Telecom Q2FY19 Review: ARPU Down-Trading Continues To Hurt Industry Revenues

The Telecom sector reported largely weak results in Q2FY19. ARPU down-trading continued to weigh down on the performance of domestic wireless operators. Bharti Airtel and Vodafone Idea both saw ARPU fall ~4% qoq to Rs101 and Rs88, respectively.

However, Jio saw only a marginal reduction in ARPU, reporting an ARPU of Rs132 (down 2% qoq). Continued shrinking in ARPU has resulted in significant margin pressure.

Jio’s Monsoon Hungama offer led to net additions of 37mn subscribers for the operator in Q2FY19. These additions for Jio put pressure on Vodafone Idea and Bharti Airtel, which saw 13mn and 6.6mn deletions, respectively.

Both Vodafone Idea and Bharti Airtel also saw a sharp rise in leverage due to shrinkage in EBITDA margins. Net debt/equity for Vodafone Idea and Bharti Airtel stood at 1.62x (against 1.8x in Q1FY19) and 1.64x (against 1.48x in Q1FY19), respectively.

We see ARPU pressure decreasing over the medium term. However, ARPU down-trading is likely to remain a drag on earnings for incumbent operators over the next few quarters.

Our top pick is Bharti Airtel.

Bharti Airtel

Consolidated revenues for Bharti Airtel rose 1.7% qoq. However, as expected, gains from the Africa business were offset by weakness in the domestic wireless and tower businesses. Down-trading by subscribers and impact of the JioPhone monsoon hungama offer saw weakness in the Indian wireless segment, resulting in a 4.5% qoq decline in ARPU to Rs101. The Africa business saw steady ARPUs and a 3.2% qoq rise in subscriber base. Margins declined by 308bps qoq to 30.9% due to weakness in the domestic wireless and tower businesses.

Bharti Infratel

Revenues for Bharti Infratel were flat qoq as the impact of tenancy exits from Vodafone Idea was offset by a rise in sharing revenue by tower. EBITDA fell by 34bps qoq in Q2FY19 given that the impact of the average sharing factor fell to 2.04x in Q2FY19, against 2.22x in Q1FY19. PAT was lower by 6% qoq in Q2FY19.

Vodafone Idea

Results of Vodafone Idea for Q2FY19 are not comparable to those in previous quarters due to the merger of Vodafone and Idea. Proforma revenue and EBITDA for the merged entity for Q2FY19 stood at Rs12,024cr (down 7.1% qoq) and Rs978cr (down 28.7% qoq), respectively. Blended ARPUs declined from Rs92 in Q1FY19 to Rs88 in Q2FY19 due to the persistence of down-trading in the industry. PAT was impacted by significant one-time expenses related to restructuring of the company.

Tata Communications

The company’s revenue for the quarter rose 3.2% qoq to Rs4,068cr (expectation of Rs3,992cr), supported by a 5.9% qoq increase in its data business. EBITDA also grew 7.4% qoq due to breakeven achieved in the growth businesses of the company.

Monsoon Hungama exchange offer helps Jio aggressively expand subscriber base in Q2FY19E
During its AGM, the management of Reliance Industries announced a new scheme regarding the Jiophone. Under the “monsoon Hungama” offer, Reliance Jio would be offering the Jiophone at an effective price of Rs501 for a limited time period. This offer is likely to be a strong driver of subscriber additions given that it is an improvement on the already popular Jiophone.

In Q1FY19, Jio saw its subscriber base grow by ~29mn users, as subscribers (mostly from rural areas) flocked towards the Jiophone. We estimate that due to the Monsoon Hungama offer, Jio added ~242mn subscribers (up 12.4% qoq) to its subscriber base. We expect Vodafone and Idea to lose 2.8% and 3.5% of their subscriber base over Q2FY19E, while Bharti Airtel would be largely neutral on a net basis. However, Bharti Airtel is likely to see migration of low-ARPU Telenor subscribers to Jio. – indiainfoline