Telecom: A tough bet

Out of three players, two aren't investment worthy and the third is part of an opaque conglomerate

Even after brutal consolidation, two of the three survivors in the telecom services industry look to be in trouble. Vodafone-Idea and Airtel are reeling from massive losses and raising huge sums to shore up balance-sheets.

The sector contributes 6.5 per cent of the Gross Domestic Product (GDP) and employs 4 million, directly and indirectly, even after huge job losses. It has absorbed about Rs 10 trillion of investments, including close to Rs 4 trillion on spectrum payments. The industry has over Rs 4.5 trillion in debt, and about Rs 2.5 trillion in annual revenues. That debt: revenue ratio is unsettling.

The 2019 Interim Budget estimates that revenues accruing to government from telecom for 2019-20 will rise to Rs 41,520 crore, which is 5.8 per cent more than the revised estimate of Rs 39,200 crore for the current fiscal, 2018-19. The initial Budget estimate for 2018-19 was Rs 48,661 crore, revised downwards to Rs 39,200 crore. Actual revenues to the central government were Rs 30,700 crore in FY2017-18, against a Budget estimate of Rs 44,300 crore.

Quite apart from the initial over-estimates, which are significant, the falling trend illustrates stress. The central government’s revenue stream includes spectrum usage fees, revenue share, goods and services tax (GST) collections, etc.  But the big windfalls come from spectrum auctions. There were no auctions in 2018-19 since the industry wouldn’t have been capable of bidding.

Telecom was already struggling in September 2016, when Reliance Jio (RJIL) launched services. Jio was allowed to offer free services for six months. That provoked a crisis and triggered massive subscriber churn. Already low average revenue per user or ARPU and profitability nose-dived for every player.

Just three private entities are now operational. (The PSUs, BSNL and MTNL, are bankrupt and surviving on bailouts). Two of them, Vodafone-Idea and Airtel have suffered losses since the second half of 2016-17.  The third, RJIL, has gained revenue share and claims to be profitable, though it is still burning cash, as it rolls out ambitious plans.

Unlike Airtel and Vodafone-Idea, which are pure telecom plays, RJIL has the backing of a highly profitable, giant parent, with multiple interests. Hence, although RJIL has spent well over Rs 2 trillion so, it can continue to play an aggressive game. The RJIL drive into retail plus fibre broadband rollout will open up new revenue streams.

Bharti Airtel had 72 per cent drop in consolidated profits for October-Deccember 2018.The net profit of Rs 86.20 crore was thanks to a one-time gain of Rs 1,413 crore and a deferred tax asset of Rs 7,002 crore. Or else, Airtel would have had huge losses. The total revenue was Rs 2,005 crore, just 1 per cent higher than Rs 2,003 crore in Q3, 2017-18.

Vodafone Idea registered Rs 5,057 crore in net losses, the second quarter of post-merger operations. This was despite a tax write-back of Rs 2,000 crore. Merger synergies helped it to reduce Operating Expenses (ex-license fees and spectrum usage charges) by Rs 705 crore to Rs 815 crore. Meanwhile RJIO declared Rs 830 crore in net profits on total revenues of Rs 10,383 crore.

The Q3, 2018-19, RJIL ARPU of Rs 130 (Dec 2018) is also better than Airtel (Rs 106) and Vodafone-Idea (Rs 89). Vodafone-Idea and Airtel did raise ARPU by shedding low-value “incoming only” customers. Airtel dropped 48 million subscribers in Q3, while Vodafone-Idea dropped 36 million subscribers. RJIL gained 28 million subscribers.

The highly-leveraged Airtel and Vodafone-Idea are looking to raise more cash. Both need to cut debt and fund operations. Airtel will sell a larger stake in its tower arm, Bharti Infratel to raise upto $3 billion and it’s looking to raise about Rs 32,000 crore via a rights issue cum preferential debt as well. Vodafone-Idea is looking at a rights issue of Rs 25,000 crore.  

India Ratings expects RJIO to increase revenue market share from the current 26 per cent to 38 per cent by end of 2019-20 while Vodafone-idea RMS will decline to 29 per cent and Airtel’s RMS will drop to 28 per cent.

This is not a healthy situation. A highly concentrated industry eventually ends up being monopolistic with poor service standards, and low incentive for incumbents to improve technology. At some stage, all three will raise tariffs, for sure. Investors are looking at a toxic situation where two out of three players are not investment-worthy and the third is part of an opaque conglomerate.