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Green Shoots: Sector outlook improves

July 24, 2019
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After several quarters of financial upheaval, the near-term outlook for the sector is finally looking up. Blended ARPUs have improved, underpinned by the introduction of a minimum mobile tariff and growing data usage. Does this mean that the industry is finally on the path to profitability? Industry experts share their views on recent ARPU trends, operator strategies and the outlook for the telecom industry… (From Left to right: Hetal Gandhi, Director, CRISIL Research; Harsh Jagnani, Vice President and Sector Head, Corporate Ratings, ICRA Limited; Murtuza Onali Kachwala, Managing Director, Protiviti India)

In the context of the quarterly and annual results posted by telcos recently, do you believe the telecom service industry is heading towards a financial rebound?

Hetal Gandhi

The telcos’ results for the fourth quarter of 2018-19 and the full year ended March 2019 are in line with expectations, according to CRISIL Research. The ARPUs of large incumbents have started showing signs of improvement. Bharti Airtel and Vodafone Idea have seen a quarter-on-quarter ARPU growth of about 18 per cent and 16 per cent, respectively, in the fourth quarter of financial year 2019. During this period, the top three telcos have reported a gross revenue growth of about 5 per cent. Given the recovery in the second half of fiscal 2019, we believe that the Indian telecom industry will rebound this fiscal, with a growth of about 7 per cent year on year, after a decline of about 11 per cent in fiscal 2019. The growth will be driven by a rise in ARPUs, given the price stabilisation, the introduction of minimum recharge plans and a rise in data volumes, despite a drop in the subscriber base due to SIM consolidation and a saturated urban market.

Harsh Jagnani

The Indian telecom industry has been facing headwinds in terms of intense competition and pricing pressures. The year 2018-19 was the third consecutive year of revenue decline. The launch of services by Reliance Jio triggered an intense price competition, which has largely continued. The pricing pressure has manifested in a severe deterioration in the industry’s financial performance, as reflected by declining revenues, lower profitability (even losses for some telcos) and low cash generation. However, the trends of the past few months indicate some stabilisation, if not outright recovery, for the sector with ARPUs remaining resilient.

Murtuza Onali Kachwala

The Indian telecom industry is the world’s second largest market with a subscriber base of 1.2 billion. With  three major telecom players remaining in the arena post consolidation – Bharti Airtel, Reliance Jio and Vodafone Idea – market revenues have fallen about Rs 400 billion during the past two years. But things may look up, as Reliance Jio reported a net profit of Rs 29.64 billion for the full year ended March 2019, showing a growth of a whopping 310 per cent over that in the previous financial year. During 2018-19, the company’s profit was Rs 7.23 billion. Vodafone Idea’s gross revenue stood at Rs 117.75 billion and the net loss stood at Rs 48.82 billion during the quarter ended March 2019. Bharti Airtel reported a rise in its net profit in the quarter ended March 2019 after 11 straight quarters of decline. Its Indian mobile services showed signs of a turnaround, with revenues rising for the first time in 10 quarters.

Further, mobile broadband penetration has crossed 50 per cent and telecom tariffs have bottomed out, as reflected in the stable pricing. All three players now have almost equal revenue market share. Hence, monetising the existing customer base is more lucrative than chasing incremental market share.

The Indian telecom industry is expected to see a price recovery in 2020, with an increase in revenue and ARPU growth.

What trends do you foresee in terms of ARPU growth? What are your views on telcos’ strategy to weed out low-revenue subscribers?

Hetal Gandhi

Industry ARPUs are expected to inch up by 10-12 per cent year on year in fiscal 2020 to Rs 112-Rs 114. Besides stable pricing, the introduction of minimum recharge plans will push up ARPUs as inactive subscribers will need to pay a minimum of Rs 35 a month to remain active. This will lead to a weeding out of low-revenue and inactive subscribers. We believe that this will support telcos’ ARPUs, given the limited options available to remain active on the network and use the services.

Further, the high growth in data volumes will also support ARPUs. CRISIL Research expects data volume to grow by about 53 per cent year on year to reach about 85 petabytes by fiscal 2020. Data usage will contribute over 30 per cent of the total volume growth, while the rest will be contributed by a growth in data subscribers. The availability of vast content on over-the-top (OTT) platforms and the increasing popularity of mobile gaming will drive data usage. Besides, all leading telcos are likely to scrap various low-value post-paid plans in order to drive ARPUs, given Airtel’s discontinuation of post-paid plans below Rs 499 across circles.

Harsh Jagnani

The incumbent operators have been looking for triggers for upward movement in ARPUs. They are hinting at an improvement in pricing power with the implementation of minimum recharge plans as well as graded subscription plans for different subscribers. These are intended to weed out low-revenue-generating subscribers. In the latest reported quarterly results, the incumbents have reported an improvement in ARPUs, which has translated into an improvement in financial metrics as well as in revenues staying firm after having declined steadily over the last few quarters.

Murtuza Onali Kachwala

ARPUs have shown signs of improvement. Vodafone Idea reported an ARPU of Rs 89 in the quarter ended December 2018, up from Rs 88 in the previous quarter. Airtel saw its ARPU improve by 4 per cent to Rs 104. Meanwhile, Reliance Jio’s ARPU declined to Rs 126, while it now serves more than 300 million subscribers.

ARPUs are expected to increase with higher data usage and as operators monetise the existing customer database. Further, telecom operators could freeze minimum recharge plans to weed out low-revenue subscribers. This may lead to a decline in subscriber growth but it will strengthen the revenue per subscriber. Further, the top three telcos may drive tariffs higher by bundling value-added services such as music, movies and sports amidst growing data consumption. Telecom operators should turn their focus towards profitability.

How do you see telcos being positioned in terms of subscriber and revenue market share during 2019-20?

Harsh Jagnani

Overall, 2019-20 would at best be a year of stabilisation for the sector, with a growth outlook still some time away. ICRA expects a revenue growth of 6 per cent and an EBITDA growth of 20 per cent in 2019-20. However, these will come off a lower base and will still be significantly lower than the peak of 2015-16. The subscriber base has not seen significant growth over the past two years and only a moderate addition is expected, going forward. The telcos’ current subscriber market share stands as: Vodafone Idea at 34 per cent, Bharti at 28 per cent and Jio at 26 per cent. Jio has been consistently improving its market share. The revenue market share of telcos has been converging towards 30 per cent each, as of December 2018.

Murtuza Onali Kachwala

Pricing aggression is expected to remain moderate and selective in fiscal 2020, given that revenue market shares are relatively equal at 30-33 per cent each.

While the mobile user base had seen healthy growth till 2017, it has slowed down in recent years. It has now reduced and even the rural mobile user base seems to have saturated. Operators should focus on becoming one-stop service providers for customers. We could see operators bundling a plethora of services – some of their own, some through alliances – to offer to customers. This will help in revenue generation from the existing customers, as the market for new subscribers seems to be getting saturated

What should be the operators’ focus areas over the next few years?

Hetal Gandhi

Retaining quality customers instead of increasing volumes has been the focus of telcos over the past six months. This trend is expected to continue over the next year or so. It is quite evident from the results of the last two quarters that both the large incumbents have focused on high-revenue-generating customers by introducing minimum recharge plans, which has improved their ARPU, despite losing subscribers. Extending the content partnership benefit to a wider subscriber base could also be on the cards. Airtel has, for instance, launched Amazon Prime benefits for prepaid customers as a part of its Thanks programme.

Further, in order to improve operating margins, telcos will adopt cost-cutting measures such as reducing employee costs post the successful integration of telcos. They will also invest in future-fit technologies including the cloud, advanced analytics and business intelligence in order to derive further cost savings. Telcos will also focus on launching 5G services in India, depending on the spectrum auction, which is likely to take place in late 2019 or early 2020.

Harsh Jagnani

All the telcos are likely to push towards deeper and richer service usage, which, along with a firm control on pricing, will translate into higher revenues. Further, greater proliferation is expected in home broadband and direct-to-home (DTH) services going forward. Wireline broadband penetration in India is much lower as compared to international standards and presents a significant opportunity for telcos. Wireline broadband coverage will  expand largely through fibre-to-the-home (FTTH) networks, which will be the bedrock for content delivery to homes, encompassing an umbrella of services including wireline voice, wireline broadband and television. While these services have been provided by some telecom players for many years, a new entrant with plans for widespread penetration is likely to provide a greater fillip to these segments. It is expected that the subscriber base will increase rapidly in these segments, albeit at a certain cost. Another emerging trend for the industry is a greater focus on content in order to increase customer stickiness.

Murtuza Onali Kachwala

Operators should focus on new ways to monetise the existing subscribers by offering bundled services. They should focus on price recovery by launching minimum ARPU plans. These could benefit by driving a 3-4 per cent growth in revenues but at a loss of 20-25 per cent low-end feature-phone subscribers. The migration of subscribers from feature phones to smartphones will continue to drive modest ARPU upgrades. Operators should move beyond the traditional telecom business to the wider digital consumer space such as content and mobile banking solutions.

Going forward, what factors are likely to impact the sector outlook?

Hetal Gandhi

The pricing pack logs maintained by CRISIL Research indicates that the prepaid prices of leading telcos have largely stabilised over the past three quarters, and are gradually converging at about Rs 4 per GB. We believe that there will not be any further aggression in prices going forward. However, Jio is yet to gain revenue market leadership in premium circles such as the metros and Circle A, and any aggression in pricing in these circles will impact the outlook for the sector over the next one year. Thus, pricing of newer packs will remain a key monitorable. Another key monitorable would be the quantum of inactive subscribers who will opt for the minimum recharge plans of the large incumbents instead of deactivating secondary SIM cards. This will push volume growth, resulting in higher industry revenue growth.

Harsh Jagnani

Operators would need to undertake sizeable capex, including on acquiring 5G spectrum, sooner or later. However, the pressures of a weak balance sheet remain for the sector. Pressures on cash flow generation, in addition to the need for continued capex, have kept the debt levels elevated, at an estimated Rs 4.75 billion as of March 2019. Some deleveraging plans, such as rights issues by Vodafone Idea and Bharti Airtel, have already been concluded. Others on the anvil include stake sales in tower companies as well as an initial public offer (IPO) by Bharti Airtel in its African unit, and hiving off of fibre assets. Overall, these plans are expected to result in inflows of around Rs 1 trillion, which could lead to a reduction in debt to Rs 4.3 trillion by March 31, 2020. While this would ease the pressure for the time being, the best shield against the pressures of sizeable capex would be a recovery in organic cash flow generation.

Murtuza Onali Kachwala

Increasing choice and one of the lowest tariffs in the world have made cellular services in India attractive for the average consumer. The teledensity in urban areas is about 153.5 per cent. Therefore, the main driver for future growth will be the rural areas where wireless teledensity is around 57.6 per cent.

Operators offering new bundled services and one-stop solutions for all needs will also be a contributing growth factor.

Government regulations and policies will be key in deciding the industry’s future. Interconnection charges will be zero, effective January 1, 2020, from the current rate of 6 paise per minute, which would impact the revenues of the incumbents.

The government has allowed voice and data services to be provided in-flight within Indian airspace. The provision of broadband through Wi-Fi is also being pushed in a big way. These regulations and policies will help in offering OTT services to customers. The National Digital Communications Policy, 2018, envisages attracting investments worth $100 billion in the telecom sector by 2022.

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