Incumbent telcos’ revenues may stabilise in June quarter

With volumes improving and pricing likely to be steady, ARPUs are likely to recover

Reliance Jio’s (Jio’s) foray into the telecom sector in September last year and the subsequent price war has led to a severe disruption, impacting the financial performance of incumbents such as Bharti Airtel (Airtel), Vodafone India (Vodafone) and Idea Cellular (Idea), among others.

However, experts believe the worst is over for the larger telecom players and their average revenue per user (ARPUs) could remain range-bound here on as against the sharp fall in recent quarters. Manish Adukia, telecom analyst at Goldman Sachs expects incumbents’ ARPUs to largely stabilise at current levels and Jio’s prices to move to a more normalised level over the course of FY18. Morgan Stanley’s Parag Gupta, too, believes there will be pressure on ARPUs even now, but they may not be as weak as they were in the December or March quarters and could remain flat to weak.

“Overall, we see ARPUs moving up from the beginning of FY19,” he said. Gupta believes as incumbents are reacting to the new players, they are also seeing volume growth return. So it is going to be an interplay of volume growth and pricing decline.

The incumbents had witnessed a sharp decline in their revenues, ARPUs, as well as net profit in the past two quarters. Thus, while their ARPUs fell by 20 per cent in FY17, Idea posted a net loss in the financial year — a first in about 11 years. Airtel’s net profit fell 30 per cent in the year on the back of falling revenues as well as margins. However, as Jio started to bill its customers from April 1, the pain is likely to ease for the incumbents.

The free offers that were rolled out brought in a lot of users and it also gave a sense of the latent demand that was there in India. In this backdrop, focus on subscriber market share gains will continue going forward as well. The incumbents could witness some market share gains from smaller players, given the reduced price differential between the two segments in recent months.

“Despite the first-ever fall in aggregate gross revenues for the sector in the March quarter, incumbents continue to consolidate, gaining market share from smaller operators. This trend is only going to accelerate going ahead. For example, in FY17, the combined market share of the top three players increased 220 basis points,” said Sanjay Chawla, telecom analyst at JM Financial.

Jio, too, could take away share from both large and small players, believe analysts. Also, consolidation in the sector, especially the Vodafone-Idea merger, is a positive and could bring back some of the pricing power to the sector. While interacting with investors after the announcement of results for the March quarter, managements too, remained positive. Both Airtel and Idea stated they were now seeing stable revenue trends on a week-on-week basis.

Vodafone has also highlighted the company has seen reduction in multi-SIM usage in its user base and stability in recharges after Jio started charging for its services.

Considering these positives, it is not surprising that analysts, too, are slowly turning positive. “We believe June 2017 could potentially be the last quarter of sequential revenue decline (also as Jio begins to charge) though we are unsure of the strength of the recovery,” wrote analysts at JP Morgan in a recent report on the sector. The key concern, though, is that in case Jio is unable to attain its stated market share targets, it could launch new offers which could trigger another round of price wars.