Telecom Q1 Review: Kotak Sees Challenge for Incumbents in Near-term; Prefers Bharti Airtel

Kotak Institutional Equities has sounded some caution on telecom space, especially after its performance in the June quarter. It sees near-term prognosis for incumbents to be challenging, while medium-term one being an uncertain one.

In terms of stocks, it still prefers Bharti Airtel over Idea Cellular, but is cautious on Bharti Infratel.

Meanwhile, Jio closed some market share gap against incumbents, delivering 14 percent QoQ topline growth against 1 percent growth for Airtel and 2.8 percent decline for Idea-Vodafone, analysts at the firm wrote in a research note.

“Relative CapEx differential has started showing up in relative subscriber and usage metrics. Some of Jio’s recent disruptions (new postpaid plan, monsoon hungama) are yet to reflect in numbers.”

Some of the key highlights from telecom’s Q1 performance.

According to the report, the key highlight during Q1 remains the subtle change in Bharti’s stance, backfiring of Idea’s strategy and Jio’s surprise on average revenue per user (ARPU) front.

– Bharti suggested a move towards a three-large-player-with-roughly-similar-market-shares structure as far as the industry construct is concerned.

– This was a subtle but important-to-appreciate deviation from the company’s earlier stance that suggested (a) confidence in retaining its top position and (b) potential for easy and meaningful market share gains from the Idea-Voda as they struggle with consolidating two large, complex networks.

Network underinvestment

Idea’s results also included the fact that downside of network underinvestment was seen against incumbents.

As per Idea management, the company’s relatively weak performance was on account of their pricing strategy (wherein the company stepped up focus on selling unbundled plans as opposed to bundled packs) backfiring.

“This could have played a part, we agree. However, we think Idea-Vodafone needs to step up and accelerate its network coverage and capacity expansion plans to stay competitive,” experts at the firm wrote in the report.

Jio’s ARPU surprise

Kotak also said that implication of Jio’s strong 14% qoq revenue growth and stable ARPU despite increased pricing aggression is materially negative for industry pricing outlook.

“Jio does not need to increase pricing if it can add an incremental Rs 1,000 crore revenues QoQ while being aggressive on pricing,” it added.

Numbers Speak

The brokerage house said that incumbents as a pack underperformed jio on sequential comps quite meaningfully.

The incumbents’ combined revenues fell around 23% YoY and EBITDA by 46% yoy. On a QoQ basis, there was some stability in revenues of the incumbent pack as a composite. This was led by modest QoQ growth for Bharti even as Idea (-4% QoQ) and Vodafone (-1.7% QoQ) saw a decline in revenues.

Bharti’s wireless EBITDA is now down almost 55% from its pre-Jio peak levels while Idea’s is down nearly 80%. EBIT losses expanded for all the incumbents.

Broadband: The firm also observed that relative broadband sub additions slowed down materially for Idea and Vodafone while being stable for Bharti as well as Jio.

Data usage: Data usage levels continued to surge with Jio’s data usage per sub crossing the 10 GB/month mark and Bharti’s coming in just below the 8 GB mark. – Money Control

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