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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#Vodafone  #VodafoneIndia  #BeSuper  #Airtel  #Idea4G  #GetanIdea  #Jio4G  #RelJio  #Jio

Bharti Airtel - Pre-Jio & Post-Jio subscriber addition progress

In my previous report I have shared the performance of Idea Cellular in terms of Subscriber additions in pre-Jio months & post-Jio months. In this report I will share the comparative performance of Bharti Airtel for same periods, followed by that of Vodafone India in the next report. First let's have a look at the monthly progress of consolidated (all 22 Circles) Total Subscriber base & VLR base for Bharti Airtel from May'16

onwards. In the 3 months prior to Jio Welcom Offer (JWO) launch, Bharti Airtel added a total of 3.17 million subscribers, i.e. an average of about 1.06 million each month. This is nearly double the pace of Idea Cellular's number for the same period. In the 2 months post JWO launch, Bharti Airtel added 4.76 million subscribers, i.e. an average of 2.38 million a month, which is nearly half of what Idea Cellular managed in the same months!! Now let's look at Increase in VLR base. As we can see from the table, Bharti Airtel's VLR base changes have been extremely lumpy in the 3 months prior to JWO launch. In total, Bharti Airtel's VLR base increased by about 2.64 million subscribers in those 3 months, which is about 15% lower than what Idea Cellular managed in those months. But post JWO launch, Bharti Airtel's VLR base has increased by over 4.5 million, which is about 50% higher than Idea Cellular's number for the same period!! This is a very positive development for Bharti Airtel as increase in VLR base could also lead to increase in Network usage. But the important thing to check will be to see if this trend continues of VLR base change numbers goes back to being lumpy for Bharti Airtel in the following months.

Circle-wise Performance: Have a look at the table alongside. Even though Bharti Airtel has seen it's VLR base jump by over 4.5 million during the 2 months of September & October'16, it is quite obvious that only select few circles have done bulk of the contribution. The 9 circles of Bihar, J&K, Karnataka, Madhya Pradesh, Maharashtra, Rajasthan, UP(E) & (W) and West Bengal together contributed to a VLR base increase of 4.35 million subscribers, which is nearly 96% of Bharti Airtel's total VLR base increase from all 22 circles. And an even more interesting point is that in 5 of those 9 circles, Bharti Airtel had seen it's VLR base drop in the May to August'16 period. The circles where Bharti Airtel saw negative growth in VLR base during August to October'16 period are Assam, Kolkata, Mumbai & Tamil Nadu. Other circles where Bharti Airtel saw it's pace of VLR base increase decelerate sharply are Andhra Pradesh, Delhi, Gujarat, Kerala & North-East. The circles where Bharti Airtel is the most dominant telecom operator with over 40% revenue market share are Andhra Pradesh, Bihar, Himachal Pradesh, Karnataka, North-East, Orissa & Rajasthan. The operator has done well in terms of VLR base increase in all these circles except Andhra Pradesh & North-East.

Bharti Airtel already had 3G license & operational 3G network for All Circles, except Kerala, before all the 4G hungama started from June'2015. At that point Airtel had 4G spectrum (either Band 40 or Band 3 or both) in about 12 or 13 circles. Since then Bharti Airtel has been on an aggressive spectrum acquisition spree, even outside Auction process via Spectrum Trading option, to try & have strong 4G spectrum portfolio. India's No.1 Telecom operator spent around Rs.9,000 to 10,000 crores to acquire Band 40 spectrum from Augere and Aircel in a total of about 9 circles and Band 3 spectrum from Videocon in 6 circles. The Aircel spectrum deal was announced a little before the Spectrum Auctions 2016 were to start in October'16, where Bharti Airtel spent another about Rs.13,000 crores to bolster it's Band 1, 3 & 40 spectrum holdings across several key circles. All these spectrum deals has now enabled Bharti Airtel to offer 3G as well as 4G service in all 22 circles of the country, even with multi-carrier mode for both 3G & 4G in several key circles, making it the only operator other than Reliance Jio to be able to offer 4G service across the country on it's own network.

The battle for Data Traffic is very interestingly poised with 4 large operators fighting it out and another 3 or 4 smaller players trying to survive. With total consumption of Giga Bytes in India expected to multiply several times over the next few years, it will be interesting to see who all manage to grab a bigger bite than their existing market shares. The real competition will start only after Reliance Jio starts charging it's customers for service.

Idea Cellular - Pre-Jio & Post-Jio subscriber addition progress

As we all know that Reliance Jio had started offering it's services under the LYF handset bundled Preview Offer sometime in May'16. Since one needed to purchase a LYF handset to enjoy the Jio Preview Offer benefits, the number of subscribers Jio added during the months of May to July'16 were very limited, something around an average of less than 1 million a month. It was only in the 3rd or 4th week of August'16 that Jio opened the floodgates with opening of the Jio Preview Offer to almost all 4G handsets in the market, existing as well as new purchases. Hence August'16 alone must have seen about 3 million users getting active on Jio's network. This was followed up with launch of Reliance Jio services on 5th September'16 with the start of the Jio Welcome Offer, which further accelerated the pace of new users joining the Jio network.

We now have the monthly data released by the Telecom Regulator (TRAI) for Operator-wise & Circle-wise Subscriber numbers, both Total Subscribers as well as VLR (Active) Subscribers, till the month of October'16. For this analysis, I have collated Subscriber Data since the month of May'16. Reliance Jio has started announcing it's monthly Subscriber numbers from the month of September'16. Hence the 16 million subscribers which were enrolled by Reliance Jio till the end of September'16, also included the nearly 5 million subscribers enrolled under the Preview Offer, prior to the launch of Jio Welcome Offer on 5th September'16. Reliance Jio added another 19.6 million subscribers in October'16 to take it's Total Subscriber base to 35.6 million. October'16 could prove to be the best month for Reliance Jio in terms of monthly subscribers addition.

Coming to Idea Cellular, it was expected that subscriber additions for all operators (other than Reliance Jio) would slowdown substantially from September'16 onwards. But the subscriber addition numbers for some of the larger operators like Bharti Airtel & Idea Cellular are telling a completely different story. I will focus on Idea Cellular's numbers in this report ( & try to write a separate report for Bharti Airtel).

The table alongside is showing the consolidated (All 22 Circles) subscriber numbers (Total as well as VLR) for Idea Cellular from May'16 till October'16. As we can see, for the 3 months prior to the launch of Reliance Jio's Welcome Offer (i.e. till August'16), Idea Cellular added on an average less than 0.5 million new subscribers every month, while the increase in VLR base was an average of 1.02 million every month. But for the 2 months post the launch of Reliance's JWO (i.e. for September'16 & October'16), Idea Cellular saw a sudden acceleration in subscriber additions with 8.25 million subscribers getting enrolled in those 2 months, which means an average of little over 4 million a month!! The picture is not that great on the VLR base front, but still Idea Cellular's VLR base increased at an average of 1.44 million each month, which is still nearly 40% higher than what Idea Cellular did in the 3 prior months. This has me surprised for sure.

Idea Cellular had about 20% VLR base market share in August'16. Hence out of the near 36 million subscribers that Jio added till October'16, we can expect approximately 20% of them to be Idea Cellular customers too, i.e. about 7 million in number. This should have had atleast

some negative impact on Idea Cellular's VLR base progress post August'16. But the result was opposite. Idea Cellular's VLR base increased by about 2.9 million in those 2 months post August'16. In all likelihood, a major portion of the Idea customers who also purchased a Jio connection, are still using their Idea Sim card, especially the ones who have their Idea number as their Primary number. All such Idea customers who have taken up a Jio connection will definitely consume less amount of Data & Voice minutes on Idea Network. To compensate for this loss of volume, Idea Cellular seems to have successfully went on an aggression in trying to attract customers from other rivals, especially the smaller ones. Operators like Reliance Communications, Tata Teleservices, MTS & Videocon together lost quite a few million customers during the last few months. Even the larger peer Vodafone India has done very poorly on the subscriber addition front in several of it's circles. Idea Cellular seems to have grabbed a substantial portion of all such subscribers who were looking to change their mobile operator.

Circle-wise Performance: A look at the Circle-wise changes in Idea Cellular's VLR base for 3 months prior to Jio launch & 2 months post Jio launch, immediately tells us the areas where the operator has increased it's aggression and the areas where it is feeling some heat from

competition. Let's first look at circles where Idea Cellular's pace of VLR base increase has suddenly decelerated. The Metro Circles of Mumbai, Delhi & Kolkata, alongwith Tamil Nadu (Chennai numbers are now included in Tamil Nadu's numbers) certainly figure in this list. In each of these Metro circles, Idea Cellular is a relatively late entrant (compared to it's larger peers) and hence it was growing faster on a smaller base. The strong double-digit (or near double-digit) growth in VLR base in each of the 4 circles between the 3 months of May to August'16 are a clear certificate of the same. Idea had launched 3G services using 900 MHz spectrum in the 2 circles of Delhi & Kolkata in 2015, while it had launched 4G service (No 3G) in Tamil Nadu circle in first half of 2016. Idea Cellular is the weakest in Mumbai as it offers neither 3G nor 4G service on it's own. Hence it's susceptibility in Mumbai circle is clearly seen in 2 months post Jio launch. The customers in Metro circles are also expected to upgrade to 4G services faster than other circles. Hence capability to offer 4G service or atleast good quality 3G service becomes even more important in these circles.

Amongst it's Circles of strength, Kerala has done poorly with a negative growth in VLR base during post Jio 2 months. Part of it could also be due to it's cancellation of 3G ICR with Airtel, where the latter's customers were roaming on Idea Cellular's 3G network. Hopefully Idea Cellular will bounce back in Kerala soon as it is one the most important circles for the operator. In circles of Maharashtra, Madhya Pradesh, Andhra Pradesh and Gujarat, Idea Cellular continued to increase it's VLR base, though at a slower pace. The circles where Idea Cellular has seen a sharp improvement in pace of VLR base expansion are Assam, Bihar, Haryana, UP (E) & (W) and West Bengal. These 6 circles added over 1.6 million users to Idea Cellular's VLR tally during the 2 months post Jio launch. Even in Karnataka circle, where Idea Cellular is relatively small, it has continued to see healthy growth, both pre-Jio & post-Jio months. Idea offers 3G service in Karnataka via ICR with Vodafone now, but it is mainly banking on it's own 4G service for growth, having launched it in first half of 2016.

Finally, to summarise, I have to admit again that Idea Cellular has positively surprised me a bit with the pace of subscriber additions post Jio launch, especially on the VLR base front. By the end of December'16, nearly 6 to 8% of Idea Cellular's customer base might have taken a Jio Sim, atleast as a secondary connection. Hence the operator will be impacted due to substantially lower usage from these customers. For the rest of the 90+% customer base, there will be impact coming from lower tariffs for both Voice Calls as well as Data service. Hence Idea Cellular will be hoping for substantially increased usage, especially for Data service, from all such users so that drop in ARPUs will be limited to a small number and the increase in VLR base will help compensate for most of it. In my previous reports, I had mentioned that I am expecting operators like Bharti Airtel & Idea Cellular to post a 5 to 10% drop in Total Revenues for Q3-FY'17. But looking at the aggressive expansion by both these operators, there is a strong chance that the impact (drop) will be closer to the lower end of my expectation. The impact due to Demonetisation will most-probably be very small and as it was temporary in nature, only for the initial few weeks, I don't think it will drastically alter my expectations. We will come to know of the Q3 Results in the next couple of weeks.

Car Market-shares in Q3 & Demonetisation impact

After selling a record number of cars, totalling to 7.9 lakh units, during Q2-FY'17 (i.e. July to September) and recording a healthy Y-o-Y Growth of almost 18%, most of the car makers were looking forward to a buoyant second half of the fiscal. The 14 car brands (excluding the luxury & super-luxury segments), whose sales data I have considered here for my analysis, then followed it up with another new monthly record number of car despatches in October'16 at 2.78 lakh units. Then came the 8th November announcement from our PM about demonetising the Rs.500 & Rs.1000 currency notes, a step which is expected to bring substantial positives for the country & it's citizens over the longer term, but was certainly expected to negatively impact sentiment & business dynamics in various sectors in the near term. The Passenger Car market was not going to be any exception. But the Total Volume Despatch numbers from the 14 car makers in India for the month of November'16 posted a Y-o-Y Growth of 2%, surprising most analysts. But 6 of the 14 brands had reported double-digit % Drop in Sales for November'16. The main Growth drivers were Maruti Suzuki, Volkswagen, Tata Motors & Toyota, who all posted double-digit % increase in despatches.

After a not-so-disappointing November'16, all eyes were on December'16 numbers as the month was going to face not just Demonetisation blues, but also the year-end effect too. Maruti Suzuki & Tata Motors posted a 15+% M-o-M Drop in despatches, though on a Y-o-Y basis it was just about 5% lower for Maruti Suzuki and over 30% increase for Tata Motors. But a smart M-o-M improvement in despatch numbers for manufacturers like Honda, Mahindra, Renault, Volkswagen & Toyota helped restrict the deficit created by fall in numbers from the market leader, to a relatively small number. The Total Despatch volumes for the 14 car makers was just 1.4% lower on a Y-o-Y basis and 6% lower on a M-o-M basis.

The Demonetisation announcement was expected to create near term issues for the automobile industry, not just on the demand side, but also on the supply side. The lack of currency notes in the system was expected to create issues in terms of problems in movement of Goods as well as factory workers needing time off from work to visit the bank and things like that. November & December'16 were expected to have the maximum negative impact with the impact decreasing towards the end of December. If we go by the Despatch numbers for November & December'16 together, the Car industry as a whole has managed to produce & despatch almost the same number of vehicles as it did in last 2 months of 2015. This data point tells us that things were not as bad on the ground as being made out to be by the several News Channels & Economists. Ofcourse we cannot jump to any specific conclusion so soon and we will have to keep an eye on the monthly numbers for another few months before we can arrive at some conclusion with regard to effect of demonetisation on the Car industry. But the numbers from the industry for the first 2 months have been a bit of positive surprise. Hopefully it will stay that way in the coming months too.

Coming to changes in Market shares for the Car Industry, the table alongside shows the market shares of different manufacturers for Q3-FY'16, Q2-FY'17 and Q3-FY'17 to give us an idea of how things have been moving. India's No.1 Car maker, Maruti Suzuki has seen it's market share drop by about 50 bps Q-o-Q, though it is still higher Y-o-Y. On the other hand, No.2 manufacturer Hyundai's story is exactly opposite. It's market share has shown nearly 140 bps improvement Q-o-Q, but it is still lower on Y-o-Y basis. No.3 player Mahindra has managed to hold on to it's market share Q-o-Q, but is about 110 bps lower on Y-o-Y comparison. At No.4 is Renault-Nissan Alliance, which has seen a near 60 bps Q-o-Q erosion in market share, but is still significantly higher in Y-o-Y comparison. Renault-Nissan Alliance will now be gunning for the No.3 spot in the new year. At No.5 & 6 are Tata Motors and Toyota, both seeing an improvement in market share in Q-o-Q as well as Y-o-Y comparison. But Tata Motors has clearly outperformed Toyota as it was 25 bps behind the latter in Q3-FY'16, while it is now ahead by over 50 bps this year. With 2 or 3 significant new launches lined up for 2017, Tata Motors will look to continue it's march up the market share chart. Honda continues to be the biggest loser in the pack this year with it's market share dropping another 90 bps Q-o-Q. Honda was comfortably at No.4 position in Q3 last fiscal, then dropped to No.5 position in Q2 this fiscal and is now at No.7 position in Q3 this fiscal. The latest launch of BR-V or updated versions of Brio & Amaze don't seem to have helped Honda arrest it's sales slide. It is now preparing to launch the new City model, which should certainly help gain some of the lost market share back. Just like Tata Motors & Toyota, Volkswagen Group too has seen improvement in it's market share both on Y-o-Y basis as well as Q-o-Q basis. But I don't think it will be able to overtake Ford Motor to grab the No.8 position in the near future.

As with any December, most manufacturers had threatened to hike their product prices by 1 to 3% from January'17, but they might have to postpone their price-hike decision depending on the demand for their products in the new year. Generally the manufacturers bring a few updates to their existing models while hiking prices. Let's see if the manufacturers are able to pass on the price hike to the consumers or it is nullified via increase in discounts.

Eicher Motors Ltd. - Royal Enfield's recent Sales Performance & Expectations

In my previous Sales Performance update of Royal Enfield motorcycles, written about 6 months ago, we had seen the monthly sales number to be steady around the 50,000 units mark. With the company commissioning expanded production capacity from the month of July'16, Royal Enfield's monthly sales were expected to go well beyond the 50,000 units mark. Let's check out how the monthly numbers have progressed from the following chart:

We can clearly see from the chart alongside that Royal Enfield's motorcycle sales consistently improved M-o-M from June'16 till the festival season in October'16, when the monthly number peaked at little over 59,000 units. The figures for November & December'16 have been slightly lower than the peak number, but not as sharply lower as the drop experienced during the last 2 months of Calendar year 2015, when the sales were lower by about 9% compared to the October'15 number. In comparison the monthly sales number for November'16 & December'16 were lower by just about 3% when compared to October'16 number. This is despite the Demonetisation effect that India experienced during the last 2 months. This certainly talks volumes about the demand for Royal Enfield motorcycles. The strong sales performance of Royal Enfield during last 2 months of 2016 compared to last 2 months of 2015 has helped push up the Y-o-Y Growth Rates for the company during the last 2 months, which is seen in the chart below.

Royal Enfield had seen it's Y-o-Y Sales Growth taper off sharply from about 65% level in January'16 to about 30% level for the months of July to September'16. The Y-o-Y Growth Percentage has jumped sharply to over 40% level for the last 2 months, purely because of Low-base effect. Now here comes the challenging part for Eicher Motors & Royal Enfield. Look at the Sales Chart above once again. After low sales numbers for months of November & December'15, the company had seen a sharp jump in sales for the next three months. To be able to report a 40% Y-o-Y growth, Royal Enfield will have to sell in excess of 67,000 units during January'17, which looks quite impossible given the Capacity constraints as well as increased competition, especially from Bajaj's Dominar as well as Yamaha's expected new launch in the higher capacity segment. Even for a 30% Y-o-Y growth, Royal Enfield will have to sell in excess of 62,000 units, which is achievable but won't be easy. My estimate is that Royal Enfield will report sharp drop in Y-o-Y Growth rate for the months of January to March'17, something in the range of 22 to 25%, with monthly sales of around 60,000 to 62,000 units at best. This could be the slowest growth rate posted by Royal Enfield in quite some time. But remember that with increasing comparison base, even growth rate of over 20% is very respectable.

We should also be prepared to see the Y-o-Y Growth rate (possibly) dipping to under 20% during the second half of 2017. In comparison to most other volume bike makers, this growth being experienced by Royal Enfield is still very very respectable. What concerns me is the high expectations that many retail shareholders have from the Eicher Motors' stock. At the current share price of about Rs.22,700/-, Eicher Motors' stock is already trading at over 40 times it's EPS for the Trailing Twelve Months. The company's T-T-M Net Profit has grown at over 60% by September'16. The number for December'16 quarter is also expected to be strong. But I am expecting a deceleration in Net Profit growth for Eicher Motors Ltd from the March'17 quarter to something like 30%, as most of the Profit growth is riding on the back of strong growth in sales of Royal Enfield motorcycles. Hence we should not expect any run-away rally in Eicher Motors' stock going forward. I am expecting the P/E Ratio enjoyed by this stock to gradually come down to 30 to 35 levels over the next 12 months or so. Hence the shareholders of this company should have only moderate returns expectations over the coming months & years. As per my estimate, Eicher Motors will trade in the range of Rs.21,000 to Rs.26,000 over the next 12-15 months.