Wednesday, January 25, 2017

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.

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