Headwinds for telcos not over yet

Cut in interconnect usage charge and down trading would also lead to sharp fall in consolidated profit for Bharti Airtel in Q3

Despite the higher subscriber addition given the exit of smaller players, financial performance of existing telecom service providers is expected to remain under pressure in the near-term. This should also reflect in the December quarter (Q3) with analysts expecting a hit to their revenues and operating profit to the tune of 8-12 per cent. The stress on financials is expected to continue due to down-trading of monthly plans, both prepaid and post-paid, and reduction in interconnect usage charge (IUC). IUC is a charge paid by the call originating service provider to the terminating network for carriage of the call to the receiving party.

The fall in IUC by 57 per cent from 14 paise per minute to 6 paise per minute effective October 1, 2017 would be the key negative impact for the incumbents in Q3. These charges contributed a significant 15-20 per cent to Bharti and Idea’s revenues and operating profits and the cut in this rate would set their revenues and operating profit back by 8-12 per cent on a sequential basis, estimate analysts.

On the operational front, the impact is due to aggression shown by incumbent operators (Bharti, Idea and Vodafone) in opening up their unlimited plans to all subscribers during Q3 as compared to earlier offers which were limited to 4G handsets only. On account of this, analysts expect their average revenue per user (ARPU) to fall about 10 per cent on a sequential basis and up to 24 per cent year-on-year for Airtel and Idea. Given the declining trend of a fall in ARPU over the last five quarters, revenues too have followed the trend with Q3 topline expected to fall about 10 per cent sequentially for the two incumbents. This will translate to a 31 per cent fall in consolidated profits over the year ago period for Bharti and tripling of losses for Idea on a reported basis, according to Kotak Institutional Equities.

Going ahead, however, some relief should come as analysts anticipate ARPU to inch up over the next six months as competitive intensity continues to come down and only four players are left at the national level. Though aggression in the entry level packs continues, Reliance Jio, which is currently dictating the pricing for all players, has been increasing tariffs by reducing validity of their earlier plans. Tariffs for its most popular plans have been cut by 15 per cent since October. 

Given the consolidation moves, the street will keenly watch out for progress on the Idea-Vodafone merger expected to be completed by March this year, approvals for sale of assets by Reliance Communications to Reliance Jio and Bharti’s integration with Tata Teleservices and further asset sales in its direct-to-home and tower subsidiaries. 

For now, among the two key listed stocks, most brokerages have a sell rating on Idea given the uncertainty ahead of the merger with Vodafone, while they are positive on Bharti Airtel on improving Africa operations and competitive strengths vis-a-vis Reliance Jio on spectrum and coverage.