<b>Devangshu Datta:</b> Significant pain ahead for telcos

Telecom major Bharti Airtel on Tuesday posted dismal third quarter (Q3) results due to the price war initiated by Reliance Jio, and also partly to demonetisation. Its net profit dropped 55 per cent to Rs504 crore in the December 2016 quarter, compared to Rs1,108 crore a year ago. Revenue fell three per cent to Rs23,336 crore, from Rs24, 036 crore a year earlier. 

Free cash flow dropped to Rs1.5 crore, down from Rs3,547 crore a year ago and Rs3,953 crore in July-September 2016. 

Jio launched its free services on September 5, 2016. A quarter-on-quarter (q-o-q) comparison of Airtel's Q3 with Q2 (July-September 2016) indicates the impact of Jio's entry. The blended voice+data ARPU (average revenue per user) for Airtel dropped 6.5 per cent to Rs123 q-o-q. The data ARPU was down 13 per cent q-o-q to Rs175. Voice realisation was down nine per cent/minute, while data realisation/ mb was down 11 per cent. Mobile broadband (3G-4G) subscribers declined nine per cent q-o-q and the total mobile customer base (including 2G customers) declined 12 per cent.

Airtel remains by far, the largest Indian operator with about 266 million mobile subscribers in India (where it derives almost 80 per cent of revenue). In terms of revenues, it holds about one-third market share. Minutes of usage were up by about 3.2 per cent q-o-q. But, data consumption dropped 3.5 per cent, as operator slashed rates. Demonetisation also hit the pay-as-you-go customer base. 

Like every other operator, Airtel must continue bidding for spectrum and rolling out network infrastructure. As margins decline, it has taken on more debt for capital expenditure (capex). 

The balance sheet is stretched with net debt rising to $14.3 billion (USD given overseas exposures across Africa,  South Asia, etc. ) in Q3 versus $12.2 billion in Q2. The net debt was $11.85 billion on December 31, 2015. The company is now looking to raise Rs10,000 crore via private placement of non-convertible debentures (NCDs). 

The No. 3 operator, Idea Cellular was scheduled to declare its third quarter results this Monday. But, it has postponed, without giving an explanation. There are rumours of massive losses. Analyst consensus is that Idea could see losses on the order of Rs448 crore in Q3 (versus net profits of Rs91 crore in Q2). 

Debt is expected to climb to a mind-boggling Rs55,000 crore, which would be over 5x of operating profits. The No. 2 operator, Vodafone is unlisted. But, the global parent wrote down the valuation of the Indian subsidiary by €6.3 billion in November 2016.

The scenario will change again after March, as Jio begins billing. But, Jio has already picked up over 72 million users (it would be wrong to call them customers just yet). It has also spent over Rs2 lakh-crore. It is committed to keeping voice calls free, using VOLTE (voice over long-term evolution) technology.  

India is set to overtake the US this year as the second-biggest smartphone market by units. Data revenues are expected to grow at over 30 per cent annually, as more users get the broadband habit. Fibre manufacturers could make a killing and tower firms (operators like Airtel and Idea hold stakes) could also see enhanced revenues.  

But, operators will be under massive pressure and this will show up in market valuations. Weaker operators could be forced out, or compelled to deleverage drastically. Even Reliance Industries itself, despite its huge energy businesses and strong balance sheet, could feel the pressure, given its vast investments.