Muted prospects for Bharti Airtel

Heightened competition across customer segments, especially from Jio, could translate into steepest industry ARPU fall in three years

After a lacklustre September quarter, which saw a further decline in average revenue per user or ARPU of telecom operators, the outlook for Bharti Airtel (Airtel) and Vodafone Idea remains challenging and the worries could aggravate in the near term. Though both Reliance Jio (Jio) and Bharti Airtel saw their ARPU fall 2-4 per cent in the September quarter, concerns are only mounting for the latter.

Analysts believe the challenge for the incumbents — Airtel and Vodafone Idea — is on three counts: Stemming the fall of India’s wireless revenues, bringing down debt, and control costs. First, the pressure on revenues, which is a function of subscribers and ARPUs. On the subscriber front, the incumbents continue to trail the challenger — Jio.

Latest data from the regulator for August indicates that while Jio’s subscriber base increased by 10.6 million, Airtel’s and Vodafone Idea’s subscriber base were down 2.4 million and 1.2 million, respectively. For the September quarter, while Jio’s net additions came in at 37 million, up 29 per cent on a sequential basis, Airtel lost 15 million customers and had 4.4 per cent fewer customers over the June quarter.

Kunal Vohra of BNP Paribas believes that Jio is getting new customers as well as customers from the incumbents, and this trend is set to continue in the short term as the two companies are yet to respond to Jio’s feature phone offering and the gap in 4G coverage. The other worry for the Street is the risk of Airtel losing customers at the entry-level segment. The company is looking at launching minimum recharge plans (at least of ~35) and let go of the bottom-ofthe-pyramid subscribers. While this could improve its ARPU, analysts believe it would also mean losing these subscribers to Jio’s feature phone offering.

Given the gap in the numbers and the need for larger players to retain market share after consolidation, CRISIL Research expects industry ARPU to fall a further 1820 per cent in FY19. This would be the worst fall in per-subscriber revenues in three years after the 8 per cent loss in FY17, followed by the 16 per cent dip in FY18

Hetal Gandhi, director, Crisil Research, believes that the intensity of pricing pressure has not moderated yet. “The launch of the cheapest postpaid plan by the latest entrant might pressure the incumbents into revising their existing tariffs, resulting in a further deterioration in ARPU.” Gandhi, however, says the postpaid segment is yet to see as much competition as is the case in prepaid.

While the Airtel’s management indicated that the ARPU trajectory should move up on the back of new higher value packs and pick up in volumes, analysts believe that the traction on ARPUs looks difficult from the short-term viewpoint. In addition to the revenue pressure, what is pegging back any improvement in profitability is the continuing level of investments and operational expenditure. Margins

of Airtel’s India wireless business, for example, was down 600 basis points over the June quarter to 21 per cent, a much sharper fall from the year-ago margins of 34 per cent. The rise in network expenditure and access charges led to cost escalation and dented profitability. Bharti Airtel added its highest number of new network sites in at least 25 quarters, indicating perhaps the catch-up it is doing with Reliance Jio’s 4G network. Naval Seth and Harsh Kundnani of Emkay Global believe that cost escalation and the ‘new normal’ India wireless margins are negatives.

High debt is the other worry weighing on Bharti Airtel’s financials. The company’s debt increased by 10 per cent on a sequential basis in the September quarter due to higher capex, reduction in creditors and foreign currency

translation costs due to the rupee depreciation. JM Financial’s Sanjay Chawla and Vishnu KG say that Airtel’s consolidated balance sheet has deteriorated rapidly over last four quarters, and needs an urgent repair.

Net debt-to-annualised Ebitda has surged 4.7 times from 3.0 times year-on-year and, excluding cashrich Bharti Infratel, it was 5.5 times versus 3.5 times four quarters ago. The recent fundraising at its Africa operations and an initial public offer (IPO), thereafter, should address some of the debt concerns.

However, the key will continue to be the competitive pressures not just in wireless, but also in all other areas of direct to home, enterprise and fixed-line broadband. Given that non-wireless businesses account for half of Airtel’s India operating profit, this could be a major headwind going ahead.