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.