Less Is More For Vodafone Idea And Airtel, But Not Enough

 In light of the ruthless land grab that followed Reliance Jio Infocomm Ltd’s entry into India’s telecom industry, the last thing one would have expected is for telcos to say no to some subscribers. But this is exactly what incumbents Vodafone Idea Ltd and Bharti Airtel Ltd have done in recent months.

They introduced so-called “service validity vouchers”, which required customers to make minimum recharges to continue using their networks.

In Vodafone Idea’s case, this resulted in a decline of 53.2 million subscribers or about 14% in the March quarter.

As it turns out, this was a smart move. With low-value subscribers getting weeded out, total revenues increased. Vodafone Idea’s average daily revenues for the quarter increased 2.3% sequentially.

In light of the ruthless land grab that followed Reliance Jio Infocomm Ltd’s entry into India’s telecom industry, the last thing one would have expected is for telcos to say no to some subscribers. But this is exactly what incumbents Vodafone Idea Ltd and Bharti Airtel Ltd have done in recent months.

They introduced so-called “service validity vouchers”, which required customers to make minimum recharges to continue using their networks.

In Vodafone Idea’s case, this resulted in a decline of 53.2 million subscribers or about 14% in the March quarter.

As it turns out, this was a smart move. With low-value subscribers getting weeded out, total revenues increased. Vodafone Idea’s average daily revenues for the quarter increased 2.3% sequentially.

Bharti Airtel had earlier reported a 6.7% sequential jump in average daily revenues. While the company, too, got rid of low-value subscribers, its subscriber base did not fall at the same pace as Vodafone Idea’s.

In Vodafone Idea’s case, synergy benefits from last year’s merger are beginning to accrue at a faster pace, leading to higher-than-expected profits as well.

The company reported earnings before interest, tax, depreciation and amortization (Ebitda) of Rs. 1,590 crore in the March quarter, after adjusting for one-offs. This was as much as 39.4% higher than the December quarter profit of Rs. 1,140 crore.

While the increase in profitability is heartening, it clearly is far from being enough. The company’s net interest cost stood atRs.  2,789 crore last quarter, about 75% higher than current Ebitda levels.

Also note that Vodafone Idea has already achieved 60% of its synergy target. All else remaining the same, its quarterly Ebitda will rise to about Rs. 2,420 crore when 100% of the synergies kick in. That is still short of its quarterly finance costs.

Note also that Vodafone Idea’s total number of broadband sites fell sequentially by about 4,900 sites, which is unusual given the backdrop of increasing coverage by competitors Jio and Airtel.

While Vodafone Idea has successfully raised Rs. 25,000 crore through a rights issue, it still doesn’t have the financial flexibility to raise capex to the levels of its rivals.

“The company’s survival hinges on market repair and pricing uptick which is yet to be seen, analysts at ICICIdirect.com said in a post-results note to clients.

But there are no signs of price hikes, especially since Jio is still a distance away from its targeted revenue market share. While strategies such as “less is more” may have resulted in some short-term dividend, the need of the hour clearly is more pricing power and higher growth in quality subscribers.

Unfortunately for Vodafone Idea, it remains at the mercy of its more powerful competitors for things to improve on the pricing front.―Livemint