The global example shows Telecom leaders have superior profitability & returns. As a result, 2 of 3 top operators set to bleed again this fiscal, says Crisil Research
The price war for data subscribers has dented the bottom lines of wireless telecom service providers, yet none of them is likely to pull a punch. If anything, competition will only heat up further given that market leadership is all-crucial to the business. It offers many advantages once the dust settles, as is borne out by profitability trends across the world.
The leader typically commands a premium with higher average revenue per user (ARPU), a larger share of premium subscribers, and relatively lower churn. The proposed merger between Idea and Vodafone – which marks the biggest consolidation in the Indian telecom sector – is also part of this quest to strengthen market position, if not leadership, alongside lowering investment needs and costs.
Given this, CRISIL Research believes the price war in the Rs 1.5 lakh crore wireless telecom market will continue in this fiscal, too, leaving bruised bottom lines. The predicament is interesting given that till late 2015, telcos were not very gung-ho on launching 4G data services. Since then, however, they have aggressively invested in backhaul infrastructure and additional airwaves. And since the middle of 2016, slashing prices to protect turf given the debut of Reliance Jio (RJio).
2 of top 3 Indian telecom players will bleed this fiscal
Sharp price cuts and free services offered by RJio for almost 6 months – accounting for over 55% of total wireless data consumption – resulted in flat adjusted (excluding inter connect charges and service tax) gross revenue growth for telecoms. While overall data traffic has grown 5 times in the past one year, 60% fall in 4G data prices since the launching of RJio in September has resulted in muted 2% growth in adjusted gross revenue last fiscal.
With RJio pricing its services under PRIME scheme from April, adjusted gross revenues are expected to grow 12-14% in fiscal 2018. The AGR growth for the incumbents, however, is expected to vary between 0-5 % given the aggression being shown to protect their subscribers.
Today, 4G data costs as low as 1 paise per MB for the high-end plans and 7.5 paise at the lower end for Jio Prime members. And the pricing per GB for 4G stands lower than 3G today, though the players are compensating by offering only higher GB plans for 4G, ensuring overall ARPU protection.
The profitability picture appears grimmer. Last fiscal, two of the top three Indian telecom players are estimated to racked up net losses due to the price war and higher network costs. That trend should continue in this fiscal as well, with aggregate EBITDA margins of the industry (ex-Jio) expected to drop further by 50-100 bps. That’s over and above ~600 bps drop to ~29% estimated for last fiscal.
So, what is drawing the players to this bruising battle?
Globally, market leader enjoy superior profitability and returns
The financials and business dynamics of leading global telcos (Annexure 1) in key high data consuming markets confirms the premium attached to market leadership. Verizon, the largest US wireless telecom player, boasts of a sustained high market share and best-in-class network coverage in the price- competitive and mature market. Its strong cash flows has enabled it to invest in network quality, which, in turn, has ensured the lowest postpaid churn (less than 1%) for the company. Consequently, Verizon enjoys much higher profitability (average EBITDA margin of 37%) and returns (average RoC of 15%) than its peers.
Another example is Telkomsel of Indonesia, which is jointly owned by the government and Singapore-based SingTel. The company has among the highest EBIDTA margins and returns anywhere, given its widespread network, and a 75-80% market share in non-Java areas (rural areas). It also has twice the number of subscribers to its closest competitor, ensuring significant pricing advantage that also reflects in its financial profile. Ditto South Korea’s SK Telekom and Australia’s Telstra. Returns of Indian players also indicate a similar trend. Bharti’s India operations has average returns closer to 10% compared with 6-8 % for the next 2 players.
Indian telcos’ follow global peers
A similar pattern is evident when one evaluates the long-tailed margins of domestic telcos. Market leader Bharti’s (india operations) profitability is better than that of peers. Interestingly, both Bharti and Vodafone focus on metros that have a larger proportion of premium customers. Yet, while both get 55-60% of their revenue and 40-45% of subscribers from metros and circle A, Bharti has consistently enjoyed EBIDTA margins that are over 500 bps north of Vodafone’s, which is partly due to Bharti’s relatively superior ARPUs. Idea’s higher share of interconnect charges and focus on the non-metro markets with nearly 51% of its revenues coming from Circle B and C has aided it in improving its profitability over years
Lower churn, pricing power, and more premium users differentiate leaders
It is clear from the operating matrices of domestic telcos and our analysis of global players that better pricing of premium subscribers, higher share of sticky post-paid subscribers, and lower churn drive the need for leadership position in the telecom space.
The distinct advantages enjoyed by the market leader, make a compelling case for continued intense price-based competition in India’s data market. It is a big positive for 4G penetration – both in terms of subscriber base as well as data usage which is likely to cross over 80% in the medium term. However, it would severely impact cash flows in an industry with already stretched balance sheets, eventually impacting investments in network enhancement.