Margin pressures to grow for Airtel, Idea

Spending on data network and lower revenue and volume growth will continue to pressure financials'

The share price of Idea Cellular and Bharti Airtel has not moved much since Reliance Jio (RJio) extended its promotional offer till March 31, 2017, as a part of it was already factored in. Nevertheless, the extension of RJio's offer is expected to put pressure on the operating performance of incumbents in December 2016 (Q3) and March 2017 (Q4) quarters. Most brokerages estimate zero to low single-digit operating profit growth for Bharti and Idea in FY17 as well as FY18. CLSA, for example has revised its consolidated revenue and operating profit estimates for incumbent operators downwards by 1-8 per cent and earnings by 3-20 per cent in the FY17-19 period. Ambit Capital says that Idea could post losses in Q4FY17 on higher network operating costs, increased interest and depreciation. The double whammy of higher capex and high fixed operating costs will result in losses from March quarter of 2017 through to 2018, says Ambit's report.

The pressure is already visible. The sector's revenue growth in Q2 fell to 4.4 per cent year-on-year, partly due to less than expected growth in data business. Data revenue growth has fallen from 55 per cent last year to less than 25 per cent in recent times, while data volume growth is down from 70-80 per cent to 35-50 per cent in this period. Bharti's incremental data revenues has come down from Rs 168 crore in Q2FY17 to just Rs 51 crore in Q3, while Idea's has fallen to Rs 56 crore from Rs 86 crore in Q2. The lower incremental revenues are largely due to RJio launch. While Bharti gets about 25 per cent of its revenues from data, the number for Idea is 20 per cent. 

While slowing growth is a worry, IDFC Securities' analysts say that continued network spend and increase in sales and administration costs will put pressure on margins of incumbents going ahead.

The other worry for the Street is the impact this will have on the already stretched balance sheet. After the recent auctions, Idea's net debt to Ebidta stands at 4.2 while that of Bharti Airtel is at 2.5. Both companies however have been taking steps to bring down debt. While Airtel is planning to sell a bit of its stake in Bharti Infratel, Idea too is looking at monetising its tower assets.

The key issue once the promotional offers comes to an end in March 2017 is the expected churn that could come about once RJio's customers would have to pay to utilise services. 

RJio has indicated that it will offer mobile number portability and whether this will translate to 'high revenue generating' customers shifting to it will be important.

Among incumbents most analysts prefer Bharti Airtel, given strengths in spectrum, better balance sheet, edge in 4G network and distribution which has helped it to garner market share in recent months.