Headwinds for telecom service providers not over yet
Cut in IUC, down-trading may weigh on Airtel’s profits in Q3; Idea’s losses seen tripling
The financial performance of existing telecom service providers is expected to remain under pressure in near term despite higher subscriber addition following the exit of smaller players. This will be reflected in their December quarter (Q3) results as well.
Analysts expect the operators’ revenue and operating profit to take a hit by 8-12 per cent. The stress is expected to continue due to down-trading of monthly plans, both prepaid and post-paid, and reduction in interconnect usage charge (IUC). IUC is a charge paid by the call originating service provider to the terminating network for carrying the call to the receiving party. The fall in IUC by 57 per cent to 6 paise per minute from 14 paise per minute effective October 1, 2017 will have a negative impact on the incumbents in Q3.
These charges contributed a significant 15-20 per cent to Bharti Airtel and Idea’s revenues and operating profits, and the cut would set their numbers back by 8-12 per cent on a sequential basis, estimate analysts.
On the operational front, the impact is due to aggression shown by the incumbents (Bharti, Idea and Vodafone) in opening up their unlimited plans to all subscribers during Q3 compared to earlier offers that were limited to 4G handsets only. On account of this, analysts expect their average revenue per user (ARPU) to fall about 10 per cent sequentially and up to 24 per cent year-on-year for Airtel and Idea. Given the declining trend of ARPU over the past five quarters, revenues, too, have followed suit, with the Q3 top line expected to dip about 10 per cent sequentially for the two incumbents.
This will translate to a 31 per cent fall in consolidated profits over the year-ago period for Bharti and tripling of losses for Idea on a reported basis, according to Kotak Institutional Equities.
Going ahead, some relief should come as analysts anticipate ARPU to inch up over the next six months as competitive intensity continues to come down and the list of operators at the national level reduced to four by the end of this year. Though aggression in the entry-level pack continues, newbie Reliance Jio, currently dictating the pricing for all players, has been increasing tariffs by reducing validity of their earlier plans. Tariffs for its most popular plans have increased by 15 per cent since October.
Given the consolidation moves, the Street will keenly watch out for the progress on the Idea-Vodafone merger, which is expected to be completed by March this year, approvals for sale of assets by Reliance Communications to Reliance Jio and Bharti’s integration with Tata Teleservices and further asset sales in its direct-to-home and tower subsidiaries. For now, among the two key listed stocks, most brokerages have a ‘sell’ rating on Idea, given the uncertainty ahead of the merger with Vodafone, while they are positive on Bharti Airtel on improving its Africa operations and competitive strengths vis-à-vis Jio on spectrum and coverage.