Telcos focus on cost control measures as revenues dry up

Vodafone India indicated in its results that it was witnessing early signs of stabilisation in data

The Bharti Airtel and Idea Cellular stocks were up 2-3 per cent as cost-control measures taken by the companies as well as expectations of stable revenues could rub off positively on them. Vodafone India too indicated in its results that it was witnessing “early signs of stabilisation in data and voice usage and recharge values”.
 
The Street was surprised by the operating profit performance of incumbents as it was above estimates. This came at a time when the launch of free trial offers and unlimited plans had seen revenues of all the three operators fall by 5-7 per cent each in the December and March quarters. Idea Cellular was forced to cut its voice tariffs by 12.5 per cent and the mobile data rates by 27.6 per cent in the March quarter as compared to the December quarter. Vodafone too saw pressure on its financials with voice and data realisations falling 22 per cent and 38 per cent year on year in the March quarter.

 
To limit the damage caused by the RJio onslaught, telcos are looking at multiple options on the cost side. “Given that Reliance Jio is setting the price that all operators are forced to follow to be relevant, the only option left for telcos is to focus on cost control measures,” says an analyst at a foreign brokerage.
 

Take Idea Cellular’s March quarter numbers, for instance. Despite the fact that its revenues were down 6 per cent, the company reported operating profit growth of 1.4 per cent at Rs 2,196 crore. The was in large part due to the Rs 570 crore drop in operating costs on a sequential basis. Costs in the March quarter thus fell about 9 per cent to Rs 5,929 crore on revenues of Rs 8,126 crore. While network operating costs, the biggest cost head that accounts for 44 per cent of operating costs, saw a fall of 5 per cent quarter-on-quarter, employee costs fell 3 per cent. The highest savings, however, were in the sales, general and administration (SG&A) expenses, which were down 21 per cent at Rs 1,005 crore.

 
While lower network operating costs were achieved by rationalising low utilisation sites, sales expenditure was down on account of electronic know-your-customer (Aadhaar-based) implementation, which helped do away with the physical verification of documents. Capping advertising spends and renegotiation of contracts with channel partners also helped to cut costs. All this helped Idea improve its operating profit margin by 200 basis points to 27 per cent. Even if favourable forex and write-backs (Rs 170 crore) are excluded, operating profits at over Rs 2,000 crore are commendable, say analysts. However, the critical question according to analysts is whether the companies will be able to sustain their cost-cutting measures.

 
Similarly, Bharti Airtel has been able to bring down energy costs and as well as costs related to maintenance contracts, helping reduce network costs. Further with 70-80 per cent of subscriptions through eKYC route, SG&A costs too are in check. Its operating costs were down 5.2 per cent to Rs 14,074 crore, led by a 7.3 per cent reduction in network operating costs, which came in at Rs 5,162 crore. Its operating profit at Rs 7,906 crore, down 7 per cent, was better than analyst estimates.
 
The other areas the companies are focusing on are reducing debt by selling their tower assets. Bharti Airtel, which has sold a part stake in Bharti Infratel as well as shed some of its Africa businesses, is looking to reduce its debt, which, at the end of the March quarter, stood at Rs 91,399 crore. This was down six per cent over the December quarter. Idea’s net debt is just over Rs 50,000 crore and the company will look at selling its towers.