THE COMPASS: JIO COULD SLASH TELCOS’ FY18 OPERATING PROFIT

Falling revenues, increased capex, and first full year of spectrum debt may make things worse

The telecom sector may not have enough to pay off interest, going by the worst-case scenario. According to Rohit Chordia of Kotak Institutional Equities, disruptive pricing and offers could spark a 60 per cent year-on-year fall in India wireless operating profit (excluding Reliance Jio) in FY18 at under ~20,000 crore. Given the industry's debt of ~4 lakh crore, including deferred spectrum obligations, the operating profit will not be enough to pay interest, he adds. CLSA highlighted that the sector's revenues in FY18 could come in at ~1.84 lakh crore, the lowest in last nine years.

Pointers to FY18 could pop up from March quarter. Bharti Airtel is expected to post a 25 per cent year-onyear fall in operating profit for its Indian wireless business at ~4,400 crore, while Idea Cellular's is expected to fall 45 per cent at ~1,800 crore. Unlike Airtel which has Africa operations, direct-tohome, and enterprise services, Idea has none; it is a pureplay telco, estimated to end the March quarter with a net loss of ~1,000 crore as against a net profit of ~576 crore a year ago and a net loss of ~384 crore in the December 2016 quarter. And imagine that the ~1,000-crore net loss comes for a quarter seen as seasonally the strongest!

Analysts say while Airtel and Vodafone remain better, things could get difficult for Idea. If its March quarter estimates are annualised, Idea could end up with an operating profit of ~7,200 crore for FY18. On a debt of ~50,000 crore and assuming capital expenditure of ~7,000 crore (FY17 levels), it will have to borrow more to pay for interest expenses of ~4,500 crore. For smaller operators, that neither have cash to expand network nor protect their market share, the situation gets worse.

Sanjay Chawla of JM Financial says for rivals the impact of recent extension of enrolment deadline for Jio customers is negative, as the extent of sequential operating profit decline in Q1FY18 and Q2FY18 could be higher than forecasts. If Jio bundles 6-12 months of free domestic voice calling with low-cost 4G feature phones, rivals could get much worse.

Though the company has withdrawn the three-month offer, its new ~103-a-month plan is also disruptive.

An analyst at a foreign brokerage believes high-end customers migrating to ~300350 monthly rentals could be partly balanced by those shifting up from ~150 levels.