Telecom sector could bounce back in FY18

Idea is confident volume growth will compensate for weak realisations

While weak March quarter (Q4) results continue to be a dampener in the telecom space with Idea Cellular (Idea) shedding about seven per cent in trade on Monday, incumbent operators are confident that the outlook for FY18 will improve with operating metrics starting to stabilise over the last few months. Idea’s Managing Director Himanshu Kapania, in an investors’ call on Monday, said revenues for the sector have bottomed out in Q4 and expected it to improve from hereon. Idea had reported a one per cent fall in FY17 revenues, its first full-year revenue decline since its listing 11 years ago.

For the sector to come back to growth over FY17, a lot will depend on how realisations and volume growth play out. While Idea’s data and voice realisations are down 22-50 per cent year-on-year in Q4, Bharti Airtel’s metrics, though better than Idea on all counts, were no different. Data revenues account for 18 and 25 per cent for Idea and Bharti, respectively. Some of the weakness in voice realisations, in addition to lower tariffs, are also due to the larger share of incoming voice traffic, which fetches 14 p a minute, against the 40-50 p average the companies get. While voice realisations could stabilise, analysts expect data realisations to fall another 15-20 per cent in FY18 from the current levels.

The positive outlook in FY18 (flat to marginal revenue growth from a 2 per cent decline in FY17) is largely on expectations that data volume growth will improve by two-three times while voice volumes will improve 20-25 per cent, say analysts. Incumbents are, thus, banking on volume growth to compensate for the decline in realisations. Analysts say the down trading of higher ARPU (average revenue per user) customers of Rs 750- 900 to around Rs 350 is done while growth going ahead will come from migration of lower ARPU customers to unlimited plans (Rs 300-plus); this is expected to happen at a faster clip.

While the Street will be eyeing the progress on its merger with Vodafone in the near-term, incumbent operators such as Idea are looking at cost optimisation, robust subscriber addition and network expansion to hold on to their position. 

The Street will treat the management commentary from Idea positively and the listed incumbents could see some gains on Tuesday driven by operating profit upgrades on the back of cost optimisation efforts.