After Jio's deep discounts, telecom incumbents now in recovery mode

Analysts expect revenues to stabilise in June quarter; higher costs would continue to dent margins

After two quarters of pain, revenues of telecom operators are expected to stabilise in the June quarter, estimate brokerages.

While revenue growth will still be elusive, the earlier sharp cuts in realisations are expected to reduce, with companies reporting flat to marginal drops in revenue. While this is nothing to write home about, it would be much better than the prior two quarters of a 6 to 7 per cent revenue declines each on a sequential basis.

Rohit Chordia of Kotak Institutional Equities believes disrupter Reliance Jio’s offers having moved from free to ‘deep discount’ presents incumbents with a chance to put up a better fight and stem the massive revenue erosion seen in the second half of 2016-17. He says the incumbents seem to have fought well, with competitive offerings. And, this is likely to mean better sequential revenue change, compared to the December and March quarters.

While Chordia expects revenues to fall 1.4-1.7 per cent in the June quarter, Vivekanand Subbaraman of Ambit Capital estimates 1 per cent revenue growth each for Idea Cellular and Bharti Airtel.

Discounted counter-offers by the incumbent operators are expected to weigh on revenue and realisation, both in voice and data services. Bharti Airtel and Idea’s India wireless voice revenues are expected to fall 12-13 per cent and data revenues by a steeper 23-24 per cent each, year-on-year. This is despite data volumes having nearly doubled for both Bharti and Idea over the year-ago period. On a sequential basis (which is what the market typically looks at closely), while volumes are up 45-55 per cent, data revenues might fall — volumes essentially reflect increase in data allowances for the same or lower price, believes Chordia.

The incumbents will continue to face pressure on margins, due to falling revenues and higher network roll-out cost. Operating profit margin for Bharti Airtel’s wireless business would deteriorate sharply, due to aggressive network rollouts and increased promotional spending to win back customers, says Subbaraman of Ambit. Analysts estimate an 800-basis point (bp) fall in India wireless operating profit margin for Airtel to 32.9 per cent over a year; on a sequential basis the fall would be 360 bps.

Idea’s margin fall is along similar lines, to 23.3 per cent. Weak operating performance, higher depreciation and interest costs will mean it reports a consecutive quarterly loss, of about Rs 800 crore. Good performance of its non-wireless business and stabilising revenue will translate to net profit of about Rs 200 crore on a consolidated basis for Airtel, estimate analysts.

Though the extent of pain in earlier quarters is expected to come down in the coming quarters, the Street is cautious on the two listed incumbents. While the share price of both have recovered from their lows earlier in the year, competitive intensity remains high. Investors should await an improvement in revenue growth and average revenue per user before taking an exposure to the stocks, which are trading at 7 to 9 times their FY19 enterprise value to operating profit estimates.