Telecom: Where is the money?

The telecom sector continues to be a source of concern. Almost every company posted poor results. Airtel had net profits of Rs 830 million in the fourth quarter, a steep fall from the Rs 3.7 billion in net profits that it had posted a year ago. This was its worst quarter in 15 years.
 
Airtel saw a steep fall in revenues, both in India and in its overseas operations. Consolidated revenues fell by 10.5 per cent, while India-mobile revenues dropped by 20 per cent year-on-year. It did add 14 million Indian mobile customers during the quarter. The India business lost Rs 7.6 billion. If exceptional items are removed, the standalone India business suffered a loss of Rs 9.4 billion before tax. The average revenue per user (ARPU) dipped to Rs 116 from Rs 158 a year ago.

 
Idea Cellular saw consolidated losses rising to Rs 9.6 billion from Rs 3.3 billion a year ago. Revenues fell by 22 per cent year-on-year, and ARPU fell to Rs 105 from Rs 114. Vodafone India is also expected to see losses. These two service providers are targeting the completion of their merger in the first half of 2018-19. That will create an entity that is even larger than Airtel, in terms of total subscriber count at least.
 

The exceptional performance came from Reliance Jio Infocomm. Jio posted a net profit of Rs 5.1 billion, which was marginally higher than its Q3 profits of Rs 5.04 billion. It added 26 million customers in Q4, pushing subscriber count to 186 million by end-March 2018. The ARPU dropped to Rs 137 from Rs 154 in Q3, as Jio continued to fight a price-war to grab market share. However, even with the fall, the ARPU is likely higher than every other telecom service provider.

 
Jio will continue to outspend and undercut its rivals. It already holds dominant market share in the mobile broadband data market. The total data traffic registered by Jio was a humungous 5 billion Gigabytes (GB), which was 14 per cent up quarter-on-quarter. This is a lot more than Airtel's registered data traffic of 1.5 billion GB. The average Jio user consumed 9.7 GB of data every month and average voice traffic was 716 minutes per user per month. Airtel, in comparison, recorded 670 voice-minutes per user, while data usage was 6.6 GB.
 
Data is pretty much the only visible growth area and Airtel lags in that key metric because it had only 77 million mobile broadband customers in India by March 2018, whereas every Jio customer is a mobile broadband user.

 
Jio’s reported capital expenditure was Rs 140 billion in Q4, double its Q3 capex of Rs 70 billion. In the last three quarters, it has spent Rs 280 billion to earn total revenues of Rs 201 billion. The cash-flow analysis throws up negative numbers even as depreciation and amortisation allows it to register net profits.
 
Jio intends to buyout Reliance Communications (RComm’s) infrastructure for another Rs 180 billion and it also intends to employ another 80,000 people to runs operations. So, it is still burning a lot of cash and it will continue to do so, with the vast resources of Reliance Industries to back it.

 
Where do Airtel, and the combined Idea-Vodafone entity tap resources to compete at this scale? One possible answer comes from the consolidation of the tower businesses. If the Bharti Infratel and Indus Towers merger goes through, it could reduce the payment of dividend distribution tax by some Rs 5 billion. It could also pave the way for Idea, Vodafone and Airtel to all sell off some stakes in the combined entity to raise equity. Vodafone and Idea may also consider tapping respective parents for equity infusions.
 
One thing is clear. Nobody is going to make serious money until the price war ends. Given the mountains of debt on telecom balance sheets, that could pose a worry to lenders.