6%, followed by Jio at 2.2%. For Vodafone Idea, the reported numbers were ahead by 2.9%. However, after adjusting for the one-offs in Q3 and Q4, the EBTIDA was flat.

In Q3, Vodafone Idea had a positive impact of ₹ 330 crore on its EBITDA related to subscriber acquisition cost, while in Q4 it was ₹ 450 crore related to network cost which boosted the EBITDA. Vodafone Idea has also embarked upon a cost optimisation drive which led to a savings of ₹ 650 crore in Q4FY21 as against ₹ 500 crore in Q3. The company aims to save ₹ 4,000 crore annually from this cost-saving exercise. Despite this, over the last five quarters, the company’s EBITDA has been range-bound, while the other operators have seen growth.

Indian Telecom Sector: Duopoly Or Hefty Tariff Hikes?

This brings us to the incremental EBTIDA earned by Jio and Airtel. Jio continues to see limited benefits of operating leverage vs Bharti Airtel. Margins on incremental earnings for Airtel stood at 76% Vs 57% for Jio.

Indian Telecom Sector: Duopoly Or Hefty Tariff Hikes?

On the customer engagement front, Bharti Airtel’s subscribers have the highest average data usage and voice usage implying higher adoption of unlimited plans. It has reported the highest QoQ growth in data traffic in Q4.

Indian Telecom Sector: Duopoly Or Hefty Tariff Hikes?

On the balance sheet strength comparison, we are not including Reliance Jio as most of its debt are spectrum-related and the holding company has more than enough cash to meet those obligations. Now, among the remaining two, Vodafone Idea could potentially be heading towards a financial crisis. The company has a debt of ₹ 1.8 lakh crore and a leverage ratio (total debt to EBITDA) of 10.6x. If we consider the EBTIDA adjusted for Ind-AS, the leverage will swell to 22.4x.

Till April 2022, the company has liabilities worth ₹ 24,000 crore (AGR liability of ₹ 8,000 crore, bank guarantees of ₹ 8,000 crore and deferred spectrum liability of ₹ 8,200 crore) upcoming for payment. The amount is three times the EBITDA (adjusted for Ind-AS) generated by the company in FY21.

Indian Telecom Sector: Duopoly Or Hefty Tariff Hikes?

Final Thoughts

Vodafone Idea’s dire in FY21 makes one thing clear – either the sector will become a duopoly or will witness hefty tariff hikes. Vodafone Idea has already taken shareholders’ approval to raise close to ₹ 25000 crore, however, the availability of funds remains a challenge. Also, the amount it plans to raise would prove to be sufficient to meet its obligations only till April 2022. Thus, to survive beyond that it needs hefty tariff hikes.

Be tariff hikes or closure of Vodafone Idea, in either case, Bharti Airtel and Reliance Jio stand to gain.

Other Related Posts:

Is Reliance Jio Signalling A Tariff Hike?

What 2021 Holds For The Telecom Sector

What Is Bharti Airtel Upto?

Telecom Tariff Hike: Imminent, But When?

Can Vodafone Idea Survive Even With A Favourable AGR Case Outcome

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