Profit of Airtel, Idea, Vodafone halves in 3 years, margins dip 1,000 bps

Profits of the top three incumbent telecom firms - Airtel, Idea and Vodafone - have halved in the past three years with a 1,000 bps plunge in operating margins, and a recovery is seen only from FY20 when consolidation in the industry is complete, warns a report.

The corrosive effect of the competition, which began after Reliance Jio entered the fray in September 2016, will see gross revenue of the top three incumbents plunging by 14-16 per cent this financial year as they are forced to focus on retaining subscriber base, Crisil said in a report on Monday.

Nonetheless, the industry is expected to see a 45 per cent growth in data volume, 3 per cent in subscribers, but a 18-20 per cent plunge in average revenue per user (Arpu) in FY19, it added.

Industry revenue will continue to skid in FY19 as realisation will continue to head south.

"The battle unleashed by Jio has seen the industry's gross revenue and adjusted gross revenue or AGR plummeting 10 per cent and 20 per cent, respectively, in fiscal 2018, while their profit have halved in the past three years and the situation is expected to improve only after fiscal 2020, following completion of consolidation - the merger of Idea with Vodafone," it warned.

Profitability is unlikely to improve this fiscal year too as margin is expected to contract further by 150-200 bps owing to the full-year impact of the IUC cut. Top three incumbents will see a sharper deterioration, said the report.

"Consolidated margin of the top three incumbents is expected to shrink by 250-300 bps due to increase in network operation cost and fall in Arpu as competition is no longer limited to prepaid, but entered the postpaid space too.

"Between fiscals 2016 and 2019, operating profit of the top three incumbents is likely to halve following a drop of 10 percentage drop in operating margins," said the report.

Airtel's operating margin has deteriorated the worst with a 1,100 bps drop in the past seven quarters.

On top of it all, the incumbents will have to cough up Rs 750 billion on network capex this fiscal and the only breathing space they have is the relief in regulatory capex thanks to the increase in deferred payment period to 16 years from 10 and will be at Rs 165 billion this year.

The industry-wide debt is at Rs 3.5-3.7 trillion in fiscal 2018, of which over 50 per cent is with Airtel, Vodafone and Idea alone. The debt pile is expected to remain high in fiscal 2019 as cash headroom continues to drop as cash flow from operations of the top three incumbents is expected to shrink 3-5 per cent this fiscal, the report said.

These three have already announced plans to raise Rs 650 billion via bonds, debentures and loans in addition to them planning over Rs 16,500 crore through stake sale.

The only bright spots are low data tariffs and rising digital content consumption. In FY18 alone, data traffic grew four-fold. Availability of cheap 4G-enabled devices along with all-time low data tariffs are driving the shift in subscriber mix towards 4G. In all likelihood data traffic in fiscal 2019 will increase 45 per cent despite a high base.

But what is more critical is that data realisation plummeted 95 per cent during the same period, leading to dual SIM declines, with smaller players shutting shop.

The intense price war began in September 2016 when Jio entered the market with almost free data and fully free voice which it ran for months, forcing others to follow suit and shows no signs of abating even after two years.

"If anything, competition has become even more brutal, and the pain is expected to continue this fiscal as well. Consequently, average gross revenue may decline another 6-8 per cent this fiscal as deterioration in realisation from data sales will continue. But data volume growth, expected at 45 per cent-which is fivefold jump from fiscal 2018, will limit the damage," said the report.

The industry-wide realisation has been declining due to continued downward revision in tariffs more for the high end data users. As a result, average realisation per MB plummeted from 23 paise in fiscal 2016 to a mere 1.6 paise in fiscal 2018, it added.

"We see average realisation per MB falling further to 1.15-1.20 paise by this fiscal end because of the data pricing war led by Jio, which has been a net gainer following a cut in interconnect usage charges," warned the report.