No relief for telcos in September quarter

After a stable Q1, revenue and profit are likely to take a hit again

The revenues of top telecom operators are expected to decline four-eight per cent sequentially in the September quarter (Q2), belying hopes of a recovery.
 
Following a six-seven per cent sequential fall in two quarters (December and March), revenues had stabilised in June quarter (Q1), growing 0.5-0.7 per cent. But, factors such as higher taxes (goods and services tax or GST), seasonal weakness and increased competitive intensity are expected to put more pressure on revenues and operating profits in Q2. The year-on-year fall in revenue is estimated at 16-19 per cent.
 
Given competitive pressures, telcos are likely to have absorbed the hike in the GST at 18 per cent, compared with the earlier service tax of 15 per cent, said Rohit Chordia of Kotak Institutional Equities. This is a negative for the sector, which has been bleeding cash both on operations and capex (capital expenditure) fronts. There was an expectation that consumers at the lower end of the monthly pack spectrum would uptrade, given Reliance Jio’s tariffs, and thus the overall average revenue per user (ARPU) would go up. This is not the way it is playing out.
 

Chordia said a modest price revision by Jio did not have a positive impact on net ARPU movement for incumbents. This is because the top players maintained the attractive pricing packs to reduce the premium they were charging (to top-end customers) compared with Jio, coupled with the fact that there has been an ARPU downshift in select pockets such as the corporate post-paid segment.
 
What has compounded the situation is the interconnect usage charge (IUC) and the Jio feature phone.
 
Himanshu Shah of HDFC Securities, said, “Even as a stable quarter-on-quarter revenue in Q1 was encouraging, we are wary of acknowledging it as the bottom. The potential tariff war led by an IUC cut, a downward repricing owing to aggressive bundling and the impact of Jio feature phone remain unknown. Also, an increase in capex/opex (operating expense) to ramp up long-term evolution (4G LTE) capacity could keep the margins under pressure.”
 
In Q2, operating profit of incumbents would be impacted by 30-50 per cent — Idea Cellular being the worst affected. Its leverage position could get worse with the net debt-to-operating profit crossing the 10-times mark, analysts said, adding Idea will have to take steps to pare debt by monetising its tower portfolio or recalibrate capex spends (before merging with Vodafone). While Bharti Airtel’s margins are expected to fall 200 basis points (bps) to 32.3 per cent sequentially, Idea could face a steeper 500-bp cut to about 18 per cent.
 
Given the pressure on realisations and continued investments to ramp up their networks to match that of Reliance Jio, analysts are not very bullish on the near-term prospects of the listed telcos.