Idea worst hit in Q4 among telcos, to report a five fold increase in losses

While ARPU decline will impact all the operators, the sector given RJio's revenues could post a sequential uptick in revenue

Despite higher subscriber additions, the March quarter is expected to be weak for a majority of telecom service providers. Downtrading of high-value customers on the back of price cuts and fall in international terminal rates from February 1, 2018, will result in lower revenues and profits for the operators. On a sequential basis, revenues for Bharti and Idea are expected to fall by 6-8 per cent, while operating profit drop is expected to be 15-22 per cent lower on higher network costs and muted revenues. However, Hetal Gandhi, director, Crisil Research believes that the industry’s revenue is estimated to grow by 14 year-on-year in the fourth quarter and 4 per cent sequentially owing to the addition of revenues of the new entrant, Reliance Jio.

Among the telecom players, the deteriorating operating environment will reflect more sharply on Idea’s bottom line given its a pure-play telecom services exposure in India. Weak revenues, higher interest and depreciation costs means that the company is expected to report a five-fold increase in losses to Rs 15 billion. Bharti Airtel which also has Africa operations, direct to home, enterprise and tower business could end up posting a loss in the quarter or make a marginal profit, according to brokerages. While Idea has made consistent losses over the last five quarters, Bharti’s net profit has been trending down from Rs 3.7 billion in the year ago quarter to Rs 3.0 billion in December quarter. 

What has aggravated the situation, is that telecom service providers have turned their focus to market share gains since January 2018 at the cost of profitability. The situation is unlikely to change until market share gains for the top players stabilise. The sector might continue to see aggressive pricing for the next 12 months, leading to market share losses for the smaller players (15 per cent currently) as well as Vodafone-Idea until the merger settles down, believe analysts at Motilal Oswal Securities. 

Though the incumbents have lost 30 per cent of their revenue since the launch of Reliance Jio, the focus on arresting the loss of subscriber churn and gain market share is now paying dividends. Bharti has gained 470 basis points in active subscriber market share in the last 10 months, while Vodafone-Idea reversed active subscriber market share loss in October gaining 200 basis points the last three months. Further aggregate net-debt to operating profit (of top 3 incumbents) is expected to worsen in FY19 as compared to an over 6 times estimated as of fiscal 2018. However, CRISIL Research expects the ratio to improve post 2019 on monetisation of non-core assets, better revenue growth, stable margins and synergies post consolidation which will help the players reduce their debt obligations.

While larger telcos fight it out for subscribers of smaller operators, the consolidation in the sector is hurting the revenues of Bharti Infratel, which offers passive infrastructure services to operators. Loss of tenancies in December quarter coupled with a further loss of tenancies in March quarter especially due to Aircel and muted tenancy addition from Jio and incumbents will impact the company’s operating metrics. The top line is expected to decline by 2 per cent while operating profit is expected to be flat both on the sequential as well as year ago basis. In comparison to the situation now, analysts at Kotak Institutional Equities said the company’s operating profit growth trajectory was as high as 13 per cent only three quarters back. Tata Communications too is expected to report a muted quarter as improvement in growth services is likely to be offset by falling traditional services margins.