Telecom - Undercutting takes toll on revenues

Spillover of the fresh round of undercutting by operators from Q4FY18 to Q1FY19 continued to take a toll on telcos’ revenues. Consolidation in the telecom sector had fuelled the exit of tenancies, leading to higher tenancy cost per operator. This, coupled with installation of cell sites on fresh towers (non- loading) and soaring diesel prices, is expected to increase the QoQ network cost for all operators.

Wireless revenue likely to hit by competition

Bharti’s India wireless revenue is expected to remain flat QoQ (-20 per cent YoY) at Rs 10,370 crore, as the impact from ARPU downtrading would largely be offset by the synergies (~Rs 0.2b) from Telenor. Bharti’s consolidated revenue is expected to grow 2 per cent QoQ (-8 per cent YoY) to Rs 20,100 crore, led by decent 2-3 per cent QoQ growth in the Africa, passive infrastructure and enterprise segments. Idea’s

consolidated revenue should drop 2 per cent QoQ to Rs 6,010 crore. RJio’s revenue is likely to increase 6 per cent QoQ.

ARPU on a freefall

We expect Bharti/Idea’s ARPU to decline 4 per cent/6 per cent QoQ to INR112/INR98. However, this is likely to be partly offset by ~3 per cent average subscriber growth for Bharti/Idea to 308m/198m. RJio’s ARPU is expected to decline 9 per cent QoQ to INR125.

Wireless EBITDA continues to decline

Bharti’s India wireless EBITDA is expected to decline 13 per cent QoQ (-42 per cent YoY) to INR25.6b, despite flat QoQ revenue. This is mainly because of (a) a 9 per cent QoQ rise in network costs and (b) EBITDA loss contribution from Telenor. However, the fall in Bharti’s consolidated EBITDA should be cushioned by other verticals, leading to a 4 per cent QoQ decline (-14 per cent YoY) to INR66.6b. Idea’s consolidated EBITDA is expected to decline 39 per cent QoQ (-53 per cent YoY) to INR8.9b, primarily due to (a) high 4QFY18 EBITDA base (including INR4.4b one-off), (b) 2 per cent QoQ revenue decline and (c) 16 per cent QoQ rise in network cost. However, excluding the impact of one-offs, EBITDA should decline 12 per cent QoQ. RJio should report 2 per cent QoQ growth in EBITDA to INR27.4b on the back of healthy revenue growth, partly offset by a rise in operating expenses (network cost – expected to rise 12 per cent QoQ).

Intense competition -- expected for at least 2-3 quarters -- would continue keeping APRU at suppressed levels, making the dent deeper in incumbent’s margins. Synergies from (Telenor) merger should provide solace to the Bharti in the short term, while fast completion of the merger remains key for Vodafone-Idea to sustain competition. However, as the flux gets settled, we believe ARPU accretion should kick in, driving EBITDA and FCF growth.

Source: Motilal Oswal