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Indian Incumbent Telcos EBITDA Diverge As Jio Continues To Win

Indian incumbent telcos’ EBITDA are increasingly diverging as Reliance Jio continues to gain market share and report solid revenue and EBITDA growth, says Fitch Ratings. Their financial performance in the first quarter of the financial year ending March 2020 (FY20) was mixed, with Bharti Airtel Limited reporting EBITDA that was in line with Fitch’s expectation, while Vodafone-Idea Limited reported weaker results due to market-share loss to Reliance Jio. We forecast Indian mobile EBITDA growth for Bharti in FY20, driven by improvements in average revenue per user (ARPU), easing competition and cost savings. Bharti’s India mobile EBITDA, after operating lease payments, improved by 7% qoq in 1QFY20, while Vodafone-Idea’s EBITDA declined by 22%, both measures excluding one-off items.

This was while Reliance Jio continued to gain market share, keeping its ARPU flat. All telcos’ 1QFY20 reported financial performance was affected by the introduction of Indian accounting standard 116 (IndAS 116), which removed the distinction between operating and finance leases, and classifies all leases as finance leases. This inflated reported EBITDA and finance leases.

Bharti’s 1QFY20 consolidated revenue rose by 5% yoy while EBITDA increased by 2%, after deducting operating lease expenses to remove the effect of IndAS 116 so that the figure is comparable with previous quarters. The improvements were driven by continued growth in Africa, where revenue and EBITDA increased by 7% and 13%, respectively, on subscriber growth of 9% and stable ARPU. Its mobile EBITDA in India rose by 7% qoq to INR25 billion in 1QFY20 after improving by 33% in 4QFY19, driven by ARPU growth of 5% to INR129 as 4G subscribers increased by 10% to 95 million and average data consumption rose by 8% to 11.9GB per month per user. In comparison, Vodafone-Idea’s 1QFY20 revenue and EBITDA declined by 4% and 22%, respectively, as it lost 14 million customers, partly due to a minimum recharge plan of INR35.

However, ARPU improved by 4% to INR108 as it gained 4 million 4G customers, fewer than the 8 million 4G customers gained by Bharti. Vodafone-Idea’s EBITDA of INR12 billion was driven by cost synergies from the merger of the two companies. Reliance Jio continued to report solid financial performance with 1QFY20 revenue and EBITDA growth of 44% and 37% yoy, respectively, as it gained about 25 million customers, during the quarter, to reach a total subscriber base of 331 million, ahead of Vodafone-Idea’s 320 million and Bharti’s 281 million. Reliance Jio’s ARPU, which does not include interconnection revenue, was largely flat at around INR122 even as data consumption increased to 11.4GB per month per user and average voice consumption was 821 minutes per month per user, similar to Bharti’s 888 minutes. Mobile internet experience is the key factor driving subscribers as tariff differentials between telcos have disappeared.

Jio leads the mobile-broadband market, although Bharti and Vodafone-Idea are improving their 4G coverage and capacity by expanding their mobile-broadband sites and fibre backhaul. Bharti and Vodafone-Idea added 26,190 and 20,825 mobile-broadband towers during the quarter. Bharti plans to shut its 3G network across India by March-2020 and redirect its 900MHz and 2100MHz spectrum for 4G usage.

Telcos are likely to monetise their tower and fibre assets to deleverage and create financial flexibility. Bharti’s balance sheet has strengthened as it raised USD5.7 billion through a rights issue, stake sale in Airtel Africa and a subsequent IPO of Airtel Africa. We expect Bharti to raise about USD2.5 billion-3.5 billion through a stake sale in a soon-to-be-merged Bharti Infratel and Indus Tower entity in India, while Vodafone-Idea is likely to sell its entire 11% stake in the tower merged entity for about INR56 billion. Vodafone-Idea is also planning to monetise 158,000 kilometres of fibre assets. Reliance Jio announced that it entered into an agreement to monetise its tower and fibre assets worth INR252 billion via an infrastructure investment trust.―Investing

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