Telcos fight to keep network costs in check; Voda Idea spends highest

The financials of telecom companies indicate that network cost as a per cent of mobile revenues ranged between 25 and 30 per cent between financial years 2013 to 2018. 

But entry of Reliance Jio in FY17 led to a massive 4G rollout by the telcos across circles, leading to a rise in network cost. Vodafone Idea Ltd currently leads the pack with almost 43.3 per cent network operating expenses (opex) as per cent of revenue. It, however, managed to reduce it by around 10 per cent in the March quarter.

The reason for high network spends lately has been due to incumbent telcos trying to provide 4G services on a par with Reliance Jio. 

According to the March data of the Telecom Regulatory Authority of India (TRAI), Airtel has 20.35 per cent broadband market share, Vodafone Idea 19.57 per cent share while Jio leads the pack with 54.45 per cent.

Prashant Singhal, emerging markets telecom, media and technology leader, EY, said, “Globally, the trend is for telecom operators to spend between 25 and 30 per cent of their revenues as network capital expenditure (capex). Over the past few years, companies have rushed to spend on 3G-4G technology. The next line of spending will be on 5G rollout but that can be expected two years later. However, the technology cycle is getting shorter as a result of which the network spend is likely to remain high.” Analysts note that stabilisation is far off with telcos stuck in a perpetual cycle of new technology roll out. Bharti Airtel’s network cost as a per cent of mobile revenue is at 28 per cent, Jio’s is at 30 per cent and Vodafone has reduced it from 48 per cent last quarter as part of their synergy drive.

“A look at telcos’ financials indicate that network cost as a per cent of mobile revenues ranged between 25 and 30 per cent between financial years 2013 and 2018. But entry of Reliance Jio in FY17 led to the massive 4G rollout by the telcos across circles, leading to rise in network companies,” said Hetal Gandhi, director, CRISIL Research.

Gandhi added that during FY19, Bharti Airtel’s and Reliance Jio’s network operation costs grew by around 16 per cent and 85 per cent year-on-year (YoY), respectively.

CRISIL Research believes the network cost will remain high in FY20 owing to continued incremental network roll-out in rural areas and building capacities in high congestion areas, after which there may be some stabilisation.  Also, accelerated network integration in India’s largest telco, Vodafone Idea, has led to realisation of synergy in the recent quarters and is expected to see more synergies which will check network opex.

Network spends have been the highest for Vodafone Idea, which has been on a drive to synergise infrastructure to pare costs. Their 10 per cent reduction of network costs helped improve earnings before interest, tax, depreciation and amortisation (EBITDA) by 87 per cent in the March quarter, much higher than analyst estimates. 

“The underlying opex (including network opex) reduction is equivalent to an annualised  synergy realisation of around Rs 5,100 crore, 60 per cent of the Rs 8400 crore opex synergy target outlined by the company,” wrote Viju K George, research analyst, JP Morgan.  He added this may not necessarily indicate that Vodafone Idea’s steady state margins will rise to higher than the level they had forecast. George rather felt that Vodafone Idea is likely to see an accelerated reduction of the quartely operating cash outgo in the forthcoming quarters on network opex as the synergy benefits set in.

Vodafone Idea eliminated 4,894 mobile broadband sites in Q4 FY19 (-1 per cent quarter-on-quarter or QoQ) and 8,000 2G sites (-3 per cent QoQ) during the quarter.