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.

Suzlon Energy vs Inox Wind - Trailing-Twelve-Months comparison!!

Suzlon Energy Ltd.'s sale of Senvion AG got concluded in the last week of April'2015. Hence there was some impact of the German subsidiary on Suzlon's numbers for Q1-FY'16. From Q1-FY'16 onwards, it's now completed 4 full quarters of Suzlon's own performance. Hence now we can start comparing Suzlon's numbers with Inox Wind Ltd., which is a smaller & much younger player in the Wind Energy business in India. Frankly, I had never had a proper look of the numbers from Inox Wind Ltd until the day I was writing a post on Suzlon Energy about 3 months ago. (Click here for that post) After a quick glimpse of Inox Wind's numbers that day, I have studied the numbers better & tried to analyse the company's business performance properly. And I have become a fan of Inox Wind Ltd. I have been closely following the company's share price movement since then and have also included it in my portfolio with reasonably weightage.

Now let me present you the comparison of Trailing-Twelve-Months numbers of Suzlon Energy & Inox Wind:

The Financial Numbers presented here are for the 12-months period from July'15 to June'16. The Market Cap numbers are arrived at by using closing share prices of 20th Sept'16 alongwith the Equity Capital figures for June'16 result. While Inox Wind's Equity Capital is not expected to change any time soon, Suzlon's Equity Base could expand soon from the current level of 502 crore shares to potentially about 599 crore shares, as and when the remaining FCCBs also get converted into shares. Hence the effective fully-diluted Market Cap of Suzlon Energy is potentially nearly 18-20% higher than the number I have mentioned in the table alongside.

As we can see, Inox Wind's Total Income is just under 50% of Suzlon Energy's Total Income. How this percentage number moves in the coming quarters will tell us which one of the two is growing faster. Coming to the EBITDA numbers, Inox Wind's EBITDA is a whopping nearly 75% of Suzlon Energy's EBITDA number. This clearly means Inox Wind is currently enjoying very superior EBITDA margins when compared to Suzlon Energy. We can certainly give some space to Suzlon Energy here as it is still in the midst of a business revival & hence is expected to see a substantial improvement in it's EBITDA margins in the coming quarters. We can certainly expect to see the Inox-to-Suzlon EBITDA comparison percentage coming down to about 65% in the coming 2-3 quarters. I will certainly be disappointed with Suzlon's performance if this does not happen.

Coming to the Interest Cost comparison, it's a no-brainer. Inox Wind's Interest Cost is less than 10% of Suzlon Energy's Interest Cost. On one hand Inox Wind's Net Debt was very low until 2 or 3 quarters ago as the company had enough Equity Capital and Cash Profits to fund it's operations. The Net Debt has now risen to about Rs.1500-1600 crores over the last couple of quarters primarily due to huge capacity expansion undertaken & higher working capital requirements. On the other hand, Suzlon Energy continues to have some bit of Debt hangover from it's past. Even though the 12-months Interest Cost for Suzlon has already dropped by close to half, it still has more work to do in order to bring it down to reasonable levels. The company will need improved Cash Profits to take care of it's expansion requirements on one side as well as paring down it's debt on the other side. Taking the 12-months Interest Cost well below the Rs.1000 crores mark will remain a challenge for Suzlon Energy, atleast in the coming few quarters. Thanks to this Interest Cost factor, Inox Wind will continue to enjoy substantially superior Cash Profit & Net Profit margins in the coming few years.

Suzlon continues to be PBDT Negative currently, but is expected to be in the positive in the next 1 or 2 quarters. But Suzlon might take much longer time to come close to matching Inox Wind's PBDT numbers, maybe even 2 years. Coming to Market Cap comparison, Inox Wind's market value is just about 56% of Suzlon's (non-diluted) figure. This is despite the fact that Inox Wind is already posting healthy profits, while Suzlon continues to be Loss making. Higher Market Value being awarded to Suzlon then suggests that the market expects Suzlon's Financial performance numbers to improve substantially in the coming quarters. It will be interesting to see if this expectation turns out to be true or the market changes it's opinion in the coming months and we see a substantially stronger increase in market value of Inox Wind in comparison to that of Suzlon Energy. Let's wait & watch. My bet is on Inox Wind to get re-rated upwards in the coming months/quarters, while Suzlon continues to linger within a 10-20% range from current levels.

Gitanjali Gems Ltd. - What the numbers are saying so far...

Before I talk about the recent Financial performance numbers of Gitanjali Gems Ltd, I would like to show you two of it's stock price charts:

Click to enlarge

One showing Gitanjali's stock price movement over the last 5 years and the other showing the movement over the last 1 year. The chart alongside is the 5-years chart. First we can see that Gitanjali's stock price shot up from just under Rs.300 before the end of June'2012 to over Rs.600 by the start of March'13. After spending a few months around that level, Gitanjali's stock saw massive selling and non-stop Lower Circuits for over a month, which resulted in the stock losing around 90% of it's value. If I remember correctly, the reason being said was that some broker was involved in price-rigging of the stock earlier. The price did attempt a mild recovery, when the price did hit 3-digits a few months later, but it was shortlived as the company's business was affected due to Govt's Gold-import restrictions in 2014-15.

Click to enlarge

This chart here is the last 1-year's chart. After spending most of it's time in the Rs.35 to 45 range, the company's stock is finally attempting a break-out, post announcement of Q1-FY'17 results. In order to analyse if this break-out is sustainable or not and if it has any legs, we need to check the company's recent financial performance very closely.

I have prepared charts representing Trailing-Twelve-Months figures for Gitanjali Gems Ltd.'s Total Income, EBITDA, Interest Cost and Interest/EBITDA %, from the period ending June'13 to the period ending June'16. This will help us understand the company's performance trajectory over the last 3 years. Have a look at the following Trailing-Twelve-Month charts:

As we can see, Gitanjali Gems Ltd's Consolidated T-T-M Total Income was on a sharp downswing between June'13 to Sept'14. But in the seven quarterly results since Dec'14 quarter, Gitanjali Gems Ltd. has managed to post a Y-o-Y Growth of over 24% in six of those quarters. This splendid recovery in business volumes has helped the company bring back it's T-T-M Total Income figure very close to the Rs.15,000 crores mark and looks like it will be attempting to hit an all time high in the coming 2-3 quarters.

Surprisingly though, Gitanjali's EBITDA has not kept pace with increase in it's Total Income. From the charts we can see that the company's T-T-M EBITDA peaked out during the March'15 quarter, then remained stable for a couple of more quarters, and then dropped suddenly during Dec'15 quarter and has continued to slide to a smaller extent till June'16. Most probably the volatility in Gitanjali's EBITDA has something to do with the sharp drop in Gold prices during 2015. Now that international Gold prices have recovered about 20% from the lows hit last year, the EBITDA margin of the company seems to be coming back to normal levels. Historically, Gitanjali Gems Ltd. has enjoyed EBITDA margins in the range of 5-6%. For the T-T-M period ended June'16, the company's EBITDA margin stands at 5.9%. Hence it is certainly back to normal range now. Hopefully the EBITDA will stop sliding now and move in tandem with the company's Total Income growth. Let's keep an eye on that.

During the period when the Govt had put restrictions on Gold imports, Gitanjali Gems faced a crisis-like situation with it's Debt burden, including client payments and working capital requirements. This had led to Gitanjali Gems' T-T-M Interest cost shoot up from lows of around Rs.400 crores in June'13 to highs of around Rs.900 crores by Dec'14. But the company's promoter/management certainly deserves some praise in the way they handled the situation and have now come out of it with improving financial profile of the company. As we can see, the T-T-M Interest Cost is already on a decline over the last 3 quarters. I am expecting the T-T-M Interest Cost figure drop to & then stabilise around the Rs.500 crores mark over the next few quarters. On a T-T-M basis, Gitanjali's Interest Cost as a percentage of it's EBITDA is now at around 75%, which is the lowest level in the last 10 quarters. This is now helping the company post stronger Net Profit numbers. Going forward we can expect this figure to drop further to around 60% level.

At a time when the company's share price was ruling below Rs.40 levels over the last 12-18 months, the company's promoters and few other investors infused more funds into the company via Convertible warrants at a price of close to Rs.63 per share. On one hand this Equity infusion into the company gave confidence to the Bankers, on the other hand these investors got to increase their stake in the company at a reasonably attractive valuations, especially considering the longer terms fundamentals of the company. The company's Equity Capital has already expanded from about Rs.98 crores to about Rs.108 crores over the last 3 quarters, and is set to expand to around Rs.119 crores soon. Even considering the expanded Equity Capital, Gitanjali Gems Ltd currently commands a Market Cap of just about Rs.700 crores at the current price of around Rs.60 per share. At this level, it is available at just about 3.5 times Gitanjali's T-T-M Cash Profit and at less than 2 times 1-year forward Cash Profit of the company. I think it does make a strong case for Investors to consider having a small exposure to Gitanjali Gems with a 1-3 years view.

Telecom Subscriber Base (VLR) Analysis for Apr-Jun'16 quarter.

About 3 weeks after the end of every month, all Telecom Operators declare their Circle-wise Subscriber Base, which basically includes all the Activated Sim Cards out in the market. This also takes into consideration the Sim Cards that have been De-activated due to MNP requests or 90-days Zero Use period. But thanks to the multi-Sim usage profiles of several lakhs of Indians, not all Activated Sim cards are in use all the time. For this the TRAI started collating the VLR (Visitor Location Register) Database from all operators and declaring the highest VLR Percentages for every respective month. VLR basically tells us how many Sim Cards of each operator was actually hooked to it's Network alteast for some time during that respective month. But all this Data Collation takes additional 4-6 weeks. The VLR Data for the month of June'16 was declared by TRAI on 9th of Sept.'16, i.e. nearly 10 weeks after the end of June month.

I have now started arranging Operator-wise All-India Subscriber Base Information from the period ending March'16, into my Spreadsheets, in order to analyse the changing scenario in the Telecom market & it's possible co-relation with the Revenue performances of each operator. I had presented my views on Telecom AGR numbers for Apr-Jun'16 quarter a couple of weeks ago at this link. Bharti Airtel was the clear Best Performer in terms of Q-o-Q growth in AGR, followed by Vodafone and then Idea Cellular. It will be interesting to see how the VLR Subscriber numbers for each operator have changed during the quarter. Remember that Reliance Jio had started issuing it's Sim cards under the LYF Handset Preview Offer from the middle of May'16 and is estimated to have activated nearly 1 million Sim Cards during the quarter ending June'16. Another major development during the quarter was Closure of CDMA Operations of Reliance Communication (ADAG) across the country during the month of June'16. The company wished to switch it's CDMA users to it's 4G network, which it was launching in collaboration with RelJio, but everyone knows that the switchover wasn't smooth for the company & it's subscribers. This CDMA closure has caused a major upheaval in the numbers reported by RCom.

The Table here displays the Operator-wise All-India VLR % reported by TRAI for every month since March'16. This figure normally considers the Highest VLR number for that particular month. As we can see, the Overall Industry-wide VLR % number has seen a nominal 64 bps decline between March'16 to May'16, but a sharp 186 bps decline during June'16. RCom's VLR % dropping from 89.10% to 72.50% is the main reason for a sharp decline in June'16. Let's ignore RCom for the time being as it forms less than 3.5% of the Industry's AGR, despite a much stronger subscriber market share. It is interesting to note that each of the Top-3 operators, i.e. Airtel, Vodafone & Idea, have seen a small erosion in their VLR % during the Apr-June'16 period. While Airtel has seen an 80 bps decline, Idea has reported a 108 bps erosion and Vodafone has posted the biggest decline at 136 bps. These VLR % declines experienced by the three largest operators is most certainly due to two factors: Increased competitive pressure from BSNL and few other smaller operators & secondly from the fact that nearly 1 million RelJio Sim cards were activated during the second half of the quarter. RelJio has not yet started reporting it's Subscriber numbers to TRAI as it was undertaking 'Testing' of it's Networks until 5th of September'16. Hopefully we should be getting RelJio's subscriber numbers from September'16 onwards.

The Table alongside compares the EoP VLR Subscriber base of each operator at the end of March'16 and June'16 to know the progress the made by each of them. The Highlight of the table has to be RCom, which has lost over 2 crore VLR subscribers during the quarter, with 90% of them during the month of June'16. What is surprising is that RCom was claiming to have about 5 million CDMA subscribers, which it was asking to switch to 4G. But the drop in VLR subscriber base is 4 times of that number. If the VLR numbers for July & August don't post some big correction, then RCom is potentially going down the Closure path in the coming quarters. Apart from RCom, Vodafone was the biggest loser during the quarter, in terms of VLR subscriber base, having lost over 1.3 million subscribers, which is quite a big surprise. Tata Tele was next with a loss of nearly 0.8 million, which is not surprising given the fact that it is also curtailing it's CDMA operations in several circles. In all likelihood, Tata Tele must has been a Net Gainer in VLR subscribers on the GSM front. Idea was the next big loser with nearly 0.7 million users, possibly mainly due to reduced number of In-roamers on it's network. Until a few months ago, subscribers of Airtel & Vodafone were using Idea's 3G networks in certain circles via 3G-Roaming agreements. Airtel has pulled out of these agreements after having launched 3G service on it's own in 21 of the 22 circles. This must have impacted Idea's VLR subscriber numbers as well as Revenues to some extent.

In terms of percentage gainers, Aircel added nearly 2.5% (nearly 1.6 million) new VLR subscribers during the quarter. But Bharti Airtel was the biggest gainer in terms of Gross VLR subscribers addition at nearly 2.3 million new users. Airtel's VLR subscribers market share at the end of June'16 now stands at just over 27%, commanding a huge 6%+ lead over 2nd placed Vodafone. BSNL/MTNL too added nearly 0.7 million new VLR subscribers, followed by Telenor which added a little under half a million new users. In terms of VLR subscribers market share, Aircel is now closing in on BSNL/MTNL's combined base. Both Aircel as well as BSNL are aggressively marketing their respective 3G services with some very attractively priced Data packs. It will be interesting to see is BSNL/MTNL manages to stay ahead of Aircel in the coming months or not.

RelJio is expected to have started impacting the VLR numbers of all existing operators to a very small extent from June'16 onwards, but the impact is expected to get much larger from Aug or Sept onwards. With RelJio having announced a full scale launch from 5th September, we can expect the operator to start declaring it's subscriber numbers from the current month. I will try & post a fresh update on VLR numbers status every month from hereon, possibly as soon as I receive the numbers.

Inox Wind's Q1 Performance - Poor upfront numbers, but hopes of better future alive.

Amongst the four quarters of any financial year, the first quarter (Apr-Jun) is always the weakest quarter for Inox Wind Ltd in terms of Reported Revenues & Profits. The primary reason for this being the huge number of orders that get booked during the last quarter (Jan-Mar) of the previous financial year. A substantial portion of the orders Billed during Jan-Mar quarter generally get physically executed only in the following quarter or two. That is the main reason behind lower number of orders getting Billed during Q1 & Q2 of any financial year for a company like Inox Wind Ltd. The secondary reason could also be the fact that Investors await for fresh fiscal announcements related to Wind Power Tariffs by various State Governments, before placing fresh orders in the new fiscal year.

Inox Wind Ltd. reported a sharp 31% drop in Total Income and 80% drop in Net Profit for the Q1-FY'17. Is this something the Investors need to worry about?? I don't think it is. Remember that Inox Wind Ltd had Billed orders worth over Rs.1800 crores for around 400 MW of WTGs, during Q4-FY'16. At the same time Inox Wind received fresh orders for another 360 MW during that quarter to finish the year with a strong Order Book of around 1100 MW. Even though Order for 400 MW were Billed during Q4-FY'16, the physical EPC work for a substantial portion of those orders must have been executed during Q1-FY'17. The same in reflected in the quantity of Blades & Towers produced by the company during Q1-FY'17. As per Inox Wind's Investor Presentation, the company produced Blades for 198 MW and Towers for 148 MW, both of which are substantially higher than the same produced during Q1-FY'16. The company produced lower quantity of Nacelles & Hubs as it was sitting on substantial Inventory of the same. After this adjustment, the company claims that the Inventory mismatch between the quantity of Blades, Towers and Nacelles & Hubs has been reduced to a good extent.

Trailing-Twelve-Months charts

Even in terms of Order Inflows, Q1-FY'17 was pretty good for Inox Wind. The company received further Orders for 184 MW, which got added to it's March'16-end Order Book of 1104 MW. The company Billed orders for only 48 MW during Q1-FY'17, which was the main reason for lower Reported Total Income and Net Profit numbers. At June'16-end, Inox Wind is sitting on an Order Book for 1240 MW, which is to be executed over the next 12-15 months. We can safely expect the Total number of Orders Billed/Executed during the current fiscal to be higher than the approximate 800 MW done during FY'16. I am expecting Inox Wind to report a minimum growth of 15% over FY'16 numbers and this expectation could prove to be highly conservative by the end of the year. At the same time, the Management team of Inox Wind is under pressure from various Analyst/Investor Groups to curtail it's Net Working Capital requirement. The Management is already taking steps for the same and we could see more positive developments on this front in the coming quarters. The Interest Cost of about Rs.38 crores for Q1-FY'17 suggests that the Net Debt (including Working Capital Loans) for Inox Wind is comfortably under Rs.1500 crores, which according to me is Not an alarming number at all for a company which is growing at a handsome pace and posting T-T-M EBITDA of around Rs.700 crores or more.

Coming to Valuations, the share price of Inox Wind has continued to correct over the last month of so and is currently trading below the Rs.180 mark. At this price the company's Market Cap stands at less than Rs,4000 crores, which I think is peanuts valuation, unless something terrible is about to happen to the company's business prospects. I certainly don't think that's the case with Inox Wind. Just as Warren Buffet says: "Be Greedy in the market when everyone else is Scared". Currently everyone is running scared of Inox Wind's shares. I think it's time for genuine Investors to be Greedy.

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

Reliance Jio Tariffs - Clear focus on Revenues!!!

Reliance Jio's tariffs has become the hottest topic in the Indian media since the chairman of Reliance Industries announced the same at the company's AGM yesterday. While everyone is going ga-ga over how Revolutionary or Game-changing the tariffs are, there are people like me who are somewhat disappointed. While I was expecting Reliance Jio's tariffs to be focused on the Data user with Voice being offered as an additional VAS, the actual tariffs seem to be focused on Voice user with Data as a VAS. Yes, it is being highlighted everywhere that Reliance Jio will NOT be charging for Voice Calls being made to anywhere in India, not even on Roaming, that certainly Does Not mean that a customer with an active Sim card will be allowed to make any number of calls without Recharging with any of the 10 Plan options. In a way what Reliance Jio has done is that it has bundled Unlimited Voice calling in all it's Plans. The Plans are designed to include charges for both Voice & Data & SMS. Not just that....most of the 'supposedly Big' tariff announcements are just means to fool people into believing that they are being offered something out-of-this-world.

The 'Supposedly Big' annonucements are:

* Free Voice Calls to anywhere in India, even on National Roaming.

* Data at just Rs.50 per GB

* Free subscription to Jio Apps worth Rs.15,000 till December'2017

* Free unlimited 4G Night Usage

Now let's look at the real picture. The following image shows all the Jio's tariff plans announced by Reliance Industries via a Press Release:

Let's look at it point wise:

* Free Voice Calls to anywhere in India, even on National Roaming: Voice calls are Free only after a subscriber has paid for either of the 10 plans. For Example: Suppose a subscriber recharges for the smallest plan, i.e. Rs.19, which is valid for 1 day. He will get to make Unlimited Voice Calls only for that day. He won't be able to make any calls the next day, until he recharges again. That means Voice Calling is bundled in the Plan charges. It's an excellent deal for someone who loves talking a lot on the phone. Jio will certainly hope that most of the Voice Calls are made within the Jio network and for that to happen it will have to scale up the Subscriber base at a very rapid pace. For every call that is made to another network, Jio will have to bear the Interconnect Cost of 14 paise/min. To compensate for this, Jio will hope that it also receives an equal number of calls from other networks, especially after it has built a substantial user base. I don't think that will happen until other operators too start offering Free Unlimited Calling under some affordable plans. With the cheapest 28-days plan of Rs.149, Jio will earn a revenue of little over Rs.5 per day. Hence Jio can maintain Free Voice Calling only if the Average Calls per user per day to another Network remain under 25 minutes or so. As per information available, as of now the Average number of outgoing calls made per user per day is around 15 minutes. I think Jio subscribers will make lot more calls as it's free. Hence Jio certainly needs to not just ramp up it's subscriber base, but it also needs to ensure that subscribers use their Jio number as their Primary contact number. From a subscriber's point of view, it's a bonanza for anyone who currently spends over Rs.200 per month only on making Voice Calls. Rival operators too will tinker their Voice Call charges or their STVs to minimize loss of Voice traffic.

* Data at Rs.50 per GB: This rate is true only if we consider the WiFi Data limits, not for 4G Data limits. Even on the most expensive plan, which offers 4G Data of 75 GB for Rs.4999, the rate comes to about Rs.67 per GB. Majority of the population cannot afford anything more than the Rs.499 or Rs.999 Plan, where the Data rate comes at Rs.125 and Rs.100 per GB respectively. These rates are certainly not cheap. These plans will look attractive to only those who have regular access to JioNet's WiFi Hotspots as each of Jio's Plans (other than the Rs.149 plan) comes bundled with WiFi Data limits that are double of the respective 4G Data limits. Jio claims to have a million WiFi Hotspots active currently, but all of them are mainly in highly active Public places in Urban areas. People who frequently move in such areas will certainly find Jio's tariffs attractive. But it's a useless feature for people living in smaller towns or rural areas. And also for people who are dependent on Wireless Data service and consume substantial Data while at home and not at work. A major chunk of Data usage for most Indians happens while at home. All such people are not going to find these tariffs attractive, unless someone is highly lucky to be receiving a JioNet WiFi signal at their residence.

* Free subscription to Jio Apps worth Rs.15,000 till December'2017: This is One Big Joke!!! Take a closer look at the Tariff card shared above. It clearly says that Data used for Jio Apps, Video Calls and other content on the Internet will be debited from the Data allocation for the Plan. Then how does Jio Apps subscription become Free as a user will be charged for Data used for the same. And claiming it to be worth Rs.15,000 for the year is only the matters worse!! Amongst the Jio Apps, the main focus of most people is on JioCinema, JioTV and JioMusic. While Music streaming could consume about 2-3 MB per minute, the Video Apps consume about 15-20 MB per minute. That means a person can listen to about 300-400 minutes of Music per GB or watch 50-60 minutes of Video per GB. I seriously think that the usage of these Apps will collapse substantially from 1st January when Jio starts charging all it's users. Not many people will use these Apps on Jio's 4G network from 1st January. My earlier expectation was that Jio will offer the Apps bouquet for something like Rs.300 to 400 per month, which will also include the Data consumed by these Apps. But my expectations were probably just way too optimistic.

* Free unlimited 4G Night Usage: Look at the Night Usage timings in the above tariff card. A 3-hours window between 2 am to 5 am, when 99% of the population is fast asleep, is another big joke. Earlier I used to ridicule the 12 midnight to 6 am Night Usage timings set by the incumbent operators for some of then 3G/4G plans and was happy that atleast Tata Tele had set a more sensible timing of 11 pm to 7 am. But after looking at the timings set by Jio, even the incumbent operators start looking much much more lenient. Only a very very small percentage of Jio's subscriber base will be able to make good use of the Unlimited Night Usage feature. For all others, it's as good as non-existent feature.

Summary:

Reliance Jio is Open to all Indians from the 5th of September'2016. The Chairman has announced that All Usage of Jio network for all subscribers will be completely Free till 31st December'2016. This announcement will ensure that millions of Indians (especially the ones who already have a 4G handset) will try and grab a Jio Sim card at the earliest and hope for an early activation. The Chairman also said that the systems are being prepared to activate 1 million Sim cards per day. With a near about 118 days of Freebie period till the end of this calendar year, we could see anywhere between 20 million to 50 million Jio Sim cards being activated during this period. The 4G user experience, which was pretty good for most 'Test' users through June and July, was already seeing some bit of deterioration over the last couple of weeks, when Jio added atleast a couple of million 'Test' users to it's network. With the mad rush for Jio Sims expected to continue from next week under the 'Welcome' Offer, it will be interesting to see if Jio's network is able to handle the load and still offer a User experience which is atleast better than 3G network experience of rival operators.

During this 'Welcome' Offer period, we could see more follow-on announcement from Reliance Jio. I am hoping for some new Tariff Plans for people who are not interested much in Voice Calling, but only Data Usage, especially for people who consume over 10 GB of Data every month. Possibly specific Plans for JioFi devices. Unless something like this happens, I am expecting about 50% of Jio's users enrolled till 31st December'2016, to shun Jio and go back to their previous Sim cards from rival operators. I will certainly be one of them, unless Jio offers Data-specific plans with higher usage limits. 

I think Reliance Jio will get very popular amongst Corporate Users, who are generally Post-paid ones. Reliance Jio's Postpaid plans are certainly offering lot more than that being offered by Airtel or Vodafone or Idea currently, especially on Plan 499 and above. These operators will immediately tweak their Post paid plans to try and retain their Corporate Customers, who offer substantial ARPUs on a consistent basis. Any loss of Corporate customer base to Reliance Jio, will mean a bigger impact on their profitability.

From the company's point of view, it is positive thing that the focus is clearly on earning decent amount of Revenues from every subscriber. Even under the cheapest plan of Rs.149 with 28 days validity (for prepaid), Reliance Jio will earn a minimum of about Rs.160-165 per month from every subscriber. Assuming about 50% of it's overall subscriber base to opt for a higher plan, Reliance Jio could be looking at a monthly ARPU of around Rs.400/-. Even if Reliance Jio manages to retain a paying subscriber base of about 25 million from 1st January'2017 onwards, it could result in monthly revenues of around Rs.1000 crores to start with. I am expecting Reliance Jio to incur a monthly Operating Cost of about Rs.1000 crores just to keep the 4G network Live across the country. In addition there will be cost for License Fees, Spectrum charges, Interconnect Cost, Staff Cost, Marketing Expenditure, etc., which together should amount to about Rs.700 to 1000 crores a month. That means Reliance Jio needs to achieve a monthly Revenues of about Rs.2000 crores just to cover all it's Expenditures (excluding Interest). Depending on how well it is able to ramp up it's paying subscriber base from January'17 onwards and react to competition's moves, it could take anywhere between 6 to 12 months for Reliance Jio to reach a monthly Revenues of Rs.2000+ crores. 

Reliance Jio certainly cannot stop there as it has the Huge Debt burden to cater to as well. Thanks to a rich parent's backing, the Average Interest Rate for Debt raised by Reliance Jio is probably just about 7 to 8%. Still the Annual Interest Cost alone should be in the region of Rs.8000 to 10000 crores (including for Working Capital Loans), translating into an average monthly figure of about Rs.700 to 800 crores. That means Reliance Jio will need to take it's Monthly Revenues closer to Rs.3000 crores to achieve Cash Profit. I will be highly surprised if Reliance Jio achieves that target before the end of year 2018, especially with the current set of tariff plans announced. Reliance Jio will certainly have to make serious changes to it's tariff structure sometime around the end of year 2017 to keep the subscriber addition momentum going.

Thanks to the Freebie period under the Welcome Offer announced by Reliance Jio till 31st December'2016, I am expecting the entire Telecom industry to take a 3 to 5% hit in Gross Revenues in September'16 quarter and about 10-15% hit for December'16 quarter. The Oct-Dec'16 quarter will be quite a pain period for the entire Industry. But things should start looking better from the Jan-Mar'17 quarter and we can expect to see some good competition. The worst hit could obviously be the smaller operators & it will be interesting to see how long they survive and what steps they take. Despite the tariffs announced by Reliance Jio being disappointing for a small section of users, it will be positive for the overall Subscriber community, primarily via increased competition.