Changing subscriber base to shape revenue growth for telecom firms

Mumbai: The December quarter is not likely to throw up any major surprise for telecom companies.

Analysts do expect positive commentary on how Bharti Airtel and Vodafone Idea would be proceeding with plans for a higher minimum in average revenue per user (ARPU, got by dividing total revenue by the total of subscribers). Also, on their plans for fund raising and cost synergy.

Analysts have assumed a slower sequential (quarter-on-quarter, QoQ) decline in wireless revenue due to the exit of low ARPU subscribers (from recent schemes in this regard). However, they expect the host of new measures to improve ARPU to be showing some results for the older two. If not for Reliance Jio, their formidable challenger, which should continue to see revenue benefit from subscriber addition.

Analysts at Kotak Institutional Equities expect Airtel to report revenue and Ebitda (earnings before interest, taxes, depreciation and amortisation) of ~20,450 crore (no QoQ change) and ~6,200 crore (down 0.8 per cent from the September quarter), respectively. Also expected is a loss of ~990 crore in profit after tax.

“On the India wireless front, we expect a modest 1 per cent QoQ and 5.6 per cent year-on-year decline in revenue to ~10,150 crore,” wrote Rohit Chordia, analyst at Kotak. The expected sequential dip in revenue is largely on account of less from intra-circle roaming.

Airtel is expected to reduce net debt by around ~6,000 crore from the earlier quarter (existing net debt of ~1.15 trillion), on account of $1.25 billion (around ~8,800 crore) from the African business stake sale.

Vodafone Idea’s net debt after the September quarter was around ~1.2 trillion. Analysts have factored in a 10-million subscriber base erosion for Airtel and 15-million for Vodafone Idea in the December quarter.

“We expect Airtel India’s wireless margin to contract by around 100 basis points QoQ, led by decline in revenue and marginal increase in cost,” wrote Shashi Bhushan and Santosh Sinha of Axis Capital. Merrill Lynch analysts expect a 1.5 per cent decline in Airtel’s India wireless revenue, due to the impact of roaming and interconnect charges.

Last month, Airtel formed a committee of directors to explore options for fund raising to strengthen its capital structure and balance sheet. The market was abuzz on these plans (estimated at ~15,000 crore at least), as the telco sought to reduce debt, boost cash flow and meet capital expenditure. Commentary will be expected on specifics of the fund raising and details of the user base it is losing.

Vodafone Idea is expected to report revenue decline of 1.5-3 per cent, with ARPU improvement of almost 1.4 per cent, say most analysts. It has announced equity fund raising of ~25,000 crore for early 2019. Airtel has an Initial Public Offer plan for its African operation, which could lead to proceeds of over ~6,000 crore. Airtel and Vodafone Idea could also get a combined ~25,000 crore from sale of their stakes in the merged tower company after the combination of Bharti Infratel and Indus Towers. Investors will be looking for more clarity on these points.

“For Vodafone Idea, comparable revenues are estimated to dip 2.7 per cent QoQ, on higher subscriber decline. We expect synergy benefit of ~450 crore on account of a lower number of towers and some saving from remaining costs, with a net loss of ~4,000 crore,” wrote Sanjesh Jain, research analyst at ICICI Securities. Vodafone Idea’s synergy benefits (from the merger of Vodafone with Idea) will include less network cost and subscriber acquisition cost.

For Vodafone Idea, in addition to savings from tenancy exits, some brokerages have also factored in an extra ~2,000 crore of annualised cost saving in the quarter. The management is expected to remain focused on cost management in the initial quarters after a merger.

As such, Vodafone Idea’s capital expenditure remains significantly less than peers. This was ~3,300 crore in the September quarter, compared to ~7,680 crore by Airtel. Jio’s was ~16,000 crore.

An estimated 20-30 million dip in low ARPU subscribers will result in up to a 3 per cent revenue erosion for older majors. The movement of many of these to Jio should mean a revenue growth of almost 12 per cent to ~10,300 crore, say analysts.

This subscriber addition will negatively weigh on Jio’s ARPU by two to 3 per cent at least. Morgan Stanley has factored in 13 per cent QoQ revenue growth for Jio, while its operating expenditure is expected to increase as the network roll-out continues, and 11 per cent sequential growth in Ebitda.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.