Yes Bank's Performance Update after Q2-FY'17.

Over the last three & half years, I have posted a handful of reports on Yes Bank, which included a couple of comparison reports too. The first report was written in July'2013: Yes Bank - Future HDFC Bank available at PSU Bank valuations!!! I am happy to say that Yes Bank's performance over the last over three years has not failed my expectations & estimations. The most recent report was written about 18 months ago (Yes Bank - Good Growth, Attractive Valuations). Hence I thought it fit to post a Performance Update on Yes Bank's Financials & Valuation.

The Quarterly as well as Trailing-Twelve-Months Profit & Loss Numbers are already available on my blog at this link: http://www.stockslogic.in/2016/02/yes-bank-ltd-results.html

Hence I would focus on other details in this report. Any bank operates under 3 primary business heads: 1) Treasury Operations - Here it's in-house team trades in different kind of bonds, depending on liquidity situation at the bank & bond prices. 2) Wholesale or Corporate Banking - This division focuses on providing Banking/Lending services to SMEs & Corporates. 3) Retail Banking - This division is for providing services to individual consumers.
Older Banks with large Branch Networks since many years generally have a substantial contribution from Retail Banking operations, going upto about 35 to 45% of it's Total Income. Large Retail presence with wide network of branches is also important for any bank in terms of access to low-cost deposits. Current Account deposits form the lowest cost deposit base for Banks, followed by Savings Account deposits. Any bank with high proportion of Current Account & Savings Account (CASA) Deposits is able to offer more competitive Interest Rates on Loan products and also enjoy higher Net Interest Margins. This is one area where Yes Bank still has a lot of ground to cover, not just with older peers like HDFC Bank or Axis Bank, but even with contemporary peers like Kotak Bank or IndusInd Bank.

Have a look at the chart alongside, which shows the Trailing-Twelve-Months progress of Yes Bank's Segment-wise Income figures over the last 3 years. Yes Bank's Corporate Banking services have been it's pillar of strength right from the time of it's inception. And it continues to provide robust growth for the Bank even now with over 65% of Yes Bank's Total Income still coming from this division. Treasury Operations contributed nearly a third of Yes Bank Total Income in September'13, but has seen it's contribution coming down to a quarter of the Bank's Total Income in September'16, mainly because it did not grow at the same pace as that of the other divisions. Yes Bank's Retail Banking division has shown some urgency for growth only in the last 4 quarters. After posting a steady Y-o-Y growth of about 35% for periods ending Sept'14 and Sept'15, the Retail Division posted a handsome growth of nearly 70% for 12-months ending Sept'16. Yes Bank will need to maintain over 50% growth in Retail Banking business for another 2 or 3 years to see it's contribution improve from existing low levels of under 9% of Total Income to something like 15 to 20%. Even a relatively not-so-old Kotak Bank gets nearly 45 to 50% contribution from it's Retail Banking division. Hence I think Yes Bank should certainly be targeting to expand it's Retail Banking business' contribution to something like 25 to 30% of Total Income in the next 5 years. Growth in Retail Banking business will only help the Bank's other divisions by giving it access to increased CASA Deposits.

Another big aspect of any Bank's business is how well it manages to keep it's Cost of Funds low and also not let it's Bad Loans number go high. The Chart alongside shows the Interest & Provisioning figures as a Percentage of Yes Bank's Total Income. Interest Cost is consumes the biggest portion of any Bank or Finance Company's Total Income. In September'13, Interest Cost formed just over 62% of Yes Bank's Total Income, which the Bank has managed to bring substantially lower to about 53.3% of Total Income in September'16. This is an excellent progress, especially considering the fact that the last Equity-based Fund raising done by Yes Bank was sometime in June'14 quarter, i.e. over 27 months ago. This excellent control over Cost of Funds has helped Yes Bank expand it's Net Profit margin from 13.54% in Sept'13 to 16% in Sept'16, i.e. about 250 bps improvement in 3 years time.

Over the last couple of years we have seen the Banking sector being in the NPA storm with almost every PSU Bank and many Private Banks too having to make large Provisioning towards NPAs. In such a scenario, Yes Bank has managed to keep it's Provisioning figure to under 4% of Total Income throughout the last 4 years, despite having almost it's entire Loan Book exposed towards Corporates. This clearly talks about the quality of assets that Yes Bank has managed to identify & Finance.

Valuations & Stock performance: First have a look at Yes Bank's Stock Price chart for the last 2 years:

After spending over year within a range Rs.650 to Rs.900, Yes Bank's stock price finally a breakout in February'16, which lead to a sharp rally from Rs.675 levels to about Rs.1400 levels, that means doubling in a matter of just about 6 to 7 months. Since then the stock price has seen some bit of correction & consolidation in the Rs.1100 to 1300 range. At the current price of about Rs.1130, Yes Bank is trading at just over 16 times it's T-T-M EPS of Rs.69/-. In the current market scenario, when almost the entire market has undergone some decent correction over the last couple of months, Yes Bank's valuation cannot be called 'Very Cheap' anymore. But a P/E Ratio of 16 certainly cannot be called expensive for a quality stock like Yes Bank. As and when the market stabilises & starts progressing upwards again, I am expecting Yes Bank's stock to move towards a 20+ P/E Ratio. The quality of Yes Bank's business performance certainly deserves higher valuations in stable & progressive market conditions. Long Term investors should continue to remain invested & somebody who wishes to book atleast some portion of profits, may do so when the stock hits a P/E Ratio of something closer to 20 to 22 levels. A P/E Ratio of 15 or lower will make it a very attractive Buy option of other investors.

Performance of Top-5 Telecom Operators in their Top-5 Circles

The Indian Telecom sector was finally hit with Reliance Jio Tsunami in the last week of August'16, when the company started offering Preview Offer Sim cards to almost all 4G handsets available in the market. It was soon followed with launch of Jio Welcome Offer, which was advertised widely by the company through various mediums. Millions of people with 4G smartphones started queuing up for getting a Reliance Jio Sim card, primarily because of the offer for Free usage till 31st December'16. An additional few million people preponed their handset upgrade plan just to be able to enjoy the Jio Welcome Offer for a few months. All this lead to Reliance Jio registering a user base of close to 16 million by the end of September'16, probably the highest single-month subscriber addition by a single operator in the history of Indian Telecom sector. Ofcourse the attraction of Freebies pulled in so many users. But this sudden shift in usage of nearly 2% of India's mobile populace was bound to start reflecting on the numbers of all existing operators. The impact during September'16 quarter was expected to be small, but still noticeable. The impact will be much bigger during the December'16 quarter as Reliance Jio's userbase had swelled to over 50 million by end of November'16 and expected to hit about 60 million by end of December'16.

In my analysis for this report, I have focused on a few limited parameters. Firstly I have considered the AGR & VLR-subscriber numbers for only the Top-5 operators (excluding Jio). They are:
1) Bharti Airtel
2) Vodafone India
3) Idea Cellular
4) BSNL/MTNL
5) Tata Teleservices ....... (even though Tata Tele is smaller than RCom & Aircel in terms of subscriber numbers, it leads the other two in Adjusted Gross Revenue (AGR) terms by a considerable margin.)

Secondly, I have selected the Top-5 AGR contributing Circles for each respective operator and then studied the VLR-subscribers addition pattern for those Circles. [ The VLR subscribers number announced by each operator every month represents the Highest number of users active on it's network for that Circle in that month. It need not be true for every day of that month. Hence a change in VLR base will only give us a slight hint of things to expect in the following months. ]

Numbers in '000s

1) Bharti Airtel: India's No.1 Telecom operator has over 251 million VLR subscribers and quarterly AGR of around Rs.12,500 crores. Bharti Airtel commands about 32% AGR market share as of September'16 and about 26% subscribers market share. The Top-5 AGR contributing Circles for Bharti Airtel are: (not in any order) Andhra Pradesh, Bihar, Delhi, Karnataka and Tamil Nadu. These 5 Circles together contribute 49.8 % of the company's Nationwide AGR and hence their performance becomes even more important for the company. The combined AGR for these circles reported a 1.9% Q-o-Q drop during September'16 quarter, with Bihar being the main culprit reporting a near 9% drop in AGR. The VLR base of these Top-5 Circles form just over 40% of the company's All-India VLR base. Now have a look at the chart alongside which shows the company's monthly VLR subscribers addition since June'16. After adding 4.3 lakh & 17.5 lakh VLR subscribers during June'16 & July'16, Bharti Airtel has seen an erosion of 2 lakh & 3.2 lakh VLR subscribers during the following 2 months. The two main competitors that Airtel needs to be wary about in it's Top-5 Circles are Idea Cellular & BSNL with each of them gaining some ground in atleast 3 of them. Amongst Airtel's Top-5 circles, Idea Cellular was super-aggressive with 4G expansion in Andhra Pradesh, Karnataka & Tamil Nadu.

Numbers in '000s

2) Vodafone India: India's No.2 Telecom operator has little over 190 million VLR subscribers and little under Rs.8800 crores in quarterly AGR, making it nearly 30% smaller than the No.1 operator. The Top-5 AGR contributing Circles for Vodafone India are: (not in any order) Delhi, Gujarat, Maharashtra, Mumbai & Tamil Nadu. These 5 Circles together contribute close to 48% of Vodafone India's Nationwide AGR. The combined AGR of these Circles reported a 2.5% Q-o-Q drop during September'16 quarter, with Gujarat & Maharashtra circles being the lead losers reporting nearly 6% drop in AGRs.. The VLR base for these 5 Circles constitutes little over 37% of Vodafone's All-India VLR base. In these 5 Circles, Vodafone had seen it's VLR base increase by 6 lakhs in June'16, 4 lakhs in July'16 and over 10 lakhs in August'16, but the net addition in September'16 was barely 35,000 subscribers. The primary reason for dismal VLR addition in September'16 for Vodafone was a VLR loss of nearly 5 lakh subscribers in Delhi Circle alone. Healthy additions in Maharashtra and Tamil Nadu Circles helped avoid the Net Addition number from dipping into the red. Vodafone has fortified it's 4G-capable spectrum holdings in many of it's crucial circles in the recent auctions. It certainly needs to act fast though. Over the recent couple of months, it has been seen that Vodafone India is the slowest amongst the Top-3 operators in introducing changes to it's tariff plans, both on prepaid as well as postpaid. I think it needs to be more agile on this front too. 

Numbers in '000s

3) Idea Cellular: India's No.3 Telecom operator has little over 186 million VLR subscribers and about Rs.7300 crores in quarterly AGR. Compared to Vodafone India, Idea Cellular's VLR base is less by only about 2%, but it's AGR is less by about 15%. This clearly suggests that rural subscribers comprise a higher proportion of Idea Cellular's VLR base, compared to Vodafone India. The Top-5 AGR contributing Circles for Idea Cellular are: Andhra Pradesh, Kerala, Madhya Pradesh, Maharashtra and UP (West). These 5 Circles together contribute nearly 59% of Idea Cellular's All-India AGR, making the company even more sensitive to performance of these circles. The combined AGR of these 5 circles reported a 5.7% Q-o-Q drop in the latest quarter, with Madhya Pradesh reporting nearly 10% drop & Maharashtra reporting nearly 8% drop in AGRs. One look at the chart alongside & it is obvious that Idea Cellular is the only one amongst the leading trio to have maintained a healthy VLR addition rate every month over the recent 4 months. Idea Cellular has added about 4.8 lakh VLR subscribers every month on an average, with the lowest monthly number being 1.7 lakhs in August'16. Idea Cellular has clearly done better on VLR additions front in the month of September'16, when compared to both Bharti Airtel & Vodafone India. If this trend continues in following months, it should help Idea Cellular regain the ground it lost to it's larger peers on the AGR front. The VLR numbers for the Top-5 Circles constitute a little over 49% of Idea Cellular's All-India VLR base.

Numbers in '000s

4) BSNL / MTNL: The once-upon-a-time PSU behemoth is now a distant No.4 in the Indian Telecom space with barely 10% AGR market share, which is less than a third of the No.1 player and just about half of the No.3 player. It is only in the last couple of years that BSNL/MTNL combine has shown a few signs of making an attempt to arrest it's continuous decline. The companies are finally trying to upgrade their network infrastructure in several cities to be able to offer better coverage & services. The Top-5 AGR contributing Circles for BSNL/MTNL combine are: Karnataka, Kerala, Maharashtra, Mumbai & Tamil Nadu. These 5 Circles together contribute about 44.5% of the combine's Nationwide AGR. BSNL/MTNL has seen it's AGR for these 5 circles jump by over 8% Q-o-Q, making it the only operator to have reported a Q-o-Q growth during September'16 quarter. BSNL/MTNL have been reporting wild Q-o-Q fluctuations sometimes in previous quarters. Hence it will be worthwhile to wait & see it the combine manages to build upon this growth in the following quarter. The VLR additions chart for BSNL/MTNL combine too is very strange. The combine saw a huge surge in VLR numbers during August'16 with an increase of over 24 lakhs in just the Top-5 circles and around 83 lakhs Nationwide. It seemed as if millions of dormant BSNL sim cards suddenly were put into use by their holders. And the combine added another 2.9 lakh VLR users in September'16. If the VLR additions number for BSNL does not turn negative in the following 1 or 2 months, then the combine should be able to post another healthy growth in it's AGR during December'16 quarter.

5) Tata Teleservices: The performance of Tata Teleservices has been rather surprising over the recent quarters. From the media reports we gather that the Tata Group is not too serious about continuing with it's Telecom venture for long & is looking to find a buyer or partner since the last couple of years. It's Japanese partner too is looking to exit. In such a scenario one would have expected the company's performance to gradually dwindle. But surprisingly it has been quite steady, especially in a few important circles. The company even went ahead and purchased Band-3 Spectrum for Mumbai, Maharashtra & Andhra Pradesh Circles in the recent auctions. It is still unknown on what it plans on doing with it: continue offering 2G service or use it for 4G-LTE service.

Numbers in '000s

Tata Tele currently offers it's 2G GSM & CDMA service in 19 circles. But it has very very limited presence in 7 of those 19 circles. The company also offers 3G service in 8 circles, but with only 5 of these circles doing reasonably well. On an All-India basis, Tata Tele commands just 6.5% AGR market share. It's Top-5 AGR contributing Circles are: Andhra Pradesh, Karnataka, Maharashtra, Mumbai and Tamil Nadu. These 5 circles now contribute about 55.5% of Tata Tele's Total AGR. The combined AGR of these 5 circles reported a drop of only 1.8% Q-o-Q during latest quarter, a drop which is smaller than that reported by Bharti Airtel, Vodafone as well as Idea Cellular. The combined VLR base for these 5 circles constitutes a little under 46% of Tata Tele's Total VLR base. After having added 4.3 lakh VLR subscribers in June & July'16, Tata Tele has lost 2.61 lakh VLR subscribers in the following 2 months. The drop in VLR base for Tata Tele could be due to 2 factors: Increased competition and possible winding down of CDMA operations in a few circles. The company's exact plans on discontinuing it's CDMA operations in few or all circles is yet unknown. Hopefully this increased competitive intensity & expected pressure on cash flows will push to company into taking concrete steps towards merger/sell out or curtailing operations to a few strong circles only.

Reliance Jio's Happy New Year Offer - Bad news for everyone!!

Reliance Industries' Chairman made another 'Big' announcement yesterday about Reliance Jio. And it turned out to be just another new offer 'Happy New Year Offer', where Jio customers will get access to Free services till 31st March'2017. The main reason for extending Free services for another 3 months was said to be that the company was not very happy with the Quality of Service some of it's customers were getting,

primarily due to 2 factors: 1) The Voice Calling experience still wasn't as smooth as expected due to lack of cooperation from incumbent operators; 2) The Data speeds for some customers was below acceptable levels as nearly 20% of the subscribers were exploiting the existing FUP limits to the maximum.

To counter these, on one hand Reliance Jio will continue to work with regulator & other operators to enhance the Interconnect Capacities to bring down Call Failure rate to under 0.5% level; and on the other hand Reliance Jio is lowering the FUP limit to 1 GB per day under the new Happy New Year Offer. This offer opens for new enrollments from 4th of December'16 as TRAI had asked the company to end it's Welcome Offer after 90 days of introduction, i.e. on 3rd December'16. Subscribers of Welcome Offer will continue to enjoy benefits of the same till 31st December'16 and then will be migrated to Happy New Year Offer on 1st January'17. Hence from 1st January'17, every subscriber on the Jio network will have a FUP limit of 1 GB per day, which is expected to improve the quality of Data service for most users.

Why am I disappointed? : As a user of Jio's service, I am happy to be able to enjoy the Free service for 3 more months and in turn save couple of thousands more. But I was actually eagerly looking forward to the day when Jio's Free service ends and how it performs once people are supposed to start recharging/paying to continue using Jio's Data & Voice service. In the current situation where over 50 million subscribers continue to use/abuse Jio's Free service, it is quite an unfair comparison between experience of Jio's network with that of others'. Average Daily Data usage of a Jio user is well above 500 MB, whereas the average Monthly Data usage of a 3G/4G user of other operators is about 1 GB. Jio's user base has already crossed the 3G/4G user base of Airtel, making Jio the top Wireless Broadband service provider. That means the Data Volume on Jio's network will be in the range of about 20 to 30 times the Volume on networks of the other incumbent operators. In such circumstance, the Quality of Data service is bound to drop especially in high density regions.

The other reason for feeling bad is that this extension of Free Service period will mean even more pain in an already troubled Telecom sector. Only the Top-3 operators (Airtel, Vodafone & Idea) were making some kind of decent Cash Profit before the Jio Tsunami hit the sector about 3 or 4 months ago. All the other smaller operators were already struggling to cover their Operating Costs with their Revenues, with that situation expected to worsen much much more during the 6 months period from October'16 to March'17. In fact we could see a couple of operators to just Shut shop (either partially or fully) due to Liquidity issues as Banks will also be reluctant to fund them more, without the promoters willing to infuse more money in the business. All these existing operators (including PSUs BSNL & MTNL) are struggling to retain a substantial portion of their customer usage, especially the ones with a 4G smartphones. With over 50 million users already having shifted their Data as well as Voice usage (either partially or fully) to Jio, all the existing operators are bound to feel substantial pain in revenue momentum. In my earlier posts, I had mentioned that I am expecting the Top-3 operators to post a drop of about 10-15% in their Revenues in December'16 quarter compared to June'16 quarter numbers. Now the March'17 quarter could prove to be even more painful with the drop extending to about 15 to 20% of Revenues quite easily. Such large drops in Revenues at a time when these operators are investing in CAPEX for expanding 3G/4G capacities could mean that even these Top-3 operators could post Cash Losses or very negligible Cash Profits in either December'16 or March'17 quarter. This is also not good news for shareholders of Reliance Industries as the company will need to Capitalise another quarter's Operating Costs for Jio, which could be around $ 1 Billion, leading to higher Interest burden and Depreciation Costs once Jio's revenues & costs start being consolidated with Reliance Industries' Quarterly numbers. Ofcourse this additional $ 1 Billion is quite small to the size of the total CAPEX undertaken by the company for Jio in total. But even shareholders of Reliance Industries must be very eager to see how Jio's financial performance progresses, and this extension will mean a further delay for the same.

I am expecting all these existing operators to approach TRAI / DoT to appeal that Reliance Jio cannot be allowed to offer Free Service for another 3 months. Even I am not sure if Reliance Jio's new offer will get permission from the regulator or not. We should know about it in the next couple of weeks for sure. Let's wait & watch.

Telecom AGR Analysis - Q2-FY'17 numbers are the start of a new story.

The Q2 of FY'17, i.e. the period July to September'2016, will be the start of a new Telecom story. And all of us know why, isn't it? Yes. It is the start of Reliance Jio becoming available to a much wider population from sometime around the end of August'16, when Jio Preview Offer was opened to a huge list of 4G smartphones. Soon after that, on 5th September, Jio was made open to the public with it's Welcome Offer, which offered everything from Data, Voice calls, SMS & access to Jio Apps, FREE till 31st December'16. This lead to a mad rush to acquire a Jio Sim by millions of 4G Smartphone users. This migration of usage (atleast temporarily) from one of the existing operators to Jio by a few million users, starting from the month of September, was definitely going to affect the Revenues of all existing operators. Ofcourse, the impact was expected to be small in Q2 as Jio started activating Sim cards at a rapid pace only in the last month of the quarter. In one of my previous posts I had mentioned that I was expecting a 3 to 5% erosion of Industry's Gross Revenues in Q2 and a bigger hit of 10 to 15% in Q3. Now that we have Adjusted Gross Revenue (AGR) numbers for Q2-FY'17, let's see how the industry has fared.

For my analysis, I have been keeping a track of AGR numbers for all 22 circles of 9 Telecom operators: Airtel, Vodafone, Idea, Tata, Aircel, BSNL/MTNL, RCom, Telenor & Jio. As of now Jio's numbers are close to Zero (insignificant). The other 8 operators comprise of nearly 98% of the Industry's Total Revenues. The Total AGR for these 9 operators across all 22 circles was Rs.40,097 crores in Q1-FY'17, which has dropped by 3.3% to Rs.38,764 crores in Q2-FY'17. This was very much on expected lines. It is interesting to see how the different operators and circles

have performed Q-o-Q. After collating all the numbers, I was slightly surprised to note that impact of Jio's Welcome Offer is the least in the Metro Circles and the maximum in the C-Category Circles.[The AGR number for Metro Circles in March'16 quarter looks unusually taller mainly because of abnormal numbers from MTNL during that quarter.] On a Q-o-Q comparison, AGR for Metro Circles is down by just 1.1%, for A-Category Circles it is down by 2.3%, for B-Category Circles it is down by 3.9% and for C-Category Circles it is down by a whopping 8.2%. What does this indicate? Does this mean that Jio did not attract a decent subscriber base in Metro & A-Category Circles? I certainly don't think that is the case. The thing is that Metro & A-Category circles were expected to be the early adopters of 4G service. Hence the incumbent operators were more focused on protecting their Revenues & Customer base in these circles from migrating to Jio. Hence the Top-3 operators, i.e. Airtel, Vodafone & Idea, invested substantial Capital to aggressively expand their 4G/3G coverage in these circles and also in Urban areas of B & C-Category Circles. All the existing operators also made rapid changes to their 3G/4G Data packs and also came out with more & more attractive Special Offers for their Data consumers, in an attempt to keep a user tied to their network. And the incumbent operators certainly seem to have done an excellent job.

The other factor that might have helped here is the higher proportion of postpaid user base in Metro & A-Category circles. Most of the Postpaid users did not migrate to Jio during this Welcome Offer period as they wanted to check Jio's quality of service before jumping ship. At the same time the incumbent operators offered these postpaid users more & more Voice minutes or Data Limits within their existing plans, making it more attractive to remain with a proven operator. In case of Pre-paid users, there is no monthly commitment and hence they can easily alter their Recharge/STV choices & frequencies depending on requirement/offers. Another point being availability of Jio's 4G network across 18,000 cities & towns and over 2 lakh villages, spread across all 22 circles. On the other hand, only Airtel, Vodafone & Idea had their 4G networks operational, that too in select cities & towns, possibly more focused on areas where they knew there is a higher proportion of 4G Smartphone presence. The period between September'16 to June'17 could see the maximum pace of rollout of 4G sites by the Top-3 operators. They will also rapidly deploy the recently acquired 4G-capable spectrum in several new circles in the coming months, in an attempt to try & bridge the huge gap between Jio's 4G coverage and that of their own.

Operatorwise Categorywise Performance: It is even more interesting to see how different operators have fared in different categories. In

the Metro Category, Airtel surprisingly managed to post a 1.2% growth in AGR. Metro is one of the only 2 Category of Circles where Airtel does not hold the No.1 Rank, but it has now significantly closed the gap to Vodafone. Airtel could possibly wrest the No.1 Rank here in Q3-FY'17. MTNL is the only other operator to report Q-o-Q growth, but it's quarterly numbers recently have been quite volatile. All other operators have reported a Q-o-Q drop with RCom being the worst with 9% erosion in AGR. In Category-A Circles, BSNL was the only one to report growth with 1.7% Q-o-Q increase in AGR, but here again it can be dismissed to quarterly volatility. Amongst the other operators, the best performer surprisingly was Tata Tele with just 0.2% drop. It's 3G operations in most of the Category-A circles seems to have managed to keep it's customers tied to it's network. Idea was a big loser from the Top-3 with nearly 5% erosion in AGR. The worst performers were Telenor & RCom with 21% and 14% Q-o-Q drops in AGR.

Category-B & C Circles are where each of the Top-3 operators too have taken a considerable hit. BSNL is again the best performer in both these Categories, with 10.2% Growth in Category-B and a small drop of 2.2% in Category-C Circles. Category-B is the other segment where Airtel was trailing someone in AGR market share. With the No.1 player Idea reporting a bigger drop in AGR this quarter, Airtel is now almost on-par with it. The worst performers in Category-B Circles were again Telenor & RCom with 13% & 10% drops respectively. The same in Category-C Circles were RCom, Telenor & Idea with 32%, 16% & 14% drops respectively. Airtel which is the dominant player in the Category-C Circles with nearly 48% market share, also experienced a substantial 8.8% drop in AGR during Q2-FY'17. This is also the only Category where Airtel has reported a small drop in AGR market share by 30 bps. In all the other 3 categories, Airtel has either increased it's market share or managed to increase it with a clear outperformance.

On an overall basis, Telenor has taken the biggest percentage hit with near 17% Q-o-Q drop in AGR, followed by RCom with near 13% drop. Aircel's numbers are not exactly comparable here as I had to make some adjustments to reported numbers as it included the revenues from Spectrum trading in 7 circles. Even though BSNL/MTNL combine reported a 4.9% Q-o-Q increase in AGR, the Total AGR for the company was lower than each of the 5 quarters prior to Q1-FY'17. Hence we need to take BSNL/MTNL's Q2 numbers with a pinch of salt. Tata Tele was the surprise package here as it has managed to face the Jio storm pretty well in Q2-FY'17 with a small 3.4% Q-o-Q drop in AGR. This is despite the fact that Tata Tele has Zero 4G presence and 3G operations in only 8 circles. The credit for the good performance clearly goes to Tata Tele's operations in Category-B circles, which contributes nearly 48% to the company's Total AGR, where it reported a negligible 0.2% drop. Amongst the Top-3 operators, Idea Cellular is the one to take a significant hit with it's AGR dropping by nearly 6.2% Q-o-Q. The 2 most important circles for Idea Cellular were Rest of Maharashtra and Madhya Pradesh, which together contribute around 28% of the company's Total AGR. Idea Cellular's AGR in these 2 crucial circles reported a Q-o-Q drop of 8.5% during Q2-FY'17. The No.1 & No.2 operators, Airtel & Vodafone, proved to be the most resilient to Jio's onslaught in Q2-FY'17 with a small 2.8% Q-o-Q drop in AGR.

Now all eyes will be on 3 things: 1) How does Jio's QoS (Quality of Service) progress during the Welcome Offer Period. 2) Whether Jio announces new tariff plans or Offers in December. 3) How well do Airtel, Vodafone & Idea make use of their existing or recently acquired spectrum resources in the coming 6 months in trying to combat Jio as well as each other. Jio was facing substantial Call-connectivity issues with other operators throughout September & October. But over the recent couple of weeks, the issues seem to have been considerably resolved as most users are reporting Call-connectivity within just 1 attempt. Now Jio needs to focus on improving the experience with Data service, which had taken a beating due to the huge traffic being generated from the millions of customers it added during the last 2-odd months. Some reports suggest that Jio is rolling out LTE-Advanced (Carrier Aggregation) technology on a PAN-India basis, which should help the operator in better utilising it's Spectrum resources and improve the overall Data through-puts for most users. Let's wait & watch on how successful the operator is in completing this task well before the Welcome Offer period ends. Reliance Jio can expect to see a major portion of it's Welcome Offer user base to upgrade to being Paid-users only if the operator is able to offer decent QoS both on Voice Calls as well as Data service atleast for the last 2 weeks of the Welcome Offer period.

Hero Motocorp vs Bajaj Auto vs TVS Motors

Hero Motocorp, Bajaj Auto & TVS Motors are three of the Top-4 two-wheeler manufacturers in India. {HMSI (Honda), which is now the No.2 manufacturer, isn't a listed entity and hence isn't part of this comparison.} Hero Motocorp has long been the king of Indian motorcycle market. But after it's break-up with Honda, it's dominance in the Motorcycle segment has reduced to some extent, but at the same time it is fighting back with increasing sales of it's newer Scooter models. Bajaj Auto has had mixed fortunes as well over the last few years. Until middle of 2015, Bajaj Auto was the export champion with it's export volumes almost equaling or sometimes even exceeding it's domestic volumes. But over the last year or more, there have been some disturbances in some of it's key export markets, leading to a substantial de-growth of it's monthly export volumes. This has forced the company to focus more on the domestic market to maintain overall volumes. TVS Motors was primarily famous for it's Mopeds previously. But over the last couple of decades, the company has progressed to become a full-fledged two-wheeler maker, first riding with Suzuki's collaboration and then developing it's own R&D division. Nearly 65-70% of TVS Motors' monthly volumes now comes from it's portfolio of Scooters & Motorcycles, with the balance contribution from Mopeds and 3-wheelers. In fact TVS Motors and Bajaj Auto are now fighting each other to claim the No.3 Rank in the Indian 2-wheeler market.

Coming to comparing the financials of the 3 companies, I have considered the Trailing-Twelve-Months numbers for the October to September period for the last 3 years. Let's first start with comparing the Total Income numbers:

Hero Motocorp sells on an average about 6 lakh units every month, while Bajaj Auto sells about 3 to 3.3 lakh units and TVS Motors sells about 2.2 to 2.4 lakh units. While Hero Motocorp's & TVS Motors' T-T-M Total Income figures are in line with the proportion of their monthly sales volumes, Bajaj Auto certainly has been doing better than it's monthly sales volumes. The 2 primary reasons for this outperformance are: higher proportion of 150cc & above bikes in it's sales and over 10% of it's volumes coming from 3-wheelers, which leads to higher average realisation per unit for Bajaj Auto. Hence Bajaj Auto's Total Income is about 23% lower than Hero Motocorp, despite selling about 45% less number of vehicles.

Coming to the growth posted by the 3 companies over the last 2 years, TVS Motors has been the fastest growing with 38% increase in Total Income during Oct-Sept'16 compared to Oct-Sept'14 number. During the same period Hero Motocorp has grown by 16% and Bajaj Auto at just 13%. As we can see, most of this growth by Hero Motocorp has come in the latest 12 months, when it's Scooter sales have been posting strong growth. Hero Motocorp has been launching newer products developed by it's own R&D unit. Most of them seem to be doing well, helping the company maintain & grow it's overall sales volume.

Bajaj Auto too has found decent success with it's recent launches in the 150+cc cruiser segment and is now readying to enter the 250+cc segment on it's own with Dominar series of bikes. TVS Motors continues to do well in Scooters, Motorcycles as well as Mopeds segment, all of which have helped the company post the fastest growth amongst the three players here.

Take a look at the EBITDA progress chart alongside. It becomes obvious as to who makes the most margin per rupee of turnover. Despite having Total Income 23% lower than Hero Motorcorp in the latest 12-months period, Bajaj Auto still makes about 8% higher EBITDA. Hero Motocorp has done some excellent catch-up here with near 29% increase compared to it's EBITDA numbers for last year or year before that, compared to Bajaj Auto's 20% EBITDA growth over the last 2 years. The way Hero Motocorp's EBITDA has jumped in the latest 12-months period, it suggests that parting with Honda & launching it's self-developed models has clearly helped boost margins. TVS Motors again has managed to post the fastest growth of about 64% over the last 2 years, but in absolute terms it's EBITDA number is less than one-fifth of EBITDA numbers of either of the other 2 players. That leaves a huge scope for improvement in margins for TVS Motors, but that will need increased contribution from higher cc models.

The picture on the Net Profit front is quite similar to the EBITDA chart. Bajaj Auto's Net Profit is about 17% higher than Hero Motocorp's number in the latest 12-months period. While the latter has posted a growth of 46% in 2 years, the former has posted a decent growth of 38%. TVS Motors again has posted the fastest growth in Net Profit here with 82% increase over the last 2 years, but in absolute terms it is still a small fraction of the numbers posted by the other 2 companies. Over the last 2 years, Hero Motocorp has managed to improve it's Net Profit margin from 8.6% to 10.9% (230 bps improvement), while Bajaj Auto's margin has improved from 13.6% to 16.6% (300 bps improvement). On the other hand, TVS Motors' margin has increased by just 100 bps from 3.1% to 4.1%.

Coming to valuations, at the current Market Cap levels, TVS Motors trades at 31 times it's Earnings, while the multiples for Bajaj Auto & Hero Motocorp are 18 and 17 times respectively. The higher P/E multiple commanded by TVS Motors clearly reflects that the market expects the company to continue outperforming the other 2 players in terms of growth in Profits by a substantial margin. I will update with the status on the same a few quarters later.

Suzlon Energy vs Inox Wind - T-T-M Comparison post Q2-FY17.

I had posted a T-T-M comparison report between Suzlon Energy & Inox Wind a couple of months back based on the numbers available till Q1-FY17 (Click here for that report). The situation was clearly in favour of Inox Wind at that point. Coming to Q2-FY17 numbers announced recently, Inox Wind announced came out with substantially improved performance compared to Q1, but was still short of it's Q2-FY16 numbers. On the other hand, Suzlon Energy came out with numbers that can be termed as 'stupendous', especially the EBITDA & margin numbers, which also helped the company to post healthy Cash & Net Profit numbers for the quarter. While EBITDA margins were expected to be in the 14 to 18% range, Suzlon's Q2 numbers reported an EBITDA margin of almost 23%!! Suzlon's Q2 numbers have had a terrific impact on the company's T-T-M numbers. Hence it's prudent to see how the two companies now fare at the end of Q2-FY17.

At the end of Q1-FY17, Inox Wind's T-T-M Total Income was 49.5% of Suzlon's figure, which is now down to 42.3%, because of Suzlon's much stronger Y-o-Y performance in the latest quarter. On the T-T-M EBITDA front, Inox Wind's number was 74.5% of Suzlon's number last quarter, but now it is just 46%. The huge gap in EBITDA margins of the two companies on T-T-M basis has now been closed substantially. Suzlon's T-T-M EBITDA margin now stands at around 15.5% compared to 16.8% for Inox Wind. Now the big question is whether the 23% EBITDA margin posted by Suzlon Energy for Q2-FY17 is sustainable or was it due to some one-off event. We will come to know about it only after Q3 numbers are posted.

Coming to the Interest Cost of the two companies, this is the only part where Inox Wind's figure has maintained the same percentage over the previous quarter. Inox Wind's Interest Cost continues to be just under one-tenth of Suzlon Energy's Interest Cost. Interest Cost continues to be a pain point for Suzlon Energy. With a stupendous EBITDA performance and strong Cash Profit figure during Q2-FY17, there is a possibility of the company's Interest Cost showing decreasing trend in the coming few quarters. Thanks to the sharp jump in it's EBITDA, Suzlon Energy was able to post a decent positive T-T-M PBDT number this time, bridging the gap to Inox Wind considerably. Inox Wind's PBDT continues to be higher by a good margin, but the gap is now down by more than half of what it was at the end of the previous quarter. Market Caps of the two companies continue to maintain about the same proportions compared to what it was 2 months ago.

Other factors: From the above numbers, it is quite obvious that during Q2-FY17 Suzlon Energy has clawed back a major chunk of the advantage that Inox Wind held over it. But there is one small troubling factor for Suzlon Energy. During Q2-FY17, the company's Order Book dropped by over 100 MW, from levels of 1200+ MW to around 1100 MW. On the other hand, Inox Wind's Order Book expanded from 1100+ MW to over 1300 MW. Suzlon Energy's sales team will have to work harder to keep it's production & execution teams busy in the coming few quarters. On the other hand, Inox Wind's management has continued to exude confidence of achieving a Turnover of between Rs.5000 to 5500 crores for the current fiscal, despite the fact that the company's H1-FY17 turnover is lower than that of H1-FY16 by around 25%. Inox Wind will have to post a growth of 35 to 40% during the second half of this fiscal to achieve it's targeted turnover. They have enough orders in hand and that is probably where the management is getting it's confidence from. Let's wait & watch for Q3 numbers, which should be announced in February'17.

Adani Ports & SEZ Ltd. - Stock Price finally regaining strength.

I was just going through my past reports & found that my previous post on Adani Ports & SEZ Ltd was in March'2015 (Click Here for that report). The share price of the company was trading just above the Rs.300 mark and was enjoying a P/E multiple of almost 30. I had mentioned in that report that I expect the company to post a business growth of 20% quite comfortably in coming few years. We have seen 7 quarterly results since writing that report. During this period, Adani Ports & SEZ Ltd has seen it's Trailing-Twelve-Months Total Income grow by about 36% & it's Net Profit grow by almost 60%. The business performance has clearly not disappointed. But have a look at the way Adani Ports' stock price has behaved during this period in the following chart:

From around Rs.300 levels in March'15, Adani Ports' stock went on to hit highs of around Rs.360 in August'15, but surprisingly saw a 50% erosion in price in the following six months to hit lows of around Rs.180 by February'16. I can imagine 2 possible reasons for this surprising price correction: (1) Around the end of FY'15, the Adani Group had undergone Equity Capital restructuring, where shareholding of Adani Enterprises Ltd in other group companies was cancelled and it's shareholders were directly issued shares of each of those group companies. Some of those Investors who got shares of Adani Ports in that restructuring, might not be interested in being invested in the Ports business and could have sold their stake in those 6 months period. (2) The way the leading Opposition Parties in our Political arena were repeatedly playing up Adani Group's name as being an undeserving beneficiary of Modi Government, might have made some more investors nervous during that period, leading to added selloff.

After consolidating within a range for a few months after February'16, Adani Ports' stock price has finally started regaining strength, especially post announcement of June'16 Results. Have a look at the Trailing-Twelve-Months charts of Adani Ports' financial numbers to get an idea of the company's performance:

The growth in Adani Ports' Total Income & EBITDA has been healthy, while the growth in Net Profit has been much stronger over the last few quarters, mainly because it got added boost via lowering of the company's Interest Costs. Change in Interest Cost also reflects the company's improved Cash Flows & Capital management. Going by the improving business fundamentals of Adani Ports, it was just a matter of time before the stock price started reflecting it.

As of September'16, Adani Ports' T-T-M EPS stands at Rs.16.83/-. That means at the current share price of around Rs.290/-, it is enjoying a P/E multiple of only about 17. With the kind of growth potential the company enjoys, I certainly think that Adani Ports deserves a much higher market valuation. I would be looking forward to this company's stock enjoying P/E multiples of atleast about 25 to 30, if not higher. Hence I won't be surprised to see this stock trading at around Rs.500 or higher sometime in 2017. I may not recommend selling this stock even at that price. We just need to keep monitoring it's business performance on quarterly basis.

Bharti Airtel vs Idea Cellular (India Mobile business progress comparison) post Q2-FY'17.

As we all know that Idea Cellular's business is purely it's India Mobile business, but in case of Bharti Airtel, it's business includes not just it's Mobile business in 18 countries, but also smaller India businesses like Digital TV, Home Broadband, Enterprise Solutions, etc. For Bharti Airtel, it's India Mobile business contributes nearly two-thirds of it's Consolidated Revenues and possibly a higher proportion of it's Profits. Hence the good or bad performance of it's India Mobile business does have a substantial impact on the company's overall numbers.

For my analysis, I have divided the Total Revenues (India Mobile business only) of the two companies into two parts: Data Revenues & Non-Data Revenues. The latter part will comprise about 95% of Voice business & rest from VAS like SMS, Ringtones, etc. Let's first check out the

Quarterly progress of the Non-Data Revenues. Both the companies have seen their Quarterly Non-Data Revenues hover within a range over the last 10 quarters. Idea Cellular has performed slightly better than Bharti Airtel. Idea's Sept'16 number of Rs.7420 crores is nearly 14% higher than it's Sept'14 number of Rs.6525 crores and nearly 5% higher than it's Sept'15 number of Rs.7035 crores. On the other hand, Bharti Airtel's Sept'16 number of Rs.11,158 crores is only 3% higher than it's Sept'14 number of Rs.10829 crores and nearly 3.6% higher than it's Sept'15 number of Rs.10762 crores. In Sept'14, Idea Cellular's Non-Data Revenues were about 60.3% of Bharti Airtel's corresponding number. But the same has now improved to 66.5% in Sept'16. Idea Cellular has clearly outperformed Bharti Airtel on the Voice business front over the last 2 years. Both the companies have also reported a small Q-o-Q dip in Sept'16, with Bharti Airtel's number dropping 3.2% and Idea Cellular's number dropping 2.2%. In case of Bharti Airtel, the Non-Data portion forms 75.7% of it's India Mobile business revenues, while the same for Idea Cellular forms 78.7%.

Coming to the primary growth driver of all Telecom operators across the world, i.e. Data Revenues, the developments in Sept'16 quarter have been exactly as per expectations. The steady growth that both Bharti Airtel & Idea Cellular were reporting quarter after quarter over the last

2-3 years, is clearly showing signs of coming to a screeching halt in Sept'16. I had mentioned this in my previous post on this topic. Have a look at the chart alongside. The sudden collapse of incremental growth rate was expected due to availability of Reliance Jio's Preview Offer since June-July16 and then the Welcome Offer launch on 5th September, when 4G Smartphone owners started scrambling for a Jio simcard. Let us try & check which one of the these two have done better so far. Bharti Airtel's Sept'16 Data Revenue of Rs.3577 crores is 98% higher than Sept'14 number and 23.6% higher than Sept'15 number, but only 1.4% higher Q-o-Q. On the other hand, Idea Cellular's Sept'16 Data Revenue of Rs.2009 crores is 92% higher than Sept'14 number and 19.2% higher than Sept'15 number, but only 2.2% higher Q-o-Q. Bharti Airtel has noticeably posted a little better growth in 2-years or 1-year comparison, but Idea Cellular has posted marginally better Q-o-Q growth number.

Bharti Airtel has a much wider 3G as well as 4G spectrum footprint when compared to Idea Cellular. Hence Airtel is expected to post much better Data Revenue/Volume growth. But it seems like either Airtel is not able to properly utilise it's spectrum advantage or Idea is doing much better even with 3G/4G coverage is limited circles. Let us look at how the Data Volume growth is panning out for the two operators.

Both operators have seen a stupendous surge in Data Volumes over the last many quarters. Bharti Airtel's Sept'16 Data Volume of 178.1 million GBs is 163% higher than Sept'14 number, 54.9% higher than Sept'15 number and 12.7% higher Q-o-Q. At the same time, Idea Cellular's Sept'16 Data Volume of 107.4 million GBs is 173% higher than Sept'14 number, 49.2% higher than Sept'15 number and 15.4% higher Q-o-Q. That means Idea Cellular has managed to outperform Bharti Airtel in Q-o-Q as well as 2-years comparison, but lagged only in the 1-year comparison. I find this to be a big achievement for Idea Cellular as it has a clear disadvantage when it comes to 3G/4G spectrum footprint. Bharti Airtel has been offering 3G in 21 circles on it's own spectrum, while Idea Cellular does the same in only 13 circles. Even on 4G front, Bharti Airtel has been offering the services in 15 or 16 circles for more than a year now, while Idea Cellular started rolling out it's 4G services only in December'15, that too limited to about 9 or 10 circles. Despite this spectrum holdings advantage, Bharti Airtel has not been able to report superior performance on the Wireless Data business front. At this point, I would rate Idea Cellular's overall performance to be superior to Bharti Airtel's.

Despite it's spectrum disadvantage, Idea Cellular has been very aggressive on the rollout of 3G/4G services in it's circles of strength. I had mentioned this in an earlier post on Idea Cellular in June'16. The observations that I had shared in that post are certainly the reasons behind Idea's strong performance despite spectrum disadvantage. During the recently concluded Spectrum Auctions, Idea Cellular has not just managed to strengthen it's spectrum position in the circles of importance, but also increased it's 3G/4G reach into newer circles. If Idea Cellular does manage to replicate it's success in it's strong circles (even to a small extent) in the newer circles, Bharti Airtel will have more reasons to worry. And we cannot forget Reliance Jio and Vodafone. Bharti Airtel clearly needs to buckle up and prepare for more aggressive network rollout and use it's spectrum advantage to the maximum. It has clearly failed to do so until now.

Market-shares of Car makers - How things have changed over last 1 year.

There quite a few positives for Automobile manufacturers in the current period. Firstly the Rainfall has been good this year, which has infused optimism in the overall economic atmosphere in the country. Secondly, the Govt. has announced 7th Pay Commission for it's employees & people are again set to get healthy arrears. Even Ex-servicemen are getting their OROP arrears this year. Add to all this, the prime festive period of Navaratri to Diwali has arrived a couple of weeks early this year, compared to last year.

Most of the leading 2-wheeler makers have been reporting over 20% Y-o-Y Growth in dispatches since the last few months. The Car makers too have seen Total Sales increase by nearly 18% Y-o-Y in the recently-ended Q2 of current fiscal, after reporting single-digit growth in Q1. In order to understand who all have Gained & who all have Lost in the race for Market-share over the last 1 year, I have arranged the Quarterly

Market-share Data of all Car Makers in India (Excluding the Luxury Car Makers). There have been quite a few Surprises & changes in market-share Rankings over the last 1 year. The most prominent one being the rise of Renault-Nissan Alliance moving up from No.9 position in Q2 of last fiscal to No.4 position in Q2 of current fiscal. The primary reason for this rise has been the stupendous success of Renault's small car KWID, which was launched around the end of September'2015. The KWID helped increase Renault-Nissan's market share from under 2% in Q2-FY'16 to around 4.70% in the following quarter. And the market-share has kept improving with every passing quarter till now. Renault's KWID got some assistance from Datsun's Redigo in the recent few months. It will be interesting to see if Renault-Nissan Alliance is able to build on this 12-months of success and progress towards being a strong No.3 player in the Indian Car Market.

The next big surprise is Maruti-Suzuki's Sales resilience. Despite all the incremental competition from Renault-Nissan or Ford or Hyundai or Tata or others, Maruti Suzuki has seen it's market-share remain steady around the 47-48% range. It's Q2-FY'17 market-share being slightly higher than Q2-FY'16 suggests that Maruti-Suzuki managed to grow it's Sales during the period slightly faster than Industry growth. Yes, it's ALTO model did take some hit from KWID, but the drop in volumes was just about 10% or so. This was more than compensated by success achieved by Maruti Suzuki's new launches of the BALENO and the VITARA BREZZA and also the CIAZ. All these three models are near the upper-end of Maruti-Suzuki's model portfolio and hence their success means a lot more to the company than the small drop in sales of it's ALTO model. Both the BALENO and the BREZZA are currently commanding a waiting period of almost 3 to 5 months, which is making the company even more desperate to see Suzuki's Gujarat plant being commissioned, which is expected to happen sometime in 2017.

The next surprise is Honda's struggle for Volumes, which started in November'2015. Since then the company has been saying that it has slowed down dispatches of Diesel versions of it's Car models as there has been an inventory pile-up at dealer level due to slower demand for the same. But it's been nearly 11 months since then and Honda's volumes are still nowhere near normal, though there has been slight recovery in numbers due to BRV launch a few months ago. Honda reported a 28% Y-o-Y drop in volumes during Q1 of this fiscal, which was followed by about 18% Y-o-Y drop in volumes in Q2. This massive under-performance resulted in Honda's quarterly market-share dropping by nearly 250 bps in Q2 of this fiscal, compared to a year-ago period. Honda lost it's No.3 position during this period and is now at No.5, which too is under threat from a resurging Tata Motors.

The next point is Mahindra & Mahindra's lacklustre show despite several new potentially volume-generating launches over the last 12 months. M&M's market-share improved from 7.2% in Q2-FY'16 to 9.45% in Q4-FY'16, primarily on the back of 2 new launches in the Compact SUV space: the TUV300 and the KUV100. But both these models have failed to hold volumes beyond the initial couple of months, despite good marketing & promotional support. The NuvoSport, which was introduced later, was an even bigger dud in terms of volumes. M&M will again be pinning it's hopes on the refreshed & slightly-shorter version of the BOLERO to bring increased volumes for the company. Since the BOLERO now confirms to the Compact segment restrictions, it is cheaper by nearly Rs.1 lakh compared to the previous model. Hence it is now even better value-for-money than before and hence has good chances of being successful. M&M has managed to grab & hold the No.3 position since Q3-FY'16, but it needs to do better to continue holding the rank.

Coming to rest of the car makers, the No.2 Rank holder Hyundai has done a fine job through most of the year, but posted slower growth in latest quarter, resulting in slight erosion in market-share. Seems like Hyundai's ELITE i20 and the CRETA models are losing some steam in the face of increased competition. Tata Motors too has finally found success with it's TIAGO model, which is currently commanding a waiting-period of 2 to 3 months. The company is ramping up production at a measured pace and hence we haven't seen it's volumes shoot up suddenly. At the same time Tata Motors has another 2 to 3 new models lined up for launch, spread over the next 12 months, which should boost the company's image as well as market position in the coming quarters. Toyota continues to remain dependent on it's INNOVA model for volumes & market-share, which has remained more or less steady, even after the launch of the new generation INNOVA. The company has also refreshed the ETIOS siblings with a hope of finding more volumes.

Ford and Volkswagen have also gone nowhere in terms of market-share over the year. Ford did launch it's brand new Compact Sedan the ASPIRE and the new generation FIGO late last year. Everyone expected Ford to improve it's market-share with these new models. But it's been a big surprise to see both these capable models to do lacklustre volumes, while Ford's ECOSPORT continues to generate decent monthly volumes, despite increased competition in the Compact SUV space. Volkswagen group has only recently got slightly ambitious for increased domestic volumes.Volkswagen worked on it's POLO/VENTO platform and has introduced the AMEO compact sedan recently, which it hopes will help boost it's volumes to some extent. The result for the same is yet to be seen.

Tata Consultancy Services Ltd. - Growth & Valuation update.

It's been about 18 months since I had previously written about Tata Consultancy Services Ltd. (TCS). [Click here for that post.] At that time the TCS stock was trading around Rs.2600/-, enjoying a P/E ratio of about 24, but the company's financial numbers were just starting to show some initial signs of slowing growth. Hence I had shared my opinion that the company's valuation could cool down a bit with the stock either trading within a range for extended period or even experience some correction. It's been 18 months since that post and I am happy to have been proven right (Luckily!!). During this period, the TCS' stock has spent most of it's time within the Rs.2200 to 2700 range and is currently around the Rs.2400 level. This is a very healthy correction in Valuation, which is more time-based correction rather than a price-based one.

Now let's quickly look at the way the company's Financial performance has progressed over the last 3 years. The chart alongside shows the progress made by TCS' T-T-M Total Income numbers over the last 3 years and the corresponding Y-o-Y Growth rates. First let's look at the T-T-M Total Income numbers. Between June'13 to Dec'14, TCS' T-T-M Total Income figure kept increasing by about Rs.4500 crores Q-o-Q on an average, whereas the Average incremental Q-o-Q increase between Dec'14 and Jun'16 has dropped to about Rs.3500 crores. Larger incremental increase on a smaller base during the earlier period meant faster growth rate and Smaller incremental increase on a larger base during the latter period meant a much slower growth rate. This is clearly reflected in the Y-o-Y Total Income Growth % Chart above. The Growth rate peaked at just above 30% in June'14, then collapsed over the next few quarters and has now stabilised around the 14% level. For a company the size of TCS, with employee base of over 3,50,000 and Annual Revenues in excess of Rs.1,15,000 crores now, managing a consistent double-digit growth in Revenues, itself is a pretty good achievement. Hence I would be happy if TCS continues to post Y-o-Y Growth of somewhere around 15% even in the future. Anything more & it will be considered a bonus.

Coming to Profitability, TCS had seen a sharp dip in profit margins during the March'15 quarter, primarily due to provisioning made towards expenses incurred during Chennai Floods. TCS not just a took some hit due to damage to it's own property and loss of several working hours, but also helped it's employees financially to relocate/repair their homes. The extra expense of around Rs.2000 to 2200 crores during the March'15 quarter, clearly reflects in the drop in T-T-M EBITDA and T-T-M EPS of the company in the charts alongside. But both the parameters are back on growth path after a couple of dull quarters. The T-T-M EBITDA of TCS is about to cross the Rs.35,000 crores mark and the T-T-M Net Profit is about to cross the Rs.25,000 crores mark during the current quarter (most probably). Currently TCS is the 2nd largest Indian company in terms of Annual Net Profit, but is expected to take back the crown by the end of this fiscal as the current No.1, Reliance Industries Ltd., is expected to take some hit on it's Consolidated Net Profit due to the launch of it's Telecom venture.

Valuations: The T-T-M EPS for Tata Consultancy Services Ltd. currently stands at Rs.126/-. That means at the current price of about Rs.2400/-, the share trades at about 19 times it's EPS. I am expecting TCS to post growth rates in the region of 12 to 15% for the next few quarters. Hence I would expect it's Fair Value to lie between 15 to 18 times it's EPS. That means at 19 times it's T-T-M EPS, the stock isn't much above it's Fair Value and seems to have completed most of it's correction. Going forward I would expect TCS' share price to move in tandem with it's growth in Total Income & Net Profit. If the company's growth remains more-or-less within my expected range, then I don't expect the stock to get re-rated upwards or downwards anymore. I would put a 1-year price target of around Rs.2700-2750 on TCS. Let's see if the growth numbers do spring a positive or negative surprise in the next few quarters.

All-Out War for Wireless Data traffic now begins!!

As per Quarterly Reports presented by Bharti Airtel & Idea Cellular post June'16 Result announcements, the No. 1 & No. 3 operator were carrying approximately 60 million GBs and 35 million GBs respectively on a monthly basis. At an average realisation rate of about Rs.220 per GB, it translated into a monthly revenue of about Rs.1300-1350 crores for Bharti Airtel and about Rs.750-800 crores for Idea Cellular.

Reliance Jio entered the scene in the second half of the June quarter, when it started issuing a Jio Sim with 90-days Preview Offer alongwith all LYF handsets. By June-end, Jio had activated an additional about 1 million Sim cards under this offer, taking it's active user base to 1.5 million. The average usage of these 1.5 million users was said to be about 1 GB per day!! That means Reliance Jio's network must have carried approximately 35 to 45 million GBs of Data during the month of June'16, making it the 2nd largest Wireless Data carrier in India at that point of time. And this was just the start. Reliance Jio is expected to have added another 1 million users in the month of July'16 under the LYF-bundled Preview Offer. It's Data traffic must have been in the region of 70 to 80 million GBs for July'16, making it the No. 1 Wireless Data operator in India in terms of Traffic alone. Theoretically, Jio wasn't making any money from this traffic as it was all Free for the buyers of LYF handsets. In the 2nd fortnight of August'16, Reliance Jio opened the floodgates by allowing other 4G handset owners to also receive a Jio Sim with the 90-days Preview Offer.

By the end of August'16, the active user base on Jio's network is expected to have touched close to 5 million with a monthly Data Traffic in excess of 150 million GBs, more than double that of Airtel's expected Data traffic number for the month. It is highly unlikely that existing operators like Bharti Airtel & Idea Cellular or anyone else, must have seen any significant growth in monthly Data Volumes during the current quarter, i.e. Sept'16 quarter. A small portion of the heavy Data users had already bought the LYF handset and were enjoying the Unlimited Data benefits on Jio network. The massive rush for Jio Sims, which started in the last week of August, has continued in September after the Chairman of RIL announced full scale launch from 5th September with Welcome Offer where all users will be eligible to get 4GB per day of 4G Data & Unlimited Voice Calls & SMS till 31st December'16. Reliance Jio's user base is expected to touch around 15 million by the end of Sept'16 with a monthly Data Volume of around 250 million GBs

How is the Competition reacting to Reliance Jio's aggressive Usage growth?

With Reliance Jio zooming past all the existing operators in terms of Network Traffic numbers, it was just obvious that all the existing operators will feel varying degrees of pain. At least 10 to 20% of Traffic on Jio's network must have directly come from competitors' traffic numbers (remaining 80-90% volume was either Splurge usage or replacing Broadband/Cablenet traffic, as everything was Free on Jio's network). Before Jio came in, monthly Wireless Data volume on 2G/3G/4G networks must have been in the region of 150 million GBs and it was growing at a pace of 3 to 5% M-o-M. That means incremental growth in Volume of about 5 to 10 million GBs. That means Jio must have gulped down not just the incremental Volume, but a small portion of existing volume number too, by now. The existing operators must have detected exhaustion of growth in Data volumes in July itself. Hence their first step towards protecting volumes came around end of July in terms of increasing Data limits on packs of denomination higher than Rs.300 or 350. Where they were earlier offering 2 GB Data limit, it was revised to 3 GB and in the regular 3 GB Data pack, the limit was raised to 5 GB, and then 10 GB 3G/4G Data pack was now priced just under Rs.1000/-, which was earlier costing anywhere between Rs.1300 to 1800. 

This step might have helped retain Data volumes for some time. But after Jio unleashed the Sim card eligibility to almost all 4G handset owners in the last week of August, leading players like Bharti Airtel & Idea Cellular, who both had reasonably large 4G network in place, had to take the second step. Both of them announced something like the Mega Saver Pack costing around Rs.1498/- by the end of August, which came with upfront 1 GB Data limit & gave the subscriber the eligibility to get 1 GB/ 2 GB/ 5 GB recharges at highly discounted rates of about Rs.51/ 101 / 251, any number of times over a 12 months period. Seems like this Mega Saver pack wasn't helping these operators in arresting fall in Data Volumes much, as people across all major cities & towns continued thronging Reliance Digital stores to grab a Jio Sim at the earliest. Both Airtel & Idea further sweetened the Mega Saver pack by hiking the upfront Data limit to 6 GB, just 2 weeks after announcing the packs around August-end. Seems like this too wasn't helping the operators much as today Bharti Airtel is said to have announced another pack priced at Rs.1495, which will give the customer 30 GB of 4G Data with 90 days validity, bringing the effective Data rate to just Rs.50 per GB. This pack is said to be available in Delhi from today & will be rolled out to other circles over the next few days. I won't be surprised if Idea & Vodafone too follow Airtel in announcing a similar pack in the coming few days.

My View: 

Reliance Jio's offer includes both Free Data & Free Calling and SMS till the end of this year. This is kind of a double-whammy for all existing operators as a major usage shift of existing mobile users to Jio's network will start pulling down the former's revenues. Hence the Top-3 operators have undertaken a 2-pronged strategy to counter this: 1st is to try & spoil Reliance Jio's name as much as possible as far as Voice calling is concerned. Reliance Jio has been crying foul since even before it's commercial launch that Airtel, Vodafone & Idea have been deliberately not giving enough Points of Interconnect to enable smooth transfer of Calls from Jio to their networks & vice-versa. This might have been one reason why Jio was forced to announce Commercial operations from 5th September, coupled with Welcome Offer of Free usage to it's subscribers till year end. After announcement of Commercial operations, Jio must have signed requisite Interconnect agreements with each operator & started paying IUC @ 14 paise per min for each outgoing call to other operator. At the same time, the other operators will have to provide enough Points of Interconnect in line with increase in Call traffic between them. It's been close to 3-weeks since Jio's commercial operations have started, but the Voice calling to other operators, especially the Top-3 ones, is still not anywhere near smooth. 

Reliance Jio has been desperately pushing each of the other operators for enabling more PoIs at the earliest. But the more they delay it, the more damage will be inflicted on Jio's brand image and better their chances of retaining their customers. But this can't go on for long & very soon we will see a substantial improvement in Voice Calling from Jio numbers to those of other operators. Jio will try to streamline all their Voice Calling operations well before the Welcome Offer period ends. If Jio's active customers do get a good Voice Calling experience for atleast the last 3 to 4 weeks during this Free period, then there is a higher probability of these customers getting converted into Paying customers from 1st January'17. And once the word spreads that Voice Calling is also now normal from Jio network, many people will start thinking of porting their primary mobile numbers too.

The 2nd part of the strategy adopted by existing operators is to try & offer higher Data limits for higher denomination packs. By doing this they are trying to maintain some minimum level of Average Monthly Revenues, even though the Data Volume might get a big boost. Look at the Mega Saver pack for example. If a customer does recharge with Rs.1498, he gets 6 GB 3G/4G Data upfront with 12 months validity. This ensures an ARPU of about Rs.125/month to the operator. Suppose this customer needs atleast 5 GB of Data per month, that means he will be consuming about 60 GB in a year. That means he will need to do a recharge of Rs.251 or 252 every month from the 2nd month onwards. That means the operator will receive a total revenue of about Rs.4200 to 4300 (1498 + 2770 approx.) from this customer over the year, translating into a monthly ARPU of around Rs.350/-, which is a decent number. The other pack that Bharti Airtel announced today, which offers 30 GB of 4G Data for 90 days at Rs.1495, is again aimed to ensure around Rs.500 per month in ARPU for the operator. This pack will most probably be a limited period offer as it is an attempt to retain High Usage customers from shifting their usage to Jio. 

But the big question is: How successful will all these moves be to ensure minimum loss of revenues for all these operators for Sept & Dec quarters? 

I think all these existing operators who have millions & millions of subscribers on their 2G/3G/4G networks, will not lose much of their Voice revenues, atleast during the Sept quarter, because of 2 reasons: 1) Jio is expected to enroll just about 15 million users by Sept-end, which is just about 1.5% of the total active subscriber base; 2) Voice Calling experience on Jio is still not smooth, though it is expected to improve in the next few weeks. The existing operators will certainly lose some portion of their Voice Revenues during December quarter as Jio's user base is expected to expand from 15 million to well over 50 million over the 3-months period. And the Voice Calling experience should be much better during most part of the December quarter. I am estimating a drop in Voice Revenues to the tune of 3 to 8% across all existing operators. The drop in Outgoing Calls volume could be larger than drop in Revenues, but all these operators are expected to be Net-receivers of IUC from Reliance Jio as Calls from Jio to their networks are expected to remain 5 to 10 times higher than calls in the reverse direction, atleast in the initial few quarters. Gradually this multiple could come down to about 2-3 times over the next 1 or 2 years.

Coming to Data Revenues, this is where the impact will be much bigger on all existing operators. As of June'16-end nearly 70% of the Total Wireless Data traffic & 95% of the incremental traffic was from 3G/4G customers. Bharti Airtel had about 36 million & Idea Cellular had about 27 million 3G/4G Data customers at the end of June quarter. That means the Total 3G/4G Data customers in India should be around 100 to 110 million by the end of June'16. Out of this number, nearly half of them are expected to have a 4G handset, making them a potential customer for Reliance Jio. Apart from that, nearly 8 to 10 million new Smartphones are sold in India every month and most of them now are expected to be 4G compatible phones. That means Reliance Jio's potential customers are growing in numbers at a rapid pace. By the end of December'16, the number of 4G handsets in India could be crossing the 100 million mark and there could potentially be a Reliance Jio Sim card in half of those. Since Reliance Jio is offering all it's services Free of charge till December-end, almost all the 4G handset owners would like to try their services. So it's a matter of how many enrollments Reliance Jio is able to handle over these 3 to 4 months. I am estimating that Reliance Jio could be able to activate anywhere between 10 to 15 million Sim cards every month, which should translate into a User base of between 50 to 60 million by end of December'16. Even if this turns out to be true, then Reliance Jio could possibly become the largest Wireless Broadband player in India (in terms of Subscribers too) even before the end of this year. This will certainly have a serious impact on the Data Volumes of all existing 3G/4G operators in the country.

The existing operators are already seeing a substantial portion of their 3G/4G customers shifting their usage to Reliance Jio and hence are being forced to offer increased Data limits to their customers in order to try & retain as many Data Consuming users as possible. This action will help them in somehow maintaining the overall Data volumes on their networks, but it will certainly pull down the Net realised rate per GB of Data. I am expecting the June-quarter average rate of about Rs.220 per GB to fall to around Rs.180-190 per GB for September-quarter and to a level of below Rs.150 per GB for December-quarter. That means the Average rate per GB is expected to fall by about 30-35% over these 2 quarters. Hence in order to maintain Data revenues at same level as June-quarter, these operators will need to ensure a Data volume growth of around 30-35% over these 2 quarters, which I think will be very difficult to manage on the face of Free Usage offer from Reliance Jio during this period under consideration.

But things could be a bit different from January onwards. The Top-3 operators, who are continuously expanding their 4G network coverage currently, could recover a part of the Data Traffic market share lost during the Sept & December quarters, as Reliance Jio users will also need to pay to use their services. I have already shared my opinion on the Tariff Plans announced by Reliance Jio earlier this month. Click here for that post. Those tariff plans are more suited only to certain categories of users, like the ones who talk a lot and those who live in urban areas & have regular access to Jionet WiFi services. Those plans are clearly not suited to those who were looking for pure 4G Data packs. Unless Reliance Jio tweaks those tariff plans or introduces new pure 4G-Data packs, it is bound to lose a substantial chunk of it's user base post 1st January'17. Reliance Jio will certainly consider the traffic flow on it's networks for a couple of weeks post 1st January'17 and can then easily introduce new Data packs to bring back the users who had stopped using their services due to lack of suitability.

All in all......this massive competition amongst the incumbents & Reliance Jio for increasing Wireless Data traffic is currently benefiting the Data customers tremendously. India's Wireless Data volumes could be hitting a record high during the Oct to Dec'16 quarter, which might remain a record even for another year or more. This is Bonanza period for Customers, but equally a painful period for Shareholders of all these Telecom companies. 'Survival of the Fittest' will be tested in this sector over the next few quarters.