Tata Motors Ltd. - Gaining it's momentum back!!

Tata Motors Ltd has been primarily dependent on it's JLR division for a bulk of it's turnover and almost it's entire Profits since the last few years. The Domestic business of Tata Motors, which was mainly dependent on it's Commercial Vehicles division, had seen a slowdown or slump for a couple of years. The company put in place a new management team and made some significant changes to it's hierarchy and then started working on a new strategy. Development of new products gained momentum, both for the Commercial Vehicles division as well as Passenger Car business. The company saw it's sales momentum turning around during the year 2016. Just as things were improving, we saw the Demonetisation take place in November'16, which disturbed the momentum for a month or two. Things started getting back to normal in January to March'17 and then we saw the Supreme Court ruling come in where sales of BS-III vehicles was banned across the country. This had a much bigger impact for Tata Motors as the production of BS-IV engines for M&HCV segment wasn't enough to cater to the volumes. The vendors weren't ready for larger volumes and it took a few months to get the volumes to decent levels. Then we had the GST kicking in from July'17, which had some temporary effect as manufacturers & dealers wanted the keep the pre-GST stock low.

Post July'17, Tata Motors has seen it's M&HCV as well as LCV segment volumes getting back on the growth path very

strongly, which is clearly reflected in the Trailing-Twelve-Months Sales chart alongside. The M&HCV segment, which is the biggest turnover contributor for Tata Motors' Domestic business, saw it's 12-months volumes fall from 1.76 lakh units in Feb'17 to under 1.62 lakh units in June-July'17. Now it is back to over 1.73 lakh units and is expected to go higher in the coming few months. The production constraints for BS-IV engines is now history and the company has seen strong demand for it's new technology products. This itself is a very big positive development for Tata Motors as strong recovery of volumes for it's M&HCV products will translate into strong turnover and profits for the company.

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Tata Motors' LCV segment saw a much smaller impact on volumes due to the BS-III ban from April'17 as there were no major production constraints for most of it's products. It's 12-months volumes did dip from peaks of over 2.12 lakh units in Jan'17 to around 2.07 lakh units during April to July'17 period. But the LCV segment volumes have seen a strong recovery to over 2.23 lakh units over the last 4 months, especially with strong demand for it's newer products like XL range of ACE SCVs and Yodha range of pickups. With decent growth momentum in the country's economy, we could see continued positive growth in sales of all commercial vehicles for Tata Motors in the coming months.

One look at the Trailing-Twelve-Months Sales chart for Passenger Cars of Tata Motors and it will give an impression of a dull

segment. But there is a reasonably-exciting story building up there, especially when combined with the UV segment. If we look at the 12-months sales numbers for Cars alone, it started the year with volumes of about 1.3 lakh units in Jan'17, then peaked at about 1.41 lakh units in May'17 and then gradually come down to about 1.34 lakh units by Nov'17. But during this period there has been a substantial change in the contributions of the different products in it's portfolio. Until about May-June'17, Tata Motors was selling it's Indica-Indigo range of cars from all it's car showrooms. These models, alongwith the Nano, were contributing about 4,000 units monthly, i.e. over 30% of the volumes. From the middle of 2017, Tata Motors decided to give all it's showroom space only to the new-age products like the Tiago, Tigor, Hexa and now the Nexon, and some space to the Zest and the Safari Storme. Hence the company has stopped sales of most of the older products, mainly the Indica, Indigo-eCS and the Nano. The small dip in 12-months sales numbers over the recent few months is because the Tiago+Tigor combine was able to substantially fill the deficit of the numbers created by near-Zero sales of the older models. The Tiago+Tigor combine is already clocking sales of about 9,000 units monthly and keeping the company's Sanand plant fairly busy. The company has started offering the Zest & the Bolt for the Cab-operators.

The UV segment is the only one for Tata Motors which has seen a consistent positive M-o-M increase in the 12-months sales figures. Upto August'17, all the credit for the positive progress went to the Hexa, which has seen decent demand since it's launch. But the recent launch of the Nexon is pushing Tata Motors' UV sales number into a different trajectory. Within just 3 months of Nexon's launch, the 12-months sales number of UVs has reached a level nearly 80% higher than what it was at the start of the year. We can see the 12-months number, which is currently at about 34,000 units, reach about 60,000 units mark in another 6 to 8 months time.

In November'17, Tata Motors has managed to grab the No.3 rank in terms of sales of Passenger Cars & UVs, closely beating Mahindra & Mahindra. It will be very interesting to see these two Indian manufacturers push each other in their fight for the No.3 spot. Until a few months ago, Tata Motors was fighting for the No.5 spot with Toyota, but that seems to be history now. Even Honda has seen it's monthly sales number being very volatile in the recent months and has kind of given up on the race of the No.3 position. Renault & Nissan combine too has seen their Kwid-Redigo sales momentum lose steam in the recent months. If Tata Motors manages to carry on with it's sales momentum, it should be the un-disputed No.3 in the Indian passenger car market in a few months time, behind Maruti Suzuki and Hyundai.

IRB Infra. Developers Ltd.: Letting the numbers do the talking.

I had written a report on IRB Infra. Developers Ltd about 2 years ago. Here is the link to it. I would like everyone to see the progress made by IRB Infra over the last 8-10 quarters to get an idea of it's business performance and the corresponding changes in it's valuations.

First have a look at the following chart which shows the Trailing-Twelve-Months progress of IRB's Total Income and EBITDA:

The last time I had written about IRB Infra, it's T-T-M Total Income stood at Rs.4061 crores. In the last 2 years, it has increased by about 56% to reach Rs.6291 crores. IRB's EBITDA has increased by about 35% during the same period. This reflects a slight tapering of EBITDA margins, mainly because of many new large Highway projects were commissioned in the recent quarters and any new project delivers lower EBITDA margin in the initial couple of years. Still the business growth is strong and expected to maintain a healthy double-digit growth momentum going forward as well.

Now let's look at IRB's Earnings Per Share (EPS). I have considered EPS numbers instead of Net Profit numbers, mainly because there was some Equity Dilution done by the company in the year 2015, which affects the EPS. Hence it's better to check the EPS growth.

Between June'15 and June'17, IRB's T-T-M EPS has improved from Rs.15.9 to Rs.21.9, which is a 38% jump in the last 2 years. About 40% of IRB's EBITDA goes towards Interest Costs. With improving Cash Flows from commissioned projects and fresh borrowings at lower rate of interest, we can expect the Interest Cost as a Percentage of EBITDA to gradually go down. This will help improve IRB's Net Profit margin in future quarters.

IRB has been a consistent Dividend payer. It usually pays about 25% of it's EPS as Dividend every year. With increasing EPS, we can expect the company to maintain or enhance the 25% Dividend distribution policy.

Now let's look at IRB's share price movement over the last 2 years:

As you can see, IRB's share price has clearly not reflected the company's strong business growth. It has spent almost all it's time trading in a range of Rs.200 to Rs.270. At the current price of about Rs.210, IRB's share price is available at less than 10 times it's T-T-M EPS. This is extremely low valuations for a company which is managing to grow at healthy double-digit growth rates and is also a consistent Dividend payer. And it's business has good long term visibility as India will continue to need more & more Highways for a long time to come. Most of the B-O-T contracts that IRB has in it's bag are for a 15 to 20 years duration, where the initial 2 years are allocated for construction of the Highway and then Toll Collection and Maintenance of the Highway for the remaining period.

I think that IRB Infra Developers Ltd is a potential multibagger over the long term. Anybody with a long term horizon can invest in it and enjoy the Dividends until the share price starts moving in the direction of business performance.

Inox Wind: How the Wind Power Auction Wins might translate into Revenues.

Inox Wind Ltd had won a 250 MW bid, which was the maximum permissible limit for a single entity, out of the 1000 MW Auction carried out by Central Govt. agency in Q1 of 2017. The price of electricity to be supplied is close to Rs.3.50 per unit (KWh). Inox Wind had also won an order for another 50 MW for supply of WTGs for an IPP (Independent Power Producer), who had also won a bid in that auction. Today Inox Wind has announced that it has again won a 250 MW bid in the second auction carried out by Central Govt agency in this week. The price of electricity to be supplied has been set at Rs.2.65 per unit.

These are surprisingly low bids for Wind Power, considering the fact that until about a year or so ago, the Wind Power tariffs were well above Rs.5 per unit and it was over Rs.8 per unit about 2 or 3 years ago. So the question that arises is that whether it will be profitable for these companies to supply electricity at such low prices and how long will it take to recover their Capital Investments.

Let's consider it from an IPP's point of view, which has won a bid for 250 MW at a price of Rs.2.65 per unit. The Capital Investment required for setting up a WTG is approximately Rs.6 crores per MW. Hence the Capital required for setting up 250 MW capacity will be about Rs.1500 crores. The Capital required for setting up Power evacuation infrastructure will be relatively much smaller and hence I am ignoring it. If all these 250 MW capacity WTGs remain operational 24 x 7 for all 365 days of the year, they will generate about 219 crore units of electricity every year. But the Wind flow is not that consistent everywhere throughout the day or year and hence we can expect about 35 to 40% efficiency overall. Hence the number of units generated will be approximately 80 to 85 crores per year. At the rate of Rs.2.65 per unit, it will translate into revenues of about Rs.220 crores per year. This is close to 15% of the CAPEX involved in this business. Since the electricity is being sold to Power Trading Corporation and not directly to any State Electricity Boards, the payments for the same are expected to be timely. Hence these IPPs should be able to afford Cost of Capital of about 8 to 9% per annum with 20 or 25 years repayment terms.

Inox Wind has already announced that it will be looking to sell majority stakes in the SPVs that will be used to commission the two projects, as it does not intend to remain a Wind Power generator, and focus on it's primary business of being manufacturer and supplier of WTGs. Considering the fact that this business is expected to be profitable even at such low prices, Inox Wind should be able to find buyers for the stakes in these SPVs. Going forward, we may see stabilisation in prices of electricity generated from Wind Turbines around these levels. Any further drop in prices for electricity will need higher efficiency from the WTGs or lower manufacturing costs for them.

Telecom: Q4-FY'17 Analysis: BSNL is the surprise Winner.

It was widely expected that Q4-FY'17 will produce the worst Revenue numbers for all telecom operators as Reliance Jio had extended it's Freebie offer till 31st March'17. Reliance Jio started adding subscribers on it's 4G-LTE networks in a big way from latter half of Q2-FY'17. Hence Q1-FY'17 numbers will become the benchmark for pre-Jio era. The Top-8 operators (Airtel, Vodafone, Idea, BSNL/MTNL, Tata Tele, Aircel, RCom & Telenor) together generated Adjusted Gross Revenues (AGR) of Rs.40,089 crores in Q1-FY'17. From that point onwards, the Industry AGR numbers have been on a downward trend in each of the next 3 Quarters so far, reaching a number of Rs. 33,149 crores in Q4-FY'17. That means Reliance Jio has managed to pull down the Industry's Quarterly AGR by nearly Rs.7,000 crores or about 17.5%, over the last 3 Quarters.

How did Reliance Jio manage to make such a large impact even when it's Active Subscriber Base market share reached just about 8% by the end of March'17? That is because of 2 reasons: Firstly, these 8% subscribers shifted almost their entire Mobile (Voice as well as Data) usage to Reliance Jio from their Primary operator; Secondly, in an attempt to hold on to their precious customer base, the existing operators had to make big changes to their tariff plans and introduce many new offers to attract attention of existing as well as new subscribers. In fact many of the attractive offers from the Top-3 players (Airtel, Vodafone & Idea) were given only to new subscribers, which led to millions of existing mobile users buying new sim cards just to avail these special one-time offers. This boosted the subscriber numbers of these operators at a time when Reliance Jio was aggressively eating into their usage market share. Ofcourse most of these recently activated sim cards, purchased only to avail the special one-time offers, will soon be thrown away once the validity period of the offers expire.

Between Q1 and Q4-FY'17, all telecom operators (barring 2) have seen substantial double-digit percentage drops in their AGR numbers. The Top-3 percentage losers are: Aircel (31.5%), Tata Tele (28.4%) and Telenor (24.3%). Each of India's Top-2 telecom operators, Airtel & Vodafone, have seen their AGR shrink by 19.4% between Q1 and Q4 of FY'17. Idea Cellular too lost 17.9% of it's AGR, more than the Industry shrinkage of 17.5%. Surprisingly, two operators managed to buck the AGR shrinking trend: RCom and BSNL, but their stories are different. RCom's Q1-FY'17 AGR number of Rs.1274 crores was already lower by 33% compared to it's year ago number of Rs.1864 crores. It dropped another 25% to report a number of just Rs.968 crores in Q3-FY'17. But the company has managed to pull it back smartly to Rs.1270 crores in Q4-FY'17. Could this pull back be a result of it's association with Reliance Jio for 4G-LTE services? This will only be confirmed if RCom manages to maintain this number or improve further in Q1-FY'18. Coming to BSNL/MTNL, the PSU combine has managed to post a 7.6% increase in it's AGR numbers between Q1 and Q4 of FY'17, which is really a surprising performance. Even it's Q2 and Q3 numbers were quite stable and Q4 number has been an improvement on both. The charts above clearly show how Public Sector combine of BSNL/MTNL managed to maintain it's Quarterly AGR numbers throughout the 3 Quarters of Reliance Jio onslaught, even when none of the Private Sector players could not save themselves from 17% to 31% erosion in AGR numbers over the 3 quarters.

BSNL/MTNL have managed this strong performance even without 4G-LTE service offering. It just did the basics right. Firstly, the operator worked on improving it's 3G networks at various important urban locations. Secondly, it worked on reducing the monthly Wireline surrenders and managed to report an increase in Wireline customer base in March'17. If this trend continues, it will give further push/stability to BSNL/MTNL's AGR numbers in coming quarters. Thirdly, BSNL/MTNL surprisingly made some very swift moves to introduce new Data Plans for both 3G as well as Wireline Broadband services and marketed the same over various mediums, both at local level as well as National level. This seems to be working for the company. If BSNL continues to strengthen it's 3G network in semi-urban and rural areas as well, then it could certainly prove to be a strong challenger to Reliance Jio and the Trio of Airtel-Vodafone-Idea. With Reliance Jio finally making it's service chargeable during the current quarter of Q1-FY'18, it will be very interesting to see how the numbers pan out for different operators over the next few quarters.

Voda-Idea merger: Bigger threat for Bharti Airtel than Reliance Jio

The Vodafone-Idea Cellular merger has finally been formally announced with details of the proposed transaction. In simple terms, Vodafone's entire India business (including it's Mobile operations, recently acquired You Telecom, it's WiFi JV Firefly, M-pesa India business, etc., excluding only it's 42% stake in Indus Towers) will be merged with the listed Idea Cellular Ltd. Idea Cellular's Equity Capital will double from current level of about Rs.3600 crores, as equal number to the existing shares, will be issued to Vodafone, making the latter 50% owner of the Listed Company. Obviously the shareholding of all Idea Cellular's existing shareholders will get diluted by half due to this transaction. Aditya Birla Group's (AB Group) shareholding will drop to about 21.1%. AB Group will pay Rs.3874 crores to Vodafone to acquire 4.9% of the merged entity (let's call it Voda-Idea for the time being), to bring it's own shareholding to 26%. This transaction values Voda-Idea at about Rs.79,000 crores or about Rs.110 per share. This transaction will also give AB Group a Call Option to acquire another 9.5% stake in Voda-Idea at Rs.130 per share, within 4 years of the merger deal closure. If AB Group does exercise this Call Option, it's stake in Voda-Idea will be equal to that of Vodafone. And if it does not exercise the Call Option, even then Vodafone will not be able to enjoy the Voting Rights on the excess stake and the latter will have to divest the excess stake over the following 5 years, i.e. between the end of 4 years and end of 9 years from the merger deal closure. My guess is that AB Group will certainly shell out the money and buy the 9.5% stake from Vodafone well within the 4 years timeframe.

Everyone here knows that this merger will make Voda-Idea the largest Telecom Company in India surpassing Airtel's numbers by a significant margin. Be it in terms of Revenues or Subscriber base or EBITDA or even Profits, Voda-Idea is expected to be ahead of the current No.1 Telecom Company. I won't talk precise numbers here as they keep changing every month and in the current super-competitive transformative environment, the numbers will definitely change dramatically even in the short term. I would rather focus my article on highlighting the points that haven't been highlighted in other reports/articles.

The last 6 months have been rather grueling for the entire India Telecom Sector. The Free Voice Calling & 4G Internet service offered by Reliance Jio since September of last year, has suddenly shifted a substantial portion of network usage from all other operators to the new comer. Even though all the existing operators tried hard to retain usage from it's existing customer base by aggressively slashing prices, not one must have been left unscathed by the Reliance Jio onslaught over the last 6-7 months. But the rapid usage shifting momentum is now coming to an end by this month-end. From 1st of April'2017, the fight will be fought based on aggressive tariffs and coupled with superiority of network coverage, especially that of 3G/4G networks. Reliance Jio has already announced it's aggressive tariffs and it's intent to more than exceed the packages offered by any of the existing operators from time-to-time. Even on the coverage front, Reliance Jio's 4G-only network already is way ahead of 3G/4G coverage of all the existing operators and is infact trying to match the 2G network coverage of all existing operators across the country, by the end of this year. This is where the existing operators are going to face the biggest threat. For the initial couple of years, the migration from existing operators to Jio will be more of an Urban phenomenon, where people have started upgrading their handsets to 4G with VoLTE devices. But once Reliance Jio's network reaches most of the villages across India, the operator will definitely look to entice the population there with some attractively priced 4G with VoLTE devices and cheaper & superior Voice & Data services. This could happen once Reliance Jio growth momentum from Urban areas slows down substantially and it has excess capacity to cater to more traffic.

Until now, it was Bharti Airtel who was expected to be the strongest competitor to Reliance Jio, as it held 3G as well as 4G spectrum across all 22 circles and also had the strongest balance sheet to invest in further Capex for network roll outs. Individually both Vodafone & Idea too had the capability to offer either 3G or 4G service across all 22 circles or nearly all circles. Each of these three operators, i.e. Bharti Airtel, Vodafone and Idea, have their own 2G network across the country with about 95% or more population coverage, something like what we call Blanket Coverage. But their 3G or 4G coverages are rather patchy as the initial rollout is designed to cover areas of higher population density, i.e. areas of high usage. But it does leave several areas even within large cities without proper network signal. This is where Voda-Idea will have a tremendous advantage over Bharti Airtel. There will be thousands of cities & towns across India, where both Idea as well as Vodafone will have 3G and/or 4G network present. In all such locations, they can combine the spectrum frequencies together and beam the signal from single set of equipment, instead of having 2 sets of equipment doing the same job in the same area. The freed up equipment could be re-located to other areas in a way to be able to offer Blanket Coverage of 3G/4G signal to residents of all those cities & towns. This exercise alone could boost capacity as well as coverage substantially for Voda-Idea's 3G/4G networks before they have a need to start buying new equipment. Apart from doing the Equipment-Relocation exercise (which could also bring down their Recurring Operating Costs for Voda-Idea by a significant 10% or more), they will need to further extend their 3G/4G networks to even cover all the major highways and also all rural areas where they already have their 2G network present. With large spectrum resource pool and common strategy & planning, they can do the network roll outs much faster as well as efficiently. I am pretty sure that Voda-Idea will be able to offer Blanket Coverage of 3G/4G signals across all 22 circles to a much higher percentage of population than Bharti Airtel, by the end of 2018 or early 2019.

With higher amount of Spectrum Resources, alongwith larger Data Center Capacity and Fiber Optic Cables and wider reach of it's 3G/4G network, Voda-Idea will certainly be more aggressive than Bharti Airtel in it's attempt to attract customers from competitors. The first thing that Voda-Idea is expected to do is streamline their tariff plans across all 22 circles. The realignment & recalibration of Network equipment across so many different locations will be a very lengthy exercise and may not start until the Merger proposal gets all necessary regulatory & legal approvals. Till that point the two operators may start with Joint planning of network roll out in different circles, based on individual strengths in each circle and have Intra-Circle Roaming provisions in place to allow users of each other to use either of the networks. For eg: In circles like Mumbai, Delhi, Kolkata and Tamil Nadu, where Vodafone is strong with 3G as well as 4G presence, but Idea's presence is limited, Idea customers will be able to use the former's network for 3G or 4G service. Similarly, Idea will be able to offer 3G or 4G service to Vodafone customers for circles like Kerala, Maharashtra, Madhya Pradesh and Andhra Pradesh. The regulatory & legal approvals for the merger will take a minimum of 12 to 15 months to complete. Once it passes all the hurdles and the formal merger is completed, Voda-Idea can then rapidly look to combine Spectrum Resources and re-calibrate network equipment and relocate duplicate sites to boost network reach & capacity within those respective circles. At the same time the back-end Data Centre & IT System capacities will be combined to improve planning & efficiencies. All this will take 12 to 24 months to be put in place across all 22 circles. Hence the full benefits of the Merger will be seen sometime only in the year 2019 or 2020. By then we can expect Voda-Idea to have Blanket Coverage of 3G/4G network signals for more than 90% of India's population across all 22 circles. That could also be the time when the operators could start shutting down 2G networks and use the efficient 900 MHz spectrum band and additional 1800 MHz band spectrum for 4G or maybe even 5G service at that point. Yes, I seriously think that days of 2G technology are numbered. Year 2017 could be the start of the decline of 2G network usage as more & more devices are 3G/4G capable. The percentage of Smartphones active on the mobile networks is rapidly approaching the 50% mark with almost all of them being atleast 3G capable and nearly a third of them being 4G capable. With proliferation of 3G/4G networks in more & more rural areas, I am sure that people in those regions too will look to upgrade to 3G/4G capable devices. At the same time device manufacturers are bringing cheaper & cheaper devices capable of being used on 3G/4G networks. Hence the decline of 2G networks usage will pick up pace from 2018 and before the end of 2019, we will definitely hear about operators planning 2G network shutdown in various regions and use the freed up spectrum for 4G technology. In order to do this an operator will first need to have Blanket Coverage of 3G/4G network in place in all those regions. Here I think Voda-Idea will be in a much better position when compared to Bharti Airtel by the year 2019.

Telecom: Dec'16 Quarter AGR numbers - Who lost how much??

Soon after Reliance Jio's 1st September'16 announcement of commercial launch on 5th September'16 with Welcome Offer, I had presented my estimates expecting a drop of anywhere between 5 to 10% in Total Revenues compared to June'16 quarter numbers. I had also mentioned that the June'16 quarter numbers will continue to remain a benchmark for Quarterly Revenues for most operators for a considerable amount of time. We now have the December'16 Quarter AGR numbers for all Telecom operators in India. While most operators have reported a drop within my expected range, some smaller operators have even exceeded my expectations with over 10%. Let's have a quick look at the Quarterly Progress of AGR numbers for the Top-6 Telecom Operators in India, via the following charts:

Amongst all the Telecom Operators in India, only the Top-3 were posting a healthy rate of growth in Revenues until June'16, which is a well-known fact. It was also expected that the Top-3 operators (Airtel, Vodafone & Idea) will be the least affected by Reliance Jio's onslaught. Hence it becomes even more interesting to check whether these expectations have been met or not.

Let's start with India's No.1 operator: Bharti Airtel, which reported an AGR of Rs.12496 crores in Dec'16 quarter. This is a 8% Q-o-Q drop and 10.6% drop compared to the peak hit in June'16. In fact Airtel's Dec'16 number is nearly 2% lower than even Dec'15 number. For Bharti Airtel, the Top-5 circles which have reported the largest actual drop in AGR number for Dec'16 compared to June'16 are: Karnataka (Rs.223 crores), Bihar (Rs.163 crores), Rajasthan (Rs.133 crores), J&K (Rs.126 crores) and Delhi (Rs.106 crores). Punjab is the only circle where Airtel's Dec'16 AGR is slightly higher than it's June'16 AGR. The Top-5 circles in terms of largest Percentage Drops between the two quarters are: J&K (64.8%), Kerala (20.5%), Bihar (14.8%), UP-West (14.4%) and Rajasthan (14.2%). Airtel's largest circle in terms of AGR continues to be Karnataka despite the 13.9% drop in AGR from June'16 level. The Best-5 circles for Airtel, who have reported least change in AGR since June'16 are: Punjab (+2.1%), North-East (-3.5%), Kolkata (-4.8%), Tamil Nadu (-5.2%) & Andhra Pradesh (-5.9%).

Vodafone India reported an AGR of Rs.8305 crores in Dec'16, a Q-o-Q Drop of 5.1% and a drop of 7.8% compared to June'16 AGR. Vodafone India's AGR drop is certainly a better performance compared to Bharti Airtel, despite having lesser 4G coverage compared to the latter. For Vodafone India, the Top-5 circles which have reported the largest actual drop in AGR number for Dec'16 compared to June'16 are: Delhi (Rs.130 crores), Gujarat (Rs.105 crores), UP-East (Rs.100 crores), Maharashtra (Rs.74 crores) and UP-West (Rs.36 crores). The Top-5 circles in terms of largest Percentage Drops between the two quarters are: Delhi (16.2%), Himachal Pradesh (15.5%), Madhya Pradesh (14.6%), Haryana (12.9%) and UP-East (12.7%). The Best-5 circles for Vodafone, who have reported least change in AGR or reported Growth since June'16 are: North-East (+4.1%), Karnataka (+3.5%), Kerala (+2.2%), J&K (+1.8%) and Andhra Pradesh (-2.3%). Gujarat circle continues to be the highest AGR-contributing circle for Vodafone India, but is closely followed by Tamil Nadu & Maharashtra circles.

India's No.3 operator Idea Cellular reported an AGR of Rs.6958 crores in Dec'16, which is a Q-o-Q drop of 4.9% and a drop of 10.8% compared to June'16. For Idea Cellular, the Top-5 circles which have reported the largest actual drop in AGR number for Dec'16 compared to June'16 are: Madhya Pradesh (Rs.145 crores), Maharashtra (Rs.122 crores), Kerala (Rs.109 crores), UP-West (Rs.91 crores) and Andhra Pradesh (Rs.87 crores). The Top-5 circles in terms of largest Percentage Drops between the two quarters are: J&K (33.7%), Himachal Pradesh (26.9%), Bihar (17.2%), Haryana (16.1%) and Madhya Pradesh (15.4%). The Best-5 circles for Idea Cellular, who have reported least change in AGR or reported Growth since June'16 are: Kolkata (+45.9%), Tamil Nadu (+7.6%), Delhi (+6.8%), Karnataka (3.8%) and West Bengal (-2.9%). The Maharashtra circles continues to remain the largest AGR-contributing circle for Idea Cellular by a large margin.

BSNL+MTNL combine is probably the only operator which has reported no Q-o-Q drop in AGR and an improvement in AGR in Dec'16 when compared to June'16 AGR number. The PSU combine reported an AGR of Rs.3869 crores in Dec'16, which is about 4.9% higher compared to June'16 number. The volatility in Wireline Revenue numbers for BSNL & MTNL seems to have helped the operators to report an improvement in AGR for Dec'16. The spike in March'16 AGR followed by a sharp drop in June'16 number is proof of this phenomenon. Hence there is no point in studying the circle-wise numbers for BSNL & MTNL too seriously. One thing is quite certain, BSNL & MTNL combine is slated to report over 10% drop in AGR for FY'17 compared to FY'16 numbers.

Tata Teleservices was the biggest loser in the October-December'16 quarter in terms of number of subscribers lost. During the quarter Tata Tele lost nearly 8% of it's active (VLR) subscriber base or 3.65 million users. But despite being much much smaller than both Aircel & RCom in terms of number of Subscribers, Tata Tele's AGR for Dec'16 is still nearly 25% larger than Aircel and nearly 125% larger than RCom. This speaks volumes of the poor quality of Aircel & RCom's subscriber base. Tata Tele's Dec'16 AGR of Rs.2209 crores is about 12.7% lower Q-o-Q and about 15.7% lower compared to June'16 AGR. Tata Tele's AGR from 15 out of 19 operating circles has reported a double-digit percentage drops in Dec'16 compared to June'16. It has lost big time even in it's 3G circles. This alarming pace of revenue decline looks extremely scary. Tata Tele

needs to take some swift action towards consolidation or else it will have to die a very painful death. Operators like Tata Tele, RCom & Aircel can come together and offer 3G service in nearly all circles across the country. A good quality 3G service with aggressive pricing can certainly offer a good alternative for several price conscious subscribers across the country.

India is seeing some big consolidation moves in the Telecom sector, something which I had predicted over a year ago. Bharti Airtel has already gobbled up Videocon's Band-3 spectrum, Aircel's Band-40 spectrum and Telenor India's entire business is also being taken over. But the bigger consolidation move is that of Vodafone India with Idea Cellular, which could potentially create India's largest Telecom player, atleast for the time being. Even though the operators will continue to face pressure on Topline, this consolidation will help them rationalise their network resources and save atleast 20 to 30% of their operating costs. The combined entity will also be able to offer wider & stronger 3G/4G coverage across the country to combat competition from Reliance Jio as well as Bharti Airtel.

March'17 quarter is going to be even more painful for all telecom operators, thanks to the continued Free Services of Reliance Jio till 31st March'17. The real competition will start from April'17 onwards when Reliance Jio will finally start charging it's customers for availing it's services. But the new 4G-only operator is expected to remain extremely aggressive with it's pricing in it's effort to pile up large number of paying subscribers in the coming months. The AGR numbers reported by all existing telecom operators in June'16 will continue to remain the peak values for most of them for atleast another 4 to 6 quarters, if not more. I am expecting Reliance Jio to start with a AGR market share of nearly 15% in it's very first Revenue-Reporting quarter of April-June'17. And it will continue to build on it from there with an aim to be the No.1 player in another 3 to 4 years time.

Telecom: Nov'16 Subscriber Additions.

Last month I had written about how the Subscriber addition numbers have progressed for the Top-3 Telecom operators between May'16 to October'16, i.e. a period including 3 months leading to launch of Reliance Jio's services and 2 months after the event. Bharti Airtel and Idea Cellular had reported a sharp increase in VLR numbers for the 2 months of September & October'16, with even Vodafone reporting modest increase in pace of additions. November'16 was the 3rd month since Reliance Jio's commercial launch in first week of September'16. The new entrant with a brand new 4G-LTE network, did face several issues relating to Call Connectivity with other operators during the first couple of months. With more & more Points of Interconnect being commissioned and the network being streamlined, the Call Connectivity experience from & to Reliance Jio's network experienced a sharp improvement with most calls getting connected within the first one or two tries.

By the end of October'16, Reliance Jio's Total Subscriber base stood at 35.6 million, out of which 33.4 million were active on VLR. During the month of November'16, Reliance Jio added another 16.2 million subscribers to it's Total tally, but it's VLR number increased by just 10.4 million. This meant that a portion of people who had taken up a Reliance Jio Sim during the initial euphoria period had stopped using it, possibly due to frustration from poor quality of service experience during the initial couple of months. With the quality of service improving, especially on the Call Connectivity front, many of them could again start using the network. Reliance Jio's VLR %, which has dropped to under 85% during November'16, could again improve during the months of December'16 & January'17.

Coming back to the progress made by the Top-3 operators on the VLR base front, it was always going to be interesting to see if they are able to maintain any kind of positive momentum, at a time when Reliance Jio is aggressively adding subscribers on it's 4G-only network with the attraction of FREE services. The VLR base numbers of Bharti Airtel & Vodafone India for the month of November'16, clearly tell us that the momentum is unsustainable. Each of the Top-2 operators had added nearly 1 million subscribers to it's Total tally during the month, but both of them have seen their VLR base increase number dip in the negative territory. Though the dip in VLR base is very small for November'16, there is the fear of the situation being worse in December'16, as most Reliance Jio users had reported a sharp improvement in the Quality of Service on the Call Connectivity front from the latter half of November'16. Even the Data Speeds on the new entrant's 4G network had improved from late

December'16 onwards. This positive change in the Quality of Service on Reliance Jio's network will certainly have repercussions on the network usage of all the other operators.

Idea Cellular is probably the only operator which has managed to post a decent positive change in it's VLR subscriber base during November'16 and continuing it's charge towards challenging Vodafone India for the No.2 spot in subscriber stakes. Over the 6 months upto November'16, Idea Cellular has managed to cut down Vodafone's lead over itself from 7.6 million VLR subscribers to just about 2.9 million. Idea Cellular could certainly be looking at dethroning Vodafone India from the No.2 spot in VLR subscribers ranking latest by March'17. In such a backdrop it becomes even more interesting to see if Vodafone's management manages to convince the Aditya Birla Group & Idea Cellular's management for an All-Stock merger between the two companies to create India's No.1 cellular operator with a sizable lead over Bharti Airtel. I had already mentioned in one of my previous reports a few months ago that Vodafone India & Idea Cellular will need to co-operate with each other to offer 3G & 4G services across all 22 circles, especially when Bharti Airtel had clearly made it's intentions clear a few months ago of not offering Intra-Circle-Roaming facility going forward as it is able to offer 3G as well as 4G services across all 22 circles on it's own network. A merger between Vodafone India & Idea Cellular will certainly make for a strong competitor, atleast on paper. But there are many issues that the two will need to take care of, especially in terms of effective shareholding of their respective Promoters/Investors and the management control / decision making. There are several potential benefits too in terms of realignment of network resources & ability of offer much wider 2G/3G/4G coverage. The Indian Telecom's market dynamics will certainly change if this merger goes through, especially in the face of the rise of Reliance Jio as a serious threat to the dominance of the Top-3 operators.

I have included Tata Teleservices' VLR base change chart above just to highlight the fact that it is losing VLR subscribers at a rapid pace since October'16. Between the two months of October & November'16, Tata Tele has lost nearly 3.4 million VLR subscribers, which is nearly 7 to 8% of the operator's Total VLR subscriber base. The rapid pace of drop in VLR subscribers base clearly suggests that Tata Tele has finally decided to pull the plug on it's CDMA operations as it must be getting increasingly unviable to continue the operations. CDMA network was more popular amongst Data hungry customers before the advent of abundant 3G/4G options at cheaper price points. Now with most leading operators offering good quality 3G/4G network with excellent Data speeds and very attractive price points, the users of the CDMA (Photon) services must be shifting their usage to a better option. We can expect some firm announcement from Tata Tele about closure of it's CDMA operations some time in the next few months. With network usage dropping continuously, there is no point for the operator to continue keeping the CDMA network alive for a long period. The company can certainly utilise those resources to enhance it's 3G services and even think of launching 4G services in a few circles where it has acquired Band-3 spectrum from recent auctions. In fact I am of the opinion that Tata Tele should even exit from many of the circles where it has very insignificant presence with 2G-only network and focus on strengthening it's network where it can offer 3G/4G services. A strong operations in about 9 or 10 circles will make more sense than Tata Tele's current 19-circles operations. Let's see by when more sense will prevail with the management of the company & they take some concrete steps towards rationalising it's operations or become a part of some M&A deal.

Royal Enfield Jan'17 Sales - Slowest Growth in many years.

Exactly a month ago I had written a report on Royal Enfield's Recent Sales Performance. In that I had specifically mentioned about my expectations for coming months. I am happy to say that Royal Enfield has not managed to perform beyond my expectations, atleast in

January'17. The Total Sales number for Royal Enfield motorcycles during January'17 was 59,676 units, which is 25.1% higher than the 47,710 units number reported for January'16. This is the slowest Y-o-Y growth reported by Royal Enfield in the last many years and are clear signs of the fact that the High-Base effect is finally catching up with this manufacturer of the famous 'Bullet' motorcycles.

Eicher Motors had reported a strong surge in sales of Royal Enfield motorcycles during the 3 months of January to March'16, compared to previous few months, which is now creating a High-Comparison-Base for the company during the corresponding period this year. Hence, despite selling the highest number of motorcycles in a single month in the company's history during January'17, it's Y-o-Y Growth has dropped sharply to 25% from the 42% growth reported in the previous month of December'16. For the next 2 months, I am expecting Royal Enfield to continue despatching increased number of motorcycles, most probably in the range of 60,000 to 62,000 units each month. But the Y-o-Y Growth number will continue to dip further lower to something around 22%. Another interesting factor is that the Low-Base effect for Export Growth comparison ended in January'17 as Royal Enfield had reported sharp increase in Export despatches from February'16 onwards. Hence it will be interesting to see the kind of growth numbers Royal Enfield is able to report for Export sales too going forward.

With monthly sales number of around 60,000 units, Royal Enfield is now competing with the likes of Yamaha India and Suzuki India's 2-wheeler unit in Volume stakes, but it's turnover is way ahead as the Average Selling Price of each unit of Royal Enfield motorcycles is nearly 2 times that of the two Japanese manufacturers. Thanks to the cult-bike image that it's products carry, Royal Enfield is able to price them at a premium and hence the company is able to enjoy way superior EBITDA and Net Profit margins compared to any other 2-wheeler manufacturer in India. It will be interesting to see if this situation remains unchanged even a couple of years down the line or not.

Inox Wind's Q3 - Getting back on Growth track.

Inox Wind Ltd had disappointed investors during the first Half of this fiscal with a near 25% Y-o-Y drop in Total Income, about 35% drop in EBITDA and a much bigger fall in Net Profit numbers. In this backdrop, the company management's conservative guidance for a Total Income of between Rs.5000 to 5500 crores for FY'17, given at the start of the year, clearly looked under serious threat. To achieve even the lower end of the targeted number, Inox Wind would have needed to post a Y-o-Y growth of about 33% in Total Income during the second half of the fiscal. One thing that was riding in the company's favour was the good Order Book position as well as a healthy flow of fresh orders. The Q3 numbers announced by Inox Wind Ltd on 3rd February'17 have kept the hopes alive for the company being able to hit a Total Income figure of about Rs.5000 crores for FY'17.

Inox Wind Ltd. reported a healthy 22% Y-o-Y Growth in Total Income for Q3-FY'17. What is even more commendable is the fact that this growth came in despite the logistical & administrative impact of Demonetisation during the month of November'16 and also a few weeks of

Trailing-Twelve-Months Progress

December'16. The Q3 result certainly gives a boost to the confidence of the company's performance & growth prospects. Another positive factor being the healthy flow of orders during the quarter, amounting to about 330 MW. Inox Wind was able to report a sale of about 266 MW of WTGs during the quarter, despite delays due to Demonetisation. The company's management is fairly confident of achieving a sale of 500 to 600 MW during the Q4 of this fiscal, which should help take the company's Total Income figure to within the guided number for the fiscal. In all likelihood, Inox Wind's Q4 Total Income figure could be in excess of it's Q1+Q2+Q3 number this fiscal. The healthy Order Book of over 1300 MWs gives further confidence to this possibility. The question is whether Inox Wind will be able to manufacture & supply the requisite number of WTGs and other components. I am quite optimistic that the actual number shouldn't be far from my expectations.

Even on the EBITDA margin front, the jump in turnover has helped Inox Wind's EBITDA margin jump by over 200 bps during Q3 as compared to what it had managed during Q1 & Q2 of this fiscal. The EBITDA margin number is still about 100-125 bps lower than what Inox Wind had managed

during Q3 & Q4 of last fiscal, but that can be attributed to the higher fixed costs for the company this fiscal due to larger manufacturing capacity operational. The EBITDA margin can be expected to be higher in Q4 this fiscal than in Q3, on the back of big expected jump in turnover. Inox Wind's EBITDA for the first three quarters of this fiscal stands at about Rs.382 crores, nearly 16% lower than corresponding period of last fiscal. But I am expecting Inox Wind to finish the fiscal with an EBITDA number of between Rs.820 to 840 crores, which should be about 5% to 8% higher than that of last fiscal.

The higher EBITDA for this fiscal still may not help Inox Wind post a higher Net Profit figure as the increased Interest Outgo and higher Depreciation Provisioning will eat away all the gains & more. In the current fiscal so far, Inox Wind's Net Profit is about 32.5% lower than that during the same period last fiscal. Even though I am expecting Inox Wind's Q4-FY'17 Net Profit to be atleast 15% higher than it's Q4-FY'16 figure, the company will most likely fall about 5 to 7% short of it's FY'16 Net Profit number this fiscal. Inox Wind's expanded manufacturing capacity became operational just before the end of FY'16, which pushed it's Fixed Costs, Interest Payments and Depreciation Provisioning figures higher from the start of this fiscal. Inox Wind's T-T-M Interest Cost number has climbed to about 19% of it's EBITDA over the last 3 quarters. But I am expecting it to peak out at 20% or lower and not be any further threat to the company's Net Profit margins.

Valuation: At the current share price of about Rs.185/-, Inox Wind's Market Cap is just about 10 times it's T-T-M Net Profit and about 5 to 6 times it's T-T-M EBITDA. It is trading about 40% lower than it's IPO price, even though it has grown in size by over 60% in the last nearly 2 years. Inox Wind continues to be amongst the largest players in the business of providing Wind Power solutions with amongst the strongest Order Book positions in the Industry in India. After expanding it's manufacturing capacities for key components before the start of this fiscal, it is now in a position to focus on scaling up of capacity utilisation over the next 2 years or more, before needing any more Capital Expenditure towards expanding manufacturing capacities. Hence Inox Wind can utilise the Cash Profits from it's operations to bring down it's Net Debt levels during this period, which should help bring down it's Interest Cost in the next fiscal and improve it's Net Profit margins. With healthy Cash Profit margins & negligible CAPEX requirement for the next couple of years, Inox Wind could start paying some dividend to it's shareholders from this fiscal or the next. Finally, to summarise, Inox Wind continues to be one of the best Investment Options in the Renewable Energy space with a medium to long term view, on the back of low existing Valuations and healthy Growth Opportunities.

Bharti Airtel Q3 Numbers - Finer Details

I was anxiously waiting to have a look at Bharti Airtel's Q3 numbers last evening as this is the first quarterly result to have full impact of Reliance Jio's launch momentum. The numbers for Q2 only had partial impact due to Jio. And the numbers have turned out to be exactly as per my expectations. Ever since Jio's launch on 5th Sept'16, I had estimated a drop of between 5 to 10% in Revenues for both Bharti Airtel & Idea Cellular, when compared to their numbers for June'16 quarter. As it turned out, Bharti Airtel's Revenues from India Mobile services business has dropped just over 8% from Rs.15,053 crores to Rs.13,837 crores. Bharti Airtel's Consolidated Total Income is also down by 8.5% during the same period at Rs.23,416 crores. The drop in Non-India Revenues is mainly due to exit/mergers from a few markets in Africa and South-East Asia. Bharti Airtel's Non-Mobile India revenues posted some decent growth, which helped reduce the impact due to drop in Data as well as Voice Revenues from it's India Mobile business.

Getting to analysing the finer details of Traffic & Financial numbers of Bharti Airtel for October to December'16 quarter, it is very important to note that the impact on revenue flow for the operator due to Reliance Jio must not have been uniform for each of the 3 months. The impact must have been the smallest in October and the largest in December. Reliance Jio had about 16 million users at the start of the quarter, while it is estimated to have ended the quarter with about 70 million users. That means the 4G competitor added an average of about 18 million users every month. Also if we look at the overall user experience of Reliance Jio's services, it was pretty bad in most parts of the country during the first half of the quarter, with over 75% of the Voice Calls attempted from Jio numbers to non-Jio numbers failing to connect. Even the Data speeds on Jio's 4G network was quite patchy & inconsistent due to huge number of users abusing the network with full utilisation of FUP limits. Hence during the first half of the quarter, most Jio users must have required to recharge & use their primary mobile numbers, which must have been from one of the other operators (including Airtel). The user experience on Reliance Jio's network improved dramatically from the middle of November'16, when most Voice Calls to non-Jio numbers were getting connected on first or second attempt. Even the Data speeds became more consistent, though it was not as fast as expected, but fairly use-able. Hence the latter half of the Oct-Dec'16 quarter is when the older operators must have suffered the most slowdown in revenue flow due to Reliance Jio's Free services. Not just Data usage, but a substantial portion of Voice usage too must have shifted to Jio.

Have a look at the chart alongside, which shows the progress made by Bharti Airtel's Consolidated Quarterly Total Income since the December'13 quarter onwards. Notice the sharp slide after hitting a peak value of just over Rs.25,500 crores in June'16. The figure for December'16 quarter is even lower than that for June'15 quarter. That means the gains made by Bharti Airtel over 4 or 5 quarters upto June'16, have been wiped out in just 2 quarters. And things are expected to get even more worse for March'17 quarter as Reliance Jio's Free services have been extended till the end of March'17. At the current pace of revenue erosion, I am expecting Bharti Airtel's Total Income to fall to something around Rs.22,000 crores, if not lower, for the March'17 quarter. Airtel has managed to limit the damage to it's EBITDA via some smart Cost-reduction measures during the Dec'16 quarter. But there may not be too many cost-cutting avenues left as it cannot compromise much on the quality of service aspect. This erosion in revenues will stop only when Reliance Jio starts charging for it's services and we get to see some fair tariff-based & quality-based competition amongst all players.

Coming to Users & Usage statistics, this is probably for the first time since Wireless Broadband services over 3G/4G networks were launched, when Bharti Airtel has reported a Q-o-Q drop in number of 3G/4G users as well as the amount of GBs carried by it's network during the

quarter. The volume of GBs consumed by Airtel's customers was growing at a compounded double-digit Q-o-Q Growth rate until September'16. But it has seen a Drop of 3.5% during December'16. This drop in Volume, coupled with another 10.5% Q-o-Q drop in Rate per MB, meant that Bharti Airtel's Revenues from Wireless Data services have taken a hit of about 14% Q-o-Q. Bharti Airtel's Average Rate per MB has now dropped to just under 18 paise, which translates to about Rs.180 per GB. We all know that the Average Rates for most of the heavy Data consumers of almost all operators have now dropped to something around Rs.100 per GB or even lower. Hence I won't be surprised if Bharti Airtel reports an average Rate of around 12 to 14 paise per MB for the March'17 quarter. To compensate for this 25 to 30% drop in average realisation per MB, the volume needs to increase by a similar pace. But it certainly looks difficult in the current scenario and hence we can expect easily another 15 to 20% Q-o-Q drop (if not more) in Revenues from Wireless Data services for Bharti Airtel's India business for March'17 quarter.

Going by the way we have seen improvement in Reliance Jio's user experience since the start of the new calendar year, especially on the Data services front, it is very unlikely that a user of Reliance Jio will pay anything to other operators for availing Data services, atleast till the end of March'17. Most of the owners of 4G Smartphones across the country have already taken a Reliance Jio Sim, atleast as a secondary connection. There won't be much revenue coming to any of the incumbent operators for availing Data services. Operators like Airtel/Vodafone/Idea have been trying their best to entice buyers of new 4G Smartphones with Special Offers of something like 10 GB 4G-Data for the price of 1 GB or the latest offer from Airtel, which offers additional 3 GB 4G-Data every month for a period of 12 months on certain recharge plans, for users upgrading to 4G Smartphones until the end of February'17. All such efforts are being made with an aim to increase usage on their networks and maintain some decent level of ARPU from active users. 

At the same time, these older operators are aggressively trying to attract 2G & 3G users of smaller operators with competitive Voice &

Data tariffs. With intensifying competition from larger rivals with much wider network coverage & matching tariffs, survival will get more & more difficult for smaller operators. I think the shift is already happening at a healthy pace. But there is bad news for the incumbents here as well. There are rumours floating around that Reliance Jio is planning to launch 4G-VoLTE enabled feature phones at aggressive price points of under Rs.1500/-. This coupled with Unlimited All-India Calling & Roaming plans, Reliance Jio could start grabbing market share even in the feature-phone users space, which is still pretty large in our country. I am expecting the launch of the 4G-VoLTE enabled feature phones to align with the point when Reliance Jio starts charging for it's services. This launch will only mean more trouble for incumbents and other smaller operators.

For the December'16 quarter, Bharti Airtel did manage to post some decent growth in Voice minutes. But this growth was powered by the surge in Incoming Calls from Jio network. This resulted in lowering of average realisation rate per min more than the increase in Volume, hence resulting in a small drop in revenues from Voice services as well. Until now most Jio users are using their Jio Sim as a secondary connection. As and when large number of users start porting their primary numbers to Jio network, the Voice service revenues for all existing operators will start getting impacted even more. The Q3-FY'17 results for Bharti Airtel have now given us a fairly good idea of the kind of pain all operators are expected to go through over the next few quarters. Yes, things are expected to remain painful for not just one or two quarters, but for atleast 4 to 6 quarters. We can expect things to stabilise & bottom out Bharti Airtel & others, sometime by the end of 2017 and start improving from first half of 2018 onwards. All eyes are now on Idea Cellular's Q3 numbers. Story is expected to be similar for India's No.3 operator. But it doesn't have the cushion of Non-Mobile services that Bharti Airtel has. Hence Idea Cellular will most probably report slightly larger drops.

Reliance Industries Ltd. - Segmentwise Numbers Progress

India's No.1 company in terms of Annual Net Profits as well as Market Capitalisation, Reliance Industries Ltd., announced it's Q3-FY'17 numbers yesterday. The numbers were fairly good & mostly in line with expectations mentioned by most analysts. In my report here I will focus on things which are generally not mentioned anywhere else. I like to study the progress of a company on a Trailing-Twelve-Months (T-T-M) basis. The study of T-T-M numbers over a period of last 2 or 3 years gives us a fairly good idea of the company's performance trend.

Before we get to the Segment-wise Numbers, first lets quickly have a look at some of the key Consolidated numbers for Reliance Industries Ltd. The following charts are showing the T-T-M progress of RIL's Total Income, EBITDA, Interest Cost & Net Profit figures starting from the period ending December'13 upto period ending December'16. Have a look at the charts:

After hitting a peak of about Rs.4,50,000 crores in June'14, RIL's T-T-M Total Income figure saw a sharp slide and finally bottomed out at about Rs.2,86,000 crores in June'16. There was nothing wrong with the company's performance during this period. The sharp drop in Total Income was purely due to sharp drop in Product prices. 90% of RIL's turnover is contributed by Refining, Petrochemicals and Oil&Gas Production businesses, all of which derive it's product prices from Crude Oil. The Crude Oil prices had started sliding during the 2nd half of the year 2014 and bottomed out sometime in the early part of year 2016. With the Crude Oil prices slowly moving up over the last couple of quarters, we can already see RIL's T-T-M Total Income figure also reflecting the trend. RIL's T-T-M EBITDA chart gives us a better idea of the kind of performance RIL has managed even during the falling product prices regime. While RIL's Total Income started sliding after June'14, it's EBITDA was quite steady around the Rs.45,000 crores mark till September'15, which means the company was able to protect it's profits comfortably even when product prices were falling as it managed it's raw material cycle too very well.

After September'15, RIL has seen it's EBITDA margins genuinely expand from improvement in process efficiencies at both it's Refining as well as Petrochemicals units. Reliance Industries Ltd. has been undertaking a massive CAPEX program for it's Petrochemicals complex, which is expected to help the company improve it's cost efficiency substantially, which will in turn help the company expand it's profit margins. The commissioning of the CAPEX program has started a few weeks ago & will be done in stages over the next few months. We should start seeing it's impact on the company's results from Q4-FY'17 onwards. On one side we will see RIL's EBITDA from it's primary businesses of Refining & PetChem expand over the next few quarters, but we should also be mindful of the fact that RIL's single largest CAPEX program in it's entire history, Reliance Jio Infocom Ltd, is also expected to start billing it's customers from Q1-FY'18. The commissioning of Reliance Jio Infocom Ltd. is expected to be EBITDA negative for the initial year or two. Hence there is a strong likelihood of RIL reporting a Y-o-Y drop in Consolidated EBITDA for a few quarters, starting from Q1-FY'18. Apart from the drop in EBITDA, RIL will also see it's Interest Cost and Depreciation provisioning shoot up substantially from current levels, which might result in wiping out of most of it's Net Profit, atleast for a few quarters. The first couple of quarters of RJIL's commissioning will be the worst for RIL's financial numbers, but things will progressively improve at a rapid pace after that.

Segment-wise Revenue Performance: Currently RIL reports it's results distributed over 5 segments: Refining, Petro-Chemicals, Oil & Gas, Retail and Others (which includes it's Media & Broadband businesses). Once RJIL (Jio 4G) starts billing it's customers, it will form a separate segment.

Let's look at T-T-M progress of RIL's 4 basic operating segments (excluding Others). RIL's primary businesses of Refining & Petrochemicals continue to contribute nearly 90% to the company's Revenues and are responsible for the entire Net Profits. In fact the company is using strong Cash Flows from these businesses to help support & fund it's investments into newer avenues like Media & Telecom.
Refining business of RIL has seen it's T-T-M revenues falling from a peak level of little over Rs.4,00,000 crores to around Rs.2,25,000 crores levels (a drop of about 45% from the peak), which has been steady since the last 3 quarters. Despite the Q-o-Q rise in Crude Oil prices over the last couple of quarters, we are yet to see a noticeable uptick in RIL's T-T-M numbers, mainly because there has not been any significant change in Y-o-Y prices of Crude Oil. Jan-Mar'16 was the quarter when Crude Oil prices had hit the lowest levels in recent years of less than $30 per barrel (though for a short duration only). Hence if Crude Oil prices stay at current levels of $50+ levels during this current quarter, we could see RIL post healthy Y-o-Y growth in Revenues from it's Refining business.
The Petrochemicals business of RIL has done far better than it's Refining business. The T-T-M revenues from RIL's Petrochemicals business dropped just about 20% from it's peak values, bottomed out by the end of June'16 quarter and has already started posting healthy Y-o-Y growth, which is clearly noticeable in the charts. With completion of major CAPEX investments into the Petrochemicals business and it's commissioning, we could see momentum building up further in RIL's Petrochemicals revenues and even bigger momentum in it's profits from these units.
The Oil & Gas production business has faced an even bigger brunt of the fall in Crude Oil prices as it suffered from not just price crash, but even the production at several of the units had to be curtailed temporarily as it because economically unviable to produce when prices were under $45 per barrel. Over the last few months, the Crude Oil price has remained above the $45 levels quite consistently with not much of wild swings as before. Hence many of the Shale Gas units, which had shut production last year, could start producing again now. Any recovery in Revenue levels for RIL from this business will depend on Crude price stability above a certain level and the way the production is ramped up at producing fields.
The Retail business of RIL was growing it's T-T-M Revenues at a steady pace of around 4% Q-o-Q until March'16. This was a healthy growth rate given the extensive competition in this field from not just other Retail chains and standalone stores, but also from the e-commerce biggies. Over the last 3 quarters RIL's Retail business has been posting much faster growth in Revenues, thanks to increased footfalls in it's stores, especially the Reliance Digital stores for Jio Sim cards and LYF devices. Reliance Retail has also started supplying it's devices to other standalone mobile stores in thousands of smaller towns since about June-July'16. RIL's Retail business is now very close to hitting the Rs.30,000 crores T-T-M turnover mark and going by the healthy expected growth pace, we could very well see it hitting the Rs.40,000 crores turnover mark anytime over the next 3 to 5 quarters.

Segment-wise Profit (EBIT) Performance: The charts representing T-T-M Profit (Earnings Before Interest & Tax) for RIL's different segments

show quite different patterns, especially for Refining & Petrochemicals businesses. RIL's Refining business has seen a sharp improvement in it's T-T-M Profits from levels of about Rs.15,000 crores in December'14 to levels of just over Rs.25,000 crores since the last couple of quarters. The trend of increasing profits seems to have come to a halt now as we can see a plateau formation since the last 3 quarters, which has somewhat coincided with trend reversal in Crude Prices. I think it will be an achievement even if RIL manages to keep it's T-T-M Profits from Refining business steady at current levels even during the period when Crude prices are rising. The Refining business is the main Cash Generator for RIL and hence even if it manages to keep the figure steady at around current levels, it will be a very big positive for the company overall.
The T-T-M Profits from Petrochemicals business of RIL started reporting smart growth from the June'15 quarter onwards. The Profit number has already seen a near 50% increase over the last 7 quarters. The trend of increasing Profits from Petrochemicals business is expected to continue at a healthy pace, given the fact that the CAPEX commissioning is underway. I am expecting RIL's profits from Petrochemicals business to grow atleast another 50% from current levels over the next 3 to 5 quarters.
The T-T-M Profit figures for RIL's Oil & Gas Production business only reflect the disastrous period it has faced over the last 6 to 8 quarters due to falling Crude Prices. In fact curtailment of Production has helped limit the losses to not-so-significant levels. I think we will a trend reversal in these figures after another one or two quarters, provided that the Crude Prices remain steady at current levels of improve further.
RIL's Retail business is doing pretty well on the Profit front too, especially over the last 3 quarters. The T-T-M Profit figure from the Retail business currently stands at about Rs.670 crores. Given the strong growth momentum, I think it will hit the Rs.1000 crores mark in the next 3 quarters for sure. And there is scope for continued long term double-digit Y-o-Y Growth in this business even after that.


Telecom Venture: Reliance Jio Infocom Ltd ( RJIL )has been in the news on a regular basis and it's 'Jio' branded 4G services have been in limelight since Aug-Sept'16. As per latest reports, RJIL has already enrolled over 72 million users for it's 4G services across the country and the number is expected to be around 90 to 100 million by the end of March'17. The primary reason for such a large number of users enrolling for Jio 4G services within a span of just a few months is that it is currently offered FREE. As per latest announcement, the service is expected to remain FREE till 31st March'17. This means that during this period, eventhough RJIL incurs all the operational costs of keeping the network online and continue expanding the coverage & capacity, it will not earn any revenue till the end of the FREE period. Starting from 1st January'17, users of Jio 4G service are entitled to 1 GB of Data at 4G speed per day, after which the speed is restricted to 128 kbps. The users have the option to unlock 4G speed again by recharging their account with Rs.51 (for 1 GB data) or Rs.301 (for 6 GB data). The revenues from these recharge options is expected to be negligible till 31st March'17.

As per my estimate, RJIL's Operating Costs (including Interconnect Cost) to keep the Network online must be easily in the region of Rs.1500 to 2000 crores per month, if not more. That means a sum of around Rs.4500 to 6000 crores per quarter is being spent, without earning any revenue from the 4G service being offered. Remember that the expenditure amount mentioned above excludes the Interest Cost on the Debt raised for this venture. All these Expenditures & Interest Costs are currently being Capitalised and will start getting amortised once RJIL's numbers start getting Consolidated into RIL's Profit & Loss account. All this is expected to hurt RIL's Consolidated numbers very badly once it starts recognising RJIL's numbers. The first couple of quarters will be the worst when RJIL's Net Loss could potentially wipe out RIL's Net Profit from other business segments. Things are expected to steadily improve after that, but the pace of improvement will certainly depend on competitive pressures in the industry. The telecom competitors will also react to whatever tariff plans RJIL finally comes up with and hence it will take not just aggressive tariff plans, but also aggressive marketing to get the revenue momentum going. As per my rough estimates, RJIL needs a minimum Average Revenue Per User (ARPU) per month of Rs.300 from about 100 million Paying-Customers to be able to close to covering all it's Operating Costs and Interest Costs.

In the mean time, this extended FREE service period of RJIL is forcing consolidation within the Industry at a rapid pace. Some smaller operators have sold off their auction-purchased 4G-capable spectrum to larger operators. A few other smaller operators are trying to merge together & form a larger force in the market. A couple of other smaller players are still confused on what to do, but their weak financial position will also force them to either merge themselves with a larger operator or shut-down operations in loss making circles & focus on select strong circles. All this consolidation or shut-downs are expected to benefit all the larger operators over the medium to long term, including RJIL. Even though rumours are currently flying that RJIL is likely to extend it's existing offer in slightly altered form beyond 31st March'17, I believe that the more RJIL delays charging it's customers for service, the more damage it is causing to it's image as well as finances. It is quite obvious that RJIL is currently pushing for certain 'Records' in terms of customer enrollments and Network Usage statistics, etc. At the same time it is trying to cause maximum damage to competition. RJIL is able to do all this only because of it's Cash-rich parent's backing. But Regulatory & Financial sense will ultimately prevail and hopefully we should see Fair competition soon.

Vodafone India - Pre-Jio & Post-Jio subscriber addition progress

After sharing the subscriber addition numbers for Idea Cellular & Bharti Airtel for the period from May'16 to October'16 in my 2 previous reports, now it's time to share the comparative numbers for India's No.2 Mobile operator: Vodafone India. Going by the subscribers addition

progress reported by Vodafone over the mentioned 5 months period, it looks highly unlikely that the operator will be able to hold on to the No.2 position for long. At the end of May'16, Vodafone's Total subscriber base was about 23 million more than Idea Cellular's. The gap is down to about 16.5 million by the end of October'16. During the same period, Vodafone's lead in VLR base is down from 7.5 million to just about 4 million. At this pace Idea Cellular is likely to topple Vodafone from the No.2 spot (atleast in VLR base terms) sometime in the next 3 to 6 months time. Vodafone certainly needs to do something aggressive to hold on to it's Ranking.

Vodafone added about 1.5 million subscribers in the 3 months prior to JWO launch, while it's Total subscriber base increased by 1.7 million in the 2 months post JWO launch. Both the numbers are just mediocre. Even on the VLR base front, Vodafone's increase was just 0.62 million & 1.59 million for the two periods, again quite lacklustre compared to the numbers posted by Idea Cellular & Bharti Airtel. Vodafone's VLR base increased by 1.95 million in October'16 alone. Now it remains to be seen if it is one-off jump or whether the operator manages to post similar improvement in following months as well.

Circle-wise Performance: The Circle-wise numbers for Vodafone's VLR base changes for pre-JWO & post-JWO periods throws a lot of interesting facts. The first thing that is obvious is that Vodafone's struggle for increase in VLR subscribers started during the pre-JWO months itself and has continued in the post-JWO months in almost all circles. The 6 circles of Bihar, Haryana, Rajasthan, UP(E) & (W) and West Bengal, together helped increase Vodafone's VLR base by 2.17 million during the 2 post-JWO months, whereas the operator's All-India VLR increase was just 1.59 million for the same period. That means the remaining 16 circles together posted negative VLR base change number. Delhi circle alone saw Vodafone's VLR base drop by 0.64 million during those 2 months, wiping out more than what it had gained in the 3 pre-JWO months. Delhi is an important circle for Vodafone as it holds about 28% Revenue market share there.

Except for the 7 circles I have mentioned above, the VLR base change numbers for most of the other circles are not even worth talking about. Vodafone has traditionally been a very strong player in all the Metro circles (including Tamil Nadu) and Gujarat, UP(E) and West Bengal. Apart from the last 2, Vodafone has clearly shown signs of immense struggle to maintain it's VLR base steady in the face of stiff competition. Amongst the Top-3 operators, Vodafone was the last one to make a move towards introducing 4G services. Hence it is now paying it's price. Vodafone was also the highest spending player in the most recent Spectrum Auctions. But despite the huge purchases, Vodafone still has the weakest 4G spectrum portfolio amongst the Top-3 operators. Vodafone spent a substantial portion on acquiring spectrum in the 2500 MHz Band in several circles. None of the existing 4G services in India are operational on this band and hence the number of handsets supporting this band are very limited currently. The operator will have to push handset manufacturers to introduce more models supporting this band to gain any traction in the 4G space in many circles. Apart from the spectrum band issue, Vodafone also does not have the ability to offer 3G/4G services on it's own in all 22 circles. This is where Idea Cellular did the smart thing as it now possesses the ability to offer 3G and/or 4G service on it's own in all 22 circles, with ability to offer both services in 15 circles. I sometimes wonder about the strategy adopted by Vodafone during the Spectrum Auctions.

The top management at Vodafone India has been talking about consolidation more often than others, which is adding fuel to the rumours about it's intention to merge with another large operator in India. A potential (rumoured) Merger with Idea Cellular is something that deserves some discussion. If at all these 2 operators decide to merge operations in India, it will create India's largest mobile operator, both in terms of subscriber base as well as Revenues. But there is a hitch. Their combined market share in a few circles might be in excess of 50% currently, because of which DoT & TRAI will not allow the merger in current situation. But the same could become a possibility a couple of quarters later when Reliance Jio might have grabbed some decent market share, pulling down the combined market share of Vodafone & Idea to within permissible limits. Apart from Idea Cellular, there are other easy targets for Vodafone India to acquire or merge. Namely Telenor India and Tata Teleservices. Rumours are already flying high about a potential acquisition of Telenor India by Bharti Airtel. If it does fructify, the latter will just extend it's lead over others by a couple of percentage points. Let's see how things progress on the M&A front in the coming months.


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