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Data Drives Growth: But capex requirements also set to rise

May 30, 2016
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The telecom sector will undergo considerable change and upheaval over the next year or two, in terms of technology, in terms of competition and consolidation and, of course, in terms of financials. As such, the financial picture available at the moment may not be very representative of what is likely to happen in the near to medium term. However, we can extrapolate some trends.

One visible change is the growth in data usage, which appears to have been driven by a combination of factors. The proliferation of affordable smartphones and the spread of 3G and 4G networks with affordable data rates have coincided with the demand created by the growing popularity of m-commerce, social media, instant messaging, video entertainment, etc.

As a result, the voice-data revenue mix continues to alter in favour of data.  Going forward, the contribution of data will increase more and more. A shift to 3G from 2G has already occurred and there will be a shift to 4G with some customers likely to leapfrog directly from 2G to 4G. Over 50 per cent of smartphones sold in the second half of 2015-16 were 4G enabled and 4G penetration is estimated to rise to around 212 million or 18 per cent by March 2018.

New revenue streams have also opened up for service providers as payments banks become more popular and mobile wallet usage catches on. Disruptions in the wallet/payment space are likely since the Unified Payment Interface that was recently launched by the Reserve Bank of India will integrate the fragmented and fast-growing mobile wallet market.

Heightened competition is guaranteed across the entire sector. Reliance Jio Infocomm Limited (RJIL) will finally enter the fray this year with its 4G offerings. The RJIL–Reliance Communications (RCOM) agreement and the deep pockets of Reliance Industries will clearly make this a formidable competitor. A price war could be triggered in the 4G data space if news reports of RJIL offering drastically lower data rates turn out to be true. The new entrant is likely to carve out significant market share quickly and this will affect the margins of all the incumbents. The industry will need to gear up for another round of serious investment. Another round of spectrum auctions is scheduled for July. The budget estimates that revenues of about Rs 646 billion will accrue to the central exchequer in 2016-17 from spectrum auctions. Raising resources for this will mean taking on more debt for service providers. Paying for the spectrum is only the beginning as service providers will also have to roll out networks.

Consolidation in the sector will continue with financial pressures encouraging a shakeout. Changes in the spectrum trading policy have already triggered deals such as the partnership between RJIL and RCOM. Apart from this, Airtel’s buyout of Aircel’s spectrum in eight circles and its acquisition of Vodafone’s spectrum have given Bharti Airtel a 4G presence in all 22 circles.

RCOM and Sistema Shyam TeleServices Limited are merging, and more consolidation could be on the cards as talks continue for a merger between RCOM and Aircel. There are also reports that Idea Cellular and Telenor India are exploring merger possibilities. Any of these deals would alter the operating landscape.

Meanwhile, Vodafone is gearing up for its Rs 165 billion initial public offering and the financial resources it raises will be deployed soon enough. All the operators have significant quantities of debt on their books and they will need to raise more. Intense competition will ensure that margins remain thin. As such, the balance sheets of service providers will very likely be stretched this fiscal and the entire telecom space may look very different by the year-end.

Against this backdrop, we can take a look at the available financials. Two service majors, Bharti Airtel and Idea Cellular, had released their respective quarterly results at the time of going to press. In both cases, the balance sheet looks a little stretched. The operational performance has been good, especially for Airtel.

In addition to this, tower company Bharti Infratel has also released its quarterly results. This includes its economic interest in Indus Towers (in which Idea also has a stake). The picture here seems to indicate that tower operations should benefit from faster roll-outs. Operationally speaking though, changes in the policy on the sharing of active or passive infrastructure could make a difference to tower operators’ prospects.

Bharti Airtel

India’s largest operator exceeded market expectations with its results in the January-March 2016 quarter. The overall customer base across 20 countries stood at 357.4 million, up 10 per cent year on year, and there was a net addition of 33.1 million customers.

At the consolidated level, net sales rose by 4.9 per cent year on year for the full year and by 8.4 per cent year on year for the fourth quarter. Operating profits (profit before depreciation, interest and taxes [PBDIT]) were up by 5.9 per cent for the full year and by 10.9 per cent for the quarter. Net profits were up by 3.3 per cent for the full year and by 2.8 per cent for the quarter.

There was improvement in both India-specific and overseas operations. Operating margins (PBDIT as a percentage of net sales) rose to 36.8 per cent compared to 35 per cent in the corresponding quarter of January-March 2015. In Africa, Airtel’s net losses reduced to Rs 3.8 billion from Rs 11.4 billion a year ago. For India, the operating margin for financial year 2015-16 was 41 per cent, up from 39 per cent a year ago.

In India, voice traffic grew by 11 per cent, while data traffic rose by 69 per cent, though revenue realisations were lower than volume growth in both voice and data. Non-voice revenues contributed 36.7 per cent of total revenues, up from 32.3 per cent a year ago. About 7.9 million customers were added during the quarter and 25 million during the year. The ARPU fell slightly year on year to Rs 194 against Rs 198 in the fourth quarter in 2015, but rose in the fourth quarter over the third quarter (October-December 2015), when it stood at Rs 192.

Data contributed 23.3 per cent of mobile revenues, up from 17.6 per cent year on year. Mobile broadband customers rose to 35 million from 19 million a year ago. Data traffic rose by 69 per cent but data realisation per Mb dropped to Re 0.23 from Re 0.27 a year ago. Data volumes rose by 110 per cent in Africa.

Capital expenditure for the full year was Rs 205.9 billion ($3.1 billion), an increase of 10.3 per cent year on year. The telecom network, which contributes about 77 per cent of revenues, was upgraded, with 4,254 route km of optic fibre network and 18,900 mobile broadband base stations added in the last quarter.

Despite the improved operational performance, financial pressures are evident. Consolidated net debt increased by $1,982 million (Rs 170 billion) to $12,661 million (Rs 838 billion) compared to $10,679 million (Rs 668 billion) in 2014-15. This was primarily on account of deferred payment liabilities to the Department of Telecommunications, which rose to Rs 316 billion versus Rs 143 billion in 2014-15.

Net finance costs at Rs 68.8 billion were higher by Rs 20.4 billion primarily on account of higher interest on borrowings due to spectrum borrowing costs and finance lease obligations. The net debt-equity ratio dipped to 1.28 times as of March 31, 2016 as compared to 1.08 times in the previous year.

Airtel is also offering a buy-back. It has set aside Rs 14.34 billion for a buy-back of up to 35.8 million shares at an average price of about Rs 400 each. This would amount to about 0.9 per cent of the equity. This is actually a direct result of a buy-back offered by group company Bharti Infratel.

Airtel holds 71.7 per cent stake in Infratel and the latter is offering a buy-back of Rs 20 billion of shares. Since Airtel’s stake in Infratel amounts to Rs 14.34 billion, it is utilising the funds from the Infratel buy-back to buy back Airtel shares.

Idea Cellular

Idea Cellular, which is India’s No. 3 operator in terms of subscriber base, disappointed the market by registering a 39 per cent drop in net profit in the fourth quarter of 2015-16 compared to the corresponding quarter of the previous year. However, revenues increased by 12.6 per cent year on year and operating profits also increased by 12.5 per cent. For the full year, revenues increased by 14 per cent year on year over 2014-15 while operating profits increased by 17.4 per cent. Net profits fell 3.5 per cent year on year for the full year.

Idea now has 175 million subscribers, up about 3.2 million in the fourth quarter and up about 17 million year on year. It has rolled out 4G networks across 11 circles in the past fiscal (in 10 circles on its own and in one with a second carrier) and it offers 3G coverage in 22 circles. In financial year 2016, Idea doubled its annual fibre roll-out to 22,100 km against 11,400 km in financial year 2015. It is a leading player in eight circles.  It is also a leading player in terms of mobile number portability gains.

Voice traffic grew 9 per cent  and data traffic grew 51 per cent year on year. Idea reported average revenues from data service at Re 0.23 per MB, down from Re 0.45 per MB year on year. Data subscribers have increased by 2.7 million to 44 million and over 50 per cent of data subscribers are on 3G/4G now. Data provides about 20 per cent of service revenues and the data ARPU is about Rs 147.

Idea doubled its average capex spend in 2015-16 and it will need to continue spending. One estimate is that it will spend at least another Rs 135 billion on roll-outs and spectrum. The balance sheet is already stretched. Long-term debt has risen to Rs 365.7 billion from Rs 166 billion in 2014-15, while short-term debt is up to Rs 16 billion from Rs 2 billion. The debt-equity ratio dropped to 1.42 in 2015-16 from 0.72 in 2014-15. Given the necessity to keep investing, the balance sheet could come under serious pressure in this fiscal.

Bharti Infratel

The telecom tower firm reported an 18.7 per cent year-on-year jump in net profit for the fourth quarter of 2015-16. This was mainly due to the growth in network roll-outs. Revenues increased 7.3 per cent on a year-on-year basis while operating profits were up by 6.5 per cent. For the full year,    revenue was up 5.5 per cent while operating profit was up 10.6 per cent and net profit by 19.5 per cent. The operating margin improved sharply, from 43.6 per cent to 45.7 per cent during the quarter. The company is offering a share buy-back of Rs 20 billion and, as mentioned above, its main shareholder, Bharti Airtel, will utilise its share of the proceeds in offering a buy-back as well.

On a consolidated basis, Infratel’s results are computed including its 42 per cent stake in Indus Towers. The two companies’ operations overlap in four circles and taken together, they are present across all 22 circles. (Vodafone and Aditya Birla Telecom own 42 per cent and 16 per cent respectively in Indus.)

The company added about 3,000 towers to its portfolio during the year and the average sharing factor for its 88,808 towers is 2.16 per tower, which is an improvement over the 3.06 registered in 2014-15. Consolidated co-locations stand at 195,035. (This includes 38,458 towers owned by Infratel and its 42 per cent share of 119,881 towers owned by Indus Towers.)

Capital expenditure amounted to Rs 22 billion for the year. Net debt has actually reduced to Rs 138.6 billion for 2015-16 from Rs 142.9 billion in 2014-15, suggesting that the company is comfortably placed.

The company has grown on the back of 3G roll-outs, which have now penetrated deep into rural areas as 3G handsets become increasingly cheap. The highlight for 2015-16 was that 4G roll-outs commenced, with Airtel covering over 300 cities by March 31, 2016 and Vodafone and Idea also ramping up their 4G services. With an expected acceleration in roll-outs, more growth opportunities are in store.

By Devangshu Datta

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