Telecom Analysis - June Quarter AGR Numbers

August'2016 has been an action-packed month for the Telecom industry. Mainly because Jio's activities have built up quite a bit of pace, which has got all the existing operators running for cover & fire their own ammunition. After bundling a Jio 4G Sim with every LYF handset sold (with 90 days of Preview Offer) from the month of May'16, which picked up considerable pace only in June and July, Reliance Industries started offering the Preview Offer Sim cards to anyone with a compatible 4G handset from a huge list of manufacturers in the second half of August. Reliance Jio was expected to have activated over 3 million 4G Sim cards under 'Test' by the end of July'16, but the mad rush over the last 2 weeks must have helped it double the Active Sim Cards number by the end of August'16. With so many users eligible to use Free 4G Data and even Voice Calls (to some extent) for a period of 90 days, it is bound to impact the Revenue numbers of all existing operators for the September quarter.

TRAI recently declared the Operatorwise & Circlewise Revenue numbers for June'16 quarter. This is probably the last quarter before Reliance Jio starts making a noticeable impact on numbers for all other existing operators. Hence it becomes important to see which operators have gained pace just before the real war begins. In my analysis here, I have considered the Circlewise Adjusted Gross Revenues for all operators. (RCom has not declared it's numbers for June'16. Hence I have considered a 3% drop from it's respective March'16 numbers, just to get some approximate value. In any case RCom forms just about 3.3% of the Industry's AGR. Hence it's not going to impact the actual numbers much.)

The AGR numbers for the entire industry has posted a Q-o-Q growth of around 1.3%. As expected the Top-3 operators have managed to grow at a better rate with Airtel leading the growth charts, followed by Vodafone (surprisingly) & then Idea. Tata Tele and Telenor too have posted marginal Q-o-Q growth, while Aircel has posted a marginal drop. The biggest shocker came from BSNL/MTNL combine. It's AGR numbers are down by nearly 19-20% Q-o-Q, after having posted a strong 10+% growth in March'16 quarter. It seems as if BSNL/MTNL booked some advance revenues during March'16 quarter in order to make the numbers for the previous fiscal look good. Will be interesting to see the numbers & market share BSNL/MTNL manage to post for Sept'16 quarter. BSNL was the first to announce super-aggressive 3G tariffs offering 10 GB Data for just Rs.549/- and Unlimited (No FUP) Data for Rs.1099/-. These tariffs have become applicable from 25th August.

Metro Circles: Thanks to the massive fall reported by BSNL/MTNL, all other operators have seen their market share jump up Q-o-Q. Vodafone continues to lead here with over 34% market share & a healthy growth number too. But Airtel clearly seems to be catching up with stronger growth. Both Airtel & Vodafone are offering 3G as well as 4G service in Mumbai, Delhi & Kolkata circles. Idea is clearly losing this race, first by being a late entrant and now because of inability to offer 4G in all the 3 circles and No 3G in Mumbai circle. Surprisingly Tata Tele has managed to post marginal growth despite offering only CDMA services in Delhi and only 2G GSM services in Mumbai & Kolkata circles. It's Wireline business seems to helping it here. But still it's commendable to see Tata Tele fighting for the 3rd spot in the Metro Circles category with No 3G or 4G service.

Category-A Circles: Despite substantial fall reported by both BSNL and Telenor, the AGR for Category-A Circles has posted a 1.2% growth. Airtel has extended it's market share lead with fastest growth rate. Airtel now commands a third of the revenues in this category, a full 140 bps improvement over March'16 number. Vodafone & Idea too have seen 50 bps and 20 bps improvements. Vodafone growing faster than Idea in Category-A surprised me. I was expecting Idea to do better as it had 4G presence in more circles in this Category than Vodafone. Let's see if things change in the current quarter. Tata Tele has again done a decent job here. Telenor's performance in Maharashtra & Gujarat circles was quite disappointing in June quarter.

Category-B Circles: This category has proved to be the fastest growing one during the June'16 quarter. Airtel has posted a super-strong near 10% Q-o-Q growth in AGR, but is still in the 2nd spot in this category. Idea continues to lead in this category despite a lacklustre 1.7% growth. While Idea lost 80 bps in market share, Airtel has gained 140 bps, thus bridging the gap considerably. Vodafone & Telenor too managed to post healthy growth rates in this category, which helped them enhance their market shares by a small extent. Vodafone again managing to outpace Idea's growth even in this category is really commendable. It will be interesting to see if Vodafone can manage to hold on to this momentum in the coming quarters. Telenor's UP(E) & (W) circles continue to do well and the operator is now comfortably placed at the 4th spot in these 2 circles with near 9% market share.

Category-C Circles: Airtel has taken another big leap here and is just a fraction away from the 50% market share mark. The rest of the 6 operators have managed to hold on to just over 50% of the market in this category. Vodafone, Idea, Aircel and Telenor have all posted decent growth and have also managed to inch up their market shares, all at the expense of BSNL. Another interesting point is: Telenor, which operates only in Bihar circle in this category, is now about 3 times bigger than Tata Tele in that circle, despite being a very late entrant. Telenor now commands a respectable 7.3% market share in Bihar circle. This is the only category where Aircel has managed to post some decent growth in AGRs. Tata Tele is the smallest operator here and may seriously look to close down it's operations in these circles in the near future.

Summary:

Airtel has clearly gained good momentum in June'16 quarter and is seriously pitching itself for some tough competition with RelJio. The announcement of the 'Mega Saver' pack earlier this week was one big step in that direction. Each of the existing operators is going to get hurt due to RelJio's services, but Airtel will clearly be hurt the least. It will be very interesting to see how Airtel's 2G+3G+4G operations across almost all 22 circles will fare against RelJio's pure 4G operations across all 22 circles. With aggressive Data packs, Airtel is trying it's best to retain it's Data subscribers. But RelJio is not looking at just Data subscribers, who are mainly focused in Urban & Semi-urban locations. RelJio is pretty serious about Voice Calls business too and hence has already built excellent 4G coverage even in Rural and remote areas.

I am expecting RelJio to grab the No.5 spot in terms of AGRs within 6 months of launch. RelJio is already having over 6 million active users on it's networks and it could easily be having around 20 to 25 million users by the times it completes 6 months of Commercial operations. With ARPU expected to be a minimum of Rs.300, RelJio could be generating quarterly Revenues of over Rs.2000 crores by then. But while doing so RelJio is expected to put a bigger hole in the combined AGRs of the rest of the operators as the over-competitive environment will bring down tariffs in a knee-jerk manner, while the increase in usage will happen only over a period of time.

As of now all eyes are set on RIL's AGM tomorrow, i.e. 1st September, when everyone is expecting to hear a definite date of RelJio's Commercial launch. My hunch is that it is not very far from now. Possibly well before the end of September'16.

Idea Cellular & Bharti Airtel's Data consumption & Data Revenues progress

There was virtually no impact on the India (wireless) businesses of Bharti Airtel & Idea Cellular from waiting-in-the-wings operator Reliance Jio until the end of March'2016. Till that point Reliance Jio had offered sim cards only to it's employees & some business partners, totaling just about half a million in number. But in the month of May'2016, Reliance Jio opened the gates for outsiders to also get an opportunity to use their 4G services via the Preview Offer, where a customer buying a LYF handset (in-house brand) would get a complimentary Jio sim card with 90 days of Unlimited usage of Data, Calling & SMS. The news of the availability of Preview Offer started spreading and by the first half of June'16, thousands of heavy Data consumers across the country were buying the LYF handsets everyday, purely to enjoy unlimited 4G service for 90 days. It is expected that Reliance Jio enrolled about 1 million 4G customers in the month of June alone and July to be better. By now we are seeing Jio's signboards even in all small towns and even many villages along the highways. The operator seems to be almost ready for a commercial launch now.

Coming back of Bharti Airtel & Idea Cellular, their June-Quarter results have thrown up many important signals of things to come. (In this analysis I have focused only on the India Wireless Data business of the two operators.) These signals are not surprising at all as I have been saying it since last year that All Existing Operators will take substantial hit because of Reliance Jio's entry into the market. We just have to

keep an eye on how efficiently each operator is facing the competition. Let's start with growth in 3G/4G Data subscriber base of the 2 operators:

Bharti Airtel's 3G/4G subscriber base was just 7.4 million in Sept'13, which has now increased to 36.6 million by June'16, that means an addition of 29.2 million subscribers in 11 quarters at an average of 2.65 million per quarter. The Dec'15 quarter was the best for the company when it added 7 million new users in this category, followed by addition of another 4.6 million in March'16 quarter. But Airtel has quickly lost all momentum with addition of a paltry 1.1 million Wireless Broadband (3G/4G) subscribers in June'16 quarter. Idea Cellular has had a much more linear growth even in the recent quarters. It's 3G/4G subscriber base has increased from just about 5 million in Sept.'13 to 27 million in June'16, that means an addition of 22 million users in 11 months at an average of 2 million per quarter. And June'16 proved to be it's best quarter here when it added 3.4 million Wireless Broadband users. Out of these 3.4 million new users that Idea Cellular added, about 1.1 million were on the 4G network, after having added about 0.7 million 4G users in March'16 quarter. That means the aggressive rollout of 4G network in 10 circles, where Idea holds 4G compatible spectrum, seems to be helping the company add more users than it's larger competitor, which now has 4G compatible spectrum across all 22 circles of the country. After the recent acquisitions of Videocon's 1800 MHz and Aircel's 2300 MHz spectrum in nearly a dozen circles, Airtel now becomes the only operator other than Reliance Jio to hold a pan-India 4G compatible spectrum in either 2300 MHz or 1800 MHz bands or both (in a few circles). Now a lot depends on how quickly it manages to roll out 4G networks using these spectrum bands and also the quality of it's coverage. Idea Cellular has done a superb job of 4G network rollout in several cities & towns in the 10 circles that was possible to the operator.

Strong subscriber addition number for Wireless Broadband services in a particular quarter not just has an impact on the Data consumption

in that quarter, but also has a spillover effect in the following quarter. Have a look at the chart alongside. The Quarterly Data consumption on Bharti Airtel's networks (2G/3G/4G) has multiplied four & half times in the last 11 quarters from about 34 million GBs in Sept'13  to about 158 million GBs in June'16. Nearly 90% of this growth has been propelled by the proliferation of 3G networks initially and 4G networks in the recent couple of quarters. The situation is even better with Idea Cellular, which has seen it's Quarterly Data consumption on it's networks to multiply five & half times over the last 11 quarters. It was just about 17 million GBs then, which has now reached 93 million GBs. Idea's Data consumption number had posted an extremely weak growth in March'16 quarter on the back of nearly 10% Q-o-Q drop in 2G Data volume and a relatively slow 7.5% growth in 3G/4G Data volume. But the operator has bounced back smartly with over 16% Q-o-Q growth in 3G/4G Data volumes and over 13% growth overall in June'16. That is a big outperformance over Bharti Airtel's volume growth of under 8% in June'16. Out of the most recent 9 quarters, Idea Cellular has managed to post better Q-o-Q Data volume growth than Bharti Airtel in 5 quarters. With wider 3G & 4G coverage across all 22 circles, Bharti Airtel is certainly expected to do better than Idea Cellular in both subscriber additions as well as Data Volume growth. But it seems Idea Cellular is not going to take it lying down with superior performance in the 17 circles where it holds either a 3G license or a 4G license or both. This fight will be very interesting in the coming quarters. Both operators have recently announced substantially higher usage limits on existing Data plans, which is probably the initial steps to counter the pressure being felt from Jio's Preview Offer. We could see more upward revisions in the usage limits in the coming few weeks as the pressure keeps piling up as Jio's commercial launch gets nearer. This is the only way that the existing operators can try & maintain it's Data Volume growth.

Both Bharti Airtel & Idea Cellular have seen their Quarterly Data Revenues multiplying about three and half times over the last 11 quarters. With Reliance Jio effect expected to start kicking in from Sept.'16 quarter onwards, it will be interesting to see how long do these operators manage to continue posting growth in their Quarterly Data revenues. Frankly I am expecting almost all existing operators to report Q-o-Q drop in Data revenues over the initial couple of quarters of full-scale commercial launch by Reliance Jio, though of varying degrees. The drops experienced by each operator will depend on how well these operators are able to offer Good Quality of service at not-so-expensive tariffs compared to Reliance Jio.

I am expecting the Drops to be more severe for smaller operators like Aircel, Tata Tele & Uninor, who offer 3G or 3G-like services in very limited number of circles. Amongst the biggies, Vodafone is expected to take the biggest hit mainly because of it's limited 4G presence currently. Vodafone is expected to be the most aggressive participant in the upcoming Spectrum Auctions scheduled to start on 29th September'16. Both Idea Cellular & Bharti Airtel are a little better placed at the moment, but both of them will still experience some bit of drop in Revenues. Reliance Jio's 4G coverage across the country is expected to be currently way superior to 3G/4G coverage of any of the existing operators. Data Speeds on Reliance Jio's 4G network may not be the best at all locations, but it will certainly be better than 3G speeds offered by any of the existing operators, and priced much more aggressively. Apart from Data speeds, Reliance Jio is expected to offer Free Jio-to-Jio VoLTE calling across the country, bundled with it's Data packs. That means the existing operators have not just the Wireless Data business to worry about, but even it's bread-and-butter Voice business too.

Let's see how Reliance Jio's commercial launch unfolds (hopefully in this quarter) and how the Sept.'16 quarterly numbers turn out for Bharti Airtel & Idea Cellular.

Inox Wind Ltd. - The numbers say it all.

Inox Wind Ltd., which is a subsidiary of Gujarat Fluorochemicals Ltd., and is in the business of manufacturing & setting up of Wind Mills for it's clients, came out with an IPO in March'2015. During the IPO the shares of the company were issued at a price of Rs.325/- and the IPO was oversubscribed nearly 18-20 times. The shares started trading on NSE & BSE in April'2015 and the price hovered around the Rs.400 to 470 range for the initial few months. Inox Wind had reported an EPS of Rs.13.36 for FY'2015, which means the then share price enjoyed a P/E Ratio of over 30. The high P/E Ratio was perfectly fine considering the fact that the company was in a rapid growth phase having grown it's Total Income by over 70% and more than doubled it's Net Profit over FY'2014 numbers. But surprisingly the share price of Inox Wind has been on a steady decline since July'2015. Have a look at the price chart below:

We can see that after hitting a level of around Rs.470 in July'2015, Inox Wind's share dropped on a regular basis to hit a low of around around Rs.215 in the month of Feb-March'2016. Since then it has spent most of it's time in the Rs.220 to 250 range.

The reason why I am surprised with this kind of stock price movement is the fact that the company has done exceptionally well on the business growth front. Inox Wind did face severe capacity constraints during most part of FY'2016. But the company did manage to commission substantial additional capacity during the last quarter of FY'2016, which enabled it to post near 100% growth in Total Income and nearly 75% growth in Net Profit for Q4-FY'16. For the Full Year too, Inox Wind did very well with 64% growth in Total Income and 52% growth in Net Profit. Have a look at the charts alongside:

The charts show the Trailing-Twelve-Months progress made by Inox Wind between March'2014 and March'2016. The effect of the expanded capacity is clearly visible in the charts in terms of a notable spike in Total Income, EBITDA and Net Profit during March'16. The company too has managed to keep it's Debt under control and the Interest/EBITDA % number is proof of the same. The company's Interest Cost has remained well under 15% of it's EBITDA and now with the expanded capacity, it could drop even more.

The company is also sitting on substantial Order Book, which should keep it completely busy for the next 4-5 quarters, even if no new orders flow in. The good order book size alongwith fresh capacity should help the company post another good growth number for the current fiscal as well. My conservative expectations are that Inox Wind should be able to post a Total Income growth in excess of 25% for FY'2017 with a similar figure for the Net Profit.

Coming to Valuations, Inox Wind posted an EPS of Rs.20.36 for FY'2016. That means at the current share price of under Rs.220/-, Inox Wind trades at less than 11 times it's T-T-M EPS. This is pathetically low valuations for a profit-making company in the Renewable Energy space with substantial future business potential in a country which has set very aggressive targets to achieve for Renewable Energy production in the coming years. I think this is one Buy-and-Forget kind of stock with a 3 to 5 years view, especially at the current valuations.

[ Click here for Quarterly & T-T-M Results sheet of Inox Wind Ltd. ]