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.