Battle Ready

Bled. Battered. Beleaguered. That’s how old incumbents such as Bharti Airtel and Vodafone Idea must feel as the two-year-old intense telecom battle with Mukesh Ambani-led Jio continues. The country’s richest man Mukesh Ambani’s decision to enter the telecom market for the second time, through the launch of Reliance Jio in 2016, disrupted the market brutally. Ambani loosened his purse strings and pumped $30 billion in infrastructure and optic fibre. The gambit yielded immediate results. Several players shut shop and old incumbents weakened. 

Unable to compete with never-seen-before low prices offered by Jio, smaller players such as Telenor and Tata Tele Services folded up. India’s telecom sector turned into a four-player market including state-owned BSNL. 

Even as the sector consolidates, there are no signs of an increase in tariff anytime soon. “The tariff price hike depends on what Reliance Jio decides to do. Their stated objective is to be the largest player with 50% market share,” says Hemant Kanawala, head equities, Kotak Life Insurance. 

Holding on

As Ambani’s Jio continues to gain market share relentlessly, reaching 20.5% as of August 2018, few are able to put up a fight. Bharti Mittal, the chairman of Bharti Airtel, is one of those unwilling to budge. Year 2018 has been difficult but Mittal remains upbeat. 

Speaking to a news channel at Davos, Mittal made it clear that Airtel has now stopped playing the tariff war and increased the bottom slab of prices. Candidly, he accepted that the ailing telecom sector might not recover this year. But, he added, it may “perhaps” stop bleeding.

Going by Bharti Airtel’s latest results, the pain persists. But, the management is pulling a few tricks to counter Jio’s onslaught. For example, the company has decided to dump ultra-low cost users (who do minimum recharge for unlimited incoming) by introducing a new recharge plan with limited validity. Now, prepaid customers of Airtel will have to maintain a minimum balance of Rs.35 or face SIM deactivation. 

Analysts believe these steps will not only decongest the network, they will also lead to an increase in average revenue per user (ARPU). “Incumbents such as Bharti Airtel and Vodafone-Idea are trying to monetise the subscriber base who are using the lifetime connection for second SIM and incoming calls only. They are pushing them to pay minimum charges. Even if they can make certain percentage of such users pay, it can help to boost revenue,” says Bhupendra Tiwary, research analyst, ICICI Securities. 

After Jio’s disruptive entry, ARPU of telecom companies fell sharply. The ARPU of Airtel and Vodafone-Idea’s in the quarter of September 2018 dropped to a record low of Rs.100 and Rs.88 respectively whereas Jio commanded an ARPU of Rs.131. 

As ARPU shrinks, Bharti Airtel is struggling to maintain profit and revenue. The company reported eight quarters of decline in revenue, before registering a 1% rise in December 2018. Total revenue for the December 2018 quarter stood at Rs.205.19 billion against Rs.203.18 billion in the corresponding period of 2017.

Profitability has taken a hit, but the management indicated that it has largely held on to its market share in high ARPU postpaid customer segment. In fact, the ARPU increased from Rs.100 in the September quarter to Rs.104 in the next quarter of December 2018 (see: Glimmer of hope).

The gains made in ARPU are in-line with Bharti Airtel’s strategy to re-invent itself. The telecom player wants to earn from high-end users, who consume a lot of data through content services. The company has been partnering with Zee, Netflix and Amazon for this. According to analysts, the adoption of bundled plans, along with minimum recharge plans, will improve the telecom player’s ARPU. Bundled rates are higher than blended rates. For instance, Airtel introduced a pre-paid bundled recharge plan of Rs.97 in which the users will get 350 minutes of local, STD, roaming voice calls, 1.5 GB data and 200 local and STD SMS benefits. Whereas, a blended plan starts with a minimum recharge of Rs.35 without data subscription. 

“They are encouraging lower tier customers to upgrade through minimum time-bound recharge vouchers. By bundling free content subscriptions of Amazon Prime for a year and Netflix for three months, they have been retaining higher-value customers,” says Ravi Menon, equity analyst, Elara Securities.

Turbulent times 

In the initial days of the battle, Ambani was able to woo customers away from Vodafone Idea and Bharti Airtel by offering lucrative offers. He offered free voice calls and cheap data services bundled with free voice calls, among others. Jio had introduced a slew of prepaid recharge plans priced at Rs.19, Rs.52 and Rs.98 bundled with free voice calls.

However, Mittal has been able to stave off Jio’s aggressive expansion bid in 2018. Bharti Airtel has been able to maintain market share at 31% in 2018, despite Jio gaining 10% percentage points market share, the CLSA report claimed. It added that a 23% growth in data subscribers, adoption of bundled and minimum recharge plans would improve ARPU. Airtel’s peer Vodafone-Idea has 37.85% share of the total subscriber base, while state-run BSNL and MTNL together hold 10.50%.

According to Sushant Bhansali, managing director and head – principal investment at Ambit, Bharti Airtel will have to be innovative in digital play if they want to improve ARPU and profitability. “They have to be more innovative in data plan pricing strategy. The share of data in revenue has huge potential. If people get a good data plan with voice calls, then they are willing to pay the price as data consumption has become a habit, indeed a necessity (from being luxury consumption),” says Bhansali.

Airtel is already putting in place a multi-pronged strategy to enhance digital services. Mittal has deployed the latest Massive MIMO technology to maximise use of spectrum. The new technology is expected to expand existing network capacity, leading to much faster data speeds. Airtel customers will get this speed on their existing 4G mobile devices without any upgrades or plan change. The company is starting with Bengaluru and Kolkata. 

To win the 4G race, the company is also rewarding spending customers. The Airtel Thanks Programme, rolled out in Q2 of 2018, delivers premium digital content from Amazon, offers on smartphones and online shopping vouchers for no extra cost to customers. Those with minimum monthly ARPU commitment of Rs.100 will be able to avail these benefits, which will be delivered through My Airtel App, Airtel TV, and Wynk Music. 

And Airtel’s digital strategy seems to be yielding results. Data volume grew by 24% QoQ to 2.66 billion GB in the Q2FY19 while mobile subscribers increased to 65.7 million in Q2FY19, from 28.3 million in Q2FY18. Even in Q3FY19, data subscribers grew by 48.5% (yoy) to around 170 million. Data volumes also grew 190.9% (yoy) to 3.2 billion MB.

Apart from increasing revenue per user, the company is also looking to tighten its belt. Since the launch of Jio, Bharti Airtel has been able to control cost and protect its margins, despite offering low-priced offers. This was possible because of its “War on Waste” strategy in November 2016. Despite a drop in revenue and increase in capex, Ebitda margins have not fallen sharply. The Ebitda margins have shrunk from 37.45% in March 2017 to 34.63% in December 2018. “With their strategy, they cut on wasteful expenditure. It has helped them in Africa where the margin increased to 35%. In India, it helped them protect the (Ebitda) margins to an extent,” says an analyst. Over the past three financial years, Airtel’s wireless Ebitda margin has dropped from 39.1% to 32.6% in FY18. A detailed questionnaire sent to Bharti Airtel went unanswered.

 War chest 

Bharti Airtel has been on quick feet, slashing expenditure, protecting margins and customer base, and is also getting ready for another round of bruising battle. Africa, one of the biggest investments of Mittal with $5 billion, has turned profitable after a prolonged spell of losses. In Q2FY19, Airtel Africa’s revenue rose 11% to $824 million from $743 million in Q2FY18. Data customers increased to 27.1 million from 20.5 million in the corresponding period. The company’s Africa arm continued to deliver even in Q3FY19, with revenue up by 3.5% QoQ. 

As the Africa business stops draining cash, Mittal is planning to encash and reduce debt. The telecom operator has been preparing an initial public offering (IPO) for its Africa unit in June or July this year, after raising $1.25 billion in a pre-IPO fundraising round. In a further boost to the telecom giant, Qatar Investment Authority, the sovereign wealth fund of the state of Qatar, will also invest $200 million through a primary equity issuance in the company’s Africa arm. The announcement was made this January. 

Mittal also has several other avenues to raise cash. The company is looking to sell a further 32% stake in Bharti Infratel, valued at close to Rs.155 billion. Over the past one and a half year, Airtel has been reducing its stake in its listed tower unit to free up cash to compete with Jio. In August last year, the country’s top mobile telephone operator sold 67.53 million shares in its tower subsidiary, Bharti Infratel, for Rs.25.7 billion. It also offloaded 10.3% in Infratel for Rs.61.9 billion in March. Currently as of December, the company’s debt stands at Rs.1,113.34 billion.

“They have businesses beyond Indian wireless service such as DTH, broadband, tower and Africa businesses. They can monetise those too. They would also come out with a rights issue (wherein we could witness meaningful fund infusion from SingTel). I think they can build a war chest, sufficient for the next couple of years,” says ICICI Securities’ Tiwary.

Analysts also believe that the valuations given to Africa business won’t be based on listings but on increasing profitability. They state that the Ebitda margin has remained intact at more than 35%, and that will drive the Africa valuation, which will be around 7-8x EV/Ebitdaon one-year forward basis. 

Catch 22

With the help of deep pockets of its parent company Reliance Industries, Jio has been able to expand and acquiring 250 million customers at blitzkrieg speed. But as RIL continues to pump money in, the low profits and rising debt could worry the oil-to-retail-to-telecom conglomerate. The telecom segment of RIL is draining cash. In Q3FY19, Reliance Jio reported cash profit of Rs.25.15 billion, but capital expenditure remained high at Rs.140 billion.

As the profits drop and expenses increase, RIL reported gross debt of Rs.2.7 trillion and net debt of Rs.2 trillion in Q3FY19. The adjusted consolidated net debt at the end of this quarter stood at Rs.3 trillion, noted an IIFL report.

Staring at rising debt, RIL has begun talking about deleveraging. The company has initiated the process of transferring its fibre business and its tower business out of Reliance Jio Infocomm to separate firms. The stake sale will be a balancing act between Jio’s financials and RIL’s extent of deleveraging, according to analysts. 

“The debt is increasing on Reliance Industries’ balance sheet so they will have to start making return from their telecom business too. This can be in the form of monetisation of assets (towers, fibre business etc.), change their pricing strategy or raise capital. They have already accumulated huge debt but it is hard to predict when they will start increasing the prices. However, Bharti Airtel will benefit for sure, once the normalcy in the market rates return,” says a fund manager.

Attractive asset

In the last three years, Bharti Airtel’s market cap has eroded from Rs.1,572 billion in January 2015 to Rs.1,227 billion in January 2018 (see: Under pressure). However, analysts believe that the substantial pain is a thing of the past for the telco. “Strategically, we believe Bharti is moving in the right direction with aggressive 4G network roll-out, matching Jio on tariffs, offering freebies, mandating monthly recharge to low ARPU customers to regain lost revenue growth momentum,” says Himanshu Shah, research analyst, HDFC Securities. He adds that Jio too is increasing cash burn for all telcos. Therefore, tariff hikes may be imminent. 

Analysts also state that the marginal improvements in Airtel’s performance and revenue are becoming visible (see: Better days ahead). Tiwary says, “We note that a marked improvement in wireless ARPU is still some time away amid Jio’s continued intent to capture subscriber market share and an opportunity for market share grab during Voda-Idea integration. The near term challenge in non-wireless segment remains, but Airtel remains well placed to survive the tough times with multiple avenues to deleverage and provide cashflow support.” With the stock valuations at 9x EV/Ebitda for FY19 and 7.8x for FY20, it’s an attractive bet for the long-term. While it’s difficult to predict when the telecom tariff rates will be raised, Bharti Airtel armed with new cash flows and clear strategy remains a solid bet to withstand Jio’s hypercompetitive onslaught.