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 AGR Analysis - Q2-FY'17 numbers are the start of a new story.

The Q2 of FY'17, i.e. the period July to September'2016, will be the start of a new Telecom story. And all of us know why, isn't it? Yes. It is the start of Reliance Jio becoming available to a much wider population from sometime around the end of August'16, when Jio Preview Offer was opened to a huge list of 4G smartphones. Soon after that, on 5th September, Jio was made open to the public with it's Welcome Offer, which offered everything from Data, Voice calls, SMS & access to Jio Apps, FREE till 31st December'16. This lead to a mad rush to acquire a Jio Sim by millions of 4G Smartphone users. This migration of usage (atleast temporarily) from one of the existing operators to Jio by a few million users, starting from the month of September, was definitely going to affect the Revenues of all existing operators. Ofcourse, the impact was expected to be small in Q2 as Jio started activating Sim cards at a rapid pace only in the last month of the quarter. In one of my previous posts I had mentioned that I was expecting a 3 to 5% erosion of Industry's Gross Revenues in Q2 and a bigger hit of 10 to 15% in Q3. Now that we have Adjusted Gross Revenue (AGR) numbers for Q2-FY'17, let's see how the industry has fared.

For my analysis, I have been keeping a track of AGR numbers for all 22 circles of 9 Telecom operators: Airtel, Vodafone, Idea, Tata, Aircel, BSNL/MTNL, RCom, Telenor & Jio. As of now Jio's numbers are close to Zero (insignificant). The other 8 operators comprise of nearly 98% of the Industry's Total Revenues. The Total AGR for these 9 operators across all 22 circles was Rs.40,097 crores in Q1-FY'17, which has dropped by 3.3% to Rs.38,764 crores in Q2-FY'17. This was very much on expected lines. It is interesting to see how the different operators and circles

have performed Q-o-Q. After collating all the numbers, I was slightly surprised to note that impact of Jio's Welcome Offer is the least in the Metro Circles and the maximum in the C-Category Circles.[The AGR number for Metro Circles in March'16 quarter looks unusually taller mainly because of abnormal numbers from MTNL during that quarter.] On a Q-o-Q comparison, AGR for Metro Circles is down by just 1.1%, for A-Category Circles it is down by 2.3%, for B-Category Circles it is down by 3.9% and for C-Category Circles it is down by a whopping 8.2%. What does this indicate? Does this mean that Jio did not attract a decent subscriber base in Metro & A-Category Circles? I certainly don't think that is the case. The thing is that Metro & A-Category circles were expected to be the early adopters of 4G service. Hence the incumbent operators were more focused on protecting their Revenues & Customer base in these circles from migrating to Jio. Hence the Top-3 operators, i.e. Airtel, Vodafone & Idea, invested substantial Capital to aggressively expand their 4G/3G coverage in these circles and also in Urban areas of B & C-Category Circles. All the existing operators also made rapid changes to their 3G/4G Data packs and also came out with more & more attractive Special Offers for their Data consumers, in an attempt to keep a user tied to their network. And the incumbent operators certainly seem to have done an excellent job.

The other factor that might have helped here is the higher proportion of postpaid user base in Metro & A-Category circles. Most of the Postpaid users did not migrate to Jio during this Welcome Offer period as they wanted to check Jio's quality of service before jumping ship. At the same time the incumbent operators offered these postpaid users more & more Voice minutes or Data Limits within their existing plans, making it more attractive to remain with a proven operator. In case of Pre-paid users, there is no monthly commitment and hence they can easily alter their Recharge/STV choices & frequencies depending on requirement/offers. Another point being availability of Jio's 4G network across 18,000 cities & towns and over 2 lakh villages, spread across all 22 circles. On the other hand, only Airtel, Vodafone & Idea had their 4G networks operational, that too in select cities & towns, possibly more focused on areas where they knew there is a higher proportion of 4G Smartphone presence. The period between September'16 to June'17 could see the maximum pace of rollout of 4G sites by the Top-3 operators. They will also rapidly deploy the recently acquired 4G-capable spectrum in several new circles in the coming months, in an attempt to try & bridge the huge gap between Jio's 4G coverage and that of their own.

Operatorwise Categorywise Performance: It is even more interesting to see how different operators have fared in different categories. In

the Metro Category, Airtel surprisingly managed to post a 1.2% growth in AGR. Metro is one of the only 2 Category of Circles where Airtel does not hold the No.1 Rank, but it has now significantly closed the gap to Vodafone. Airtel could possibly wrest the No.1 Rank here in Q3-FY'17. MTNL is the only other operator to report Q-o-Q growth, but it's quarterly numbers recently have been quite volatile. All other operators have reported a Q-o-Q drop with RCom being the worst with 9% erosion in AGR. In Category-A Circles, BSNL was the only one to report growth with 1.7% Q-o-Q increase in AGR, but here again it can be dismissed to quarterly volatility. Amongst the other operators, the best performer surprisingly was Tata Tele with just 0.2% drop. It's 3G operations in most of the Category-A circles seems to have managed to keep it's customers tied to it's network. Idea was a big loser from the Top-3 with nearly 5% erosion in AGR. The worst performers were Telenor & RCom with 21% and 14% Q-o-Q drops in AGR.

Category-B & C Circles are where each of the Top-3 operators too have taken a considerable hit. BSNL is again the best performer in both these Categories, with 10.2% Growth in Category-B and a small drop of 2.2% in Category-C Circles. Category-B is the other segment where Airtel was trailing someone in AGR market share. With the No.1 player Idea reporting a bigger drop in AGR this quarter, Airtel is now almost on-par with it. The worst performers in Category-B Circles were again Telenor & RCom with 13% & 10% drops respectively. The same in Category-C Circles were RCom, Telenor & Idea with 32%, 16% & 14% drops respectively. Airtel which is the dominant player in the Category-C Circles with nearly 48% market share, also experienced a substantial 8.8% drop in AGR during Q2-FY'17. This is also the only Category where Airtel has reported a small drop in AGR market share by 30 bps. In all the other 3 categories, Airtel has either increased it's market share or managed to increase it with a clear outperformance.

On an overall basis, Telenor has taken the biggest percentage hit with near 17% Q-o-Q drop in AGR, followed by RCom with near 13% drop. Aircel's numbers are not exactly comparable here as I had to make some adjustments to reported numbers as it included the revenues from Spectrum trading in 7 circles. Even though BSNL/MTNL combine reported a 4.9% Q-o-Q increase in AGR, the Total AGR for the company was lower than each of the 5 quarters prior to Q1-FY'17. Hence we need to take BSNL/MTNL's Q2 numbers with a pinch of salt. Tata Tele was the surprise package here as it has managed to face the Jio storm pretty well in Q2-FY'17 with a small 3.4% Q-o-Q drop in AGR. This is despite the fact that Tata Tele has Zero 4G presence and 3G operations in only 8 circles. The credit for the good performance clearly goes to Tata Tele's operations in Category-B circles, which contributes nearly 48% to the company's Total AGR, where it reported a negligible 0.2% drop. Amongst the Top-3 operators, Idea Cellular is the one to take a significant hit with it's AGR dropping by nearly 6.2% Q-o-Q. The 2 most important circles for Idea Cellular were Rest of Maharashtra and Madhya Pradesh, which together contribute around 28% of the company's Total AGR. Idea Cellular's AGR in these 2 crucial circles reported a Q-o-Q drop of 8.5% during Q2-FY'17. The No.1 & No.2 operators, Airtel & Vodafone, proved to be the most resilient to Jio's onslaught in Q2-FY'17 with a small 2.8% Q-o-Q drop in AGR.

Now all eyes will be on 3 things: 1) How does Jio's QoS (Quality of Service) progress during the Welcome Offer Period. 2) Whether Jio announces new tariff plans or Offers in December. 3) How well do Airtel, Vodafone & Idea make use of their existing or recently acquired spectrum resources in the coming 6 months in trying to combat Jio as well as each other. Jio was facing substantial Call-connectivity issues with other operators throughout September & October. But over the recent couple of weeks, the issues seem to have been considerably resolved as most users are reporting Call-connectivity within just 1 attempt. Now Jio needs to focus on improving the experience with Data service, which had taken a beating due to the huge traffic being generated from the millions of customers it added during the last 2-odd months. Some reports suggest that Jio is rolling out LTE-Advanced (Carrier Aggregation) technology on a PAN-India basis, which should help the operator in better utilising it's Spectrum resources and improve the overall Data through-puts for most users. Let's wait & watch on how successful the operator is in completing this task well before the Welcome Offer period ends. Reliance Jio can expect to see a major portion of it's Welcome Offer user base to upgrade to being Paid-users only if the operator is able to offer decent QoS both on Voice Calls as well as Data service atleast for the last 2 weeks of the Welcome Offer period.

Telecom Subscriber Base (VLR) Analysis for Apr-Jun'16 quarter.

About 3 weeks after the end of every month, all Telecom Operators declare their Circle-wise Subscriber Base, which basically includes all the Activated Sim Cards out in the market. This also takes into consideration the Sim Cards that have been De-activated due to MNP requests or 90-days Zero Use period. But thanks to the multi-Sim usage profiles of several lakhs of Indians, not all Activated Sim cards are in use all the time. For this the TRAI started collating the VLR (Visitor Location Register) Database from all operators and declaring the highest VLR Percentages for every respective month. VLR basically tells us how many Sim Cards of each operator was actually hooked to it's Network alteast for some time during that respective month. But all this Data Collation takes additional 4-6 weeks. The VLR Data for the month of June'16 was declared by TRAI on 9th of Sept.'16, i.e. nearly 10 weeks after the end of June month.

I have now started arranging Operator-wise All-India Subscriber Base Information from the period ending March'16, into my Spreadsheets, in order to analyse the changing scenario in the Telecom market & it's possible co-relation with the Revenue performances of each operator. I had presented my views on Telecom AGR numbers for Apr-Jun'16 quarter a couple of weeks ago at this link. Bharti Airtel was the clear Best Performer in terms of Q-o-Q growth in AGR, followed by Vodafone and then Idea Cellular. It will be interesting to see how the VLR Subscriber numbers for each operator have changed during the quarter. Remember that Reliance Jio had started issuing it's Sim cards under the LYF Handset Preview Offer from the middle of May'16 and is estimated to have activated nearly 1 million Sim Cards during the quarter ending June'16. Another major development during the quarter was Closure of CDMA Operations of Reliance Communication (ADAG) across the country during the month of June'16. The company wished to switch it's CDMA users to it's 4G network, which it was launching in collaboration with RelJio, but everyone knows that the switchover wasn't smooth for the company & it's subscribers. This CDMA closure has caused a major upheaval in the numbers reported by RCom.

The Table here displays the Operator-wise All-India VLR % reported by TRAI for every month since March'16. This figure normally considers the Highest VLR number for that particular month. As we can see, the Overall Industry-wide VLR % number has seen a nominal 64 bps decline between March'16 to May'16, but a sharp 186 bps decline during June'16. RCom's VLR % dropping from 89.10% to 72.50% is the main reason for a sharp decline in June'16. Let's ignore RCom for the time being as it forms less than 3.5% of the Industry's AGR, despite a much stronger subscriber market share. It is interesting to note that each of the Top-3 operators, i.e. Airtel, Vodafone & Idea, have seen a small erosion in their VLR % during the Apr-June'16 period. While Airtel has seen an 80 bps decline, Idea has reported a 108 bps erosion and Vodafone has posted the biggest decline at 136 bps. These VLR % declines experienced by the three largest operators is most certainly due to two factors: Increased competitive pressure from BSNL and few other smaller operators & secondly from the fact that nearly 1 million RelJio Sim cards were activated during the second half of the quarter. RelJio has not yet started reporting it's Subscriber numbers to TRAI as it was undertaking 'Testing' of it's Networks until 5th of September'16. Hopefully we should be getting RelJio's subscriber numbers from September'16 onwards.

The Table alongside compares the EoP VLR Subscriber base of each operator at the end of March'16 and June'16 to know the progress the made by each of them. The Highlight of the table has to be RCom, which has lost over 2 crore VLR subscribers during the quarter, with 90% of them during the month of June'16. What is surprising is that RCom was claiming to have about 5 million CDMA subscribers, which it was asking to switch to 4G. But the drop in VLR subscriber base is 4 times of that number. If the VLR numbers for July & August don't post some big correction, then RCom is potentially going down the Closure path in the coming quarters. Apart from RCom, Vodafone was the biggest loser during the quarter, in terms of VLR subscriber base, having lost over 1.3 million subscribers, which is quite a big surprise. Tata Tele was next with a loss of nearly 0.8 million, which is not surprising given the fact that it is also curtailing it's CDMA operations in several circles. In all likelihood, Tata Tele must has been a Net Gainer in VLR subscribers on the GSM front. Idea was the next big loser with nearly 0.7 million users, possibly mainly due to reduced number of In-roamers on it's network. Until a few months ago, subscribers of Airtel & Vodafone were using Idea's 3G networks in certain circles via 3G-Roaming agreements. Airtel has pulled out of these agreements after having launched 3G service on it's own in 21 of the 22 circles. This must have impacted Idea's VLR subscriber numbers as well as Revenues to some extent.

In terms of percentage gainers, Aircel added nearly 2.5% (nearly 1.6 million) new VLR subscribers during the quarter. But Bharti Airtel was the biggest gainer in terms of Gross VLR subscribers addition at nearly 2.3 million new users. Airtel's VLR subscribers market share at the end of June'16 now stands at just over 27%, commanding a huge 6%+ lead over 2nd placed Vodafone. BSNL/MTNL too added nearly 0.7 million new VLR subscribers, followed by Telenor which added a little under half a million new users. In terms of VLR subscribers market share, Aircel is now closing in on BSNL/MTNL's combined base. Both Aircel as well as BSNL are aggressively marketing their respective 3G services with some very attractively priced Data packs. It will be interesting to see is BSNL/MTNL manages to stay ahead of Aircel in the coming months or not.

RelJio is expected to have started impacting the VLR numbers of all existing operators to a very small extent from June'16 onwards, but the impact is expected to get much larger from Aug or Sept onwards. With RelJio having announced a full scale launch from 5th September, we can expect the operator to start declaring it's subscriber numbers from the current month. I will try & post a fresh update on VLR numbers status every month from hereon, possibly as soon as I receive the numbers.

Telecom Analysis - June Quarter AGR Numbers

August'2016 has been an action-packed month for the Telecom industry. Mainly because Jio's activities have built up quite a bit of pace, which has got all the existing operators running for cover & fire their own ammunition. After bundling a Jio 4G Sim with every LYF handset sold (with 90 days of Preview Offer) from the month of May'16, which picked up considerable pace only in June and July, Reliance Industries started offering the Preview Offer Sim cards to anyone with a compatible 4G handset from a huge list of manufacturers in the second half of August. Reliance Jio was expected to have activated over 3 million 4G Sim cards under 'Test' by the end of July'16, but the mad rush over the last 2 weeks must have helped it double the Active Sim Cards number by the end of August'16. With so many users eligible to use Free 4G Data and even Voice Calls (to some extent) for a period of 90 days, it is bound to impact the Revenue numbers of all existing operators for the September quarter.

TRAI recently declared the Operatorwise & Circlewise Revenue numbers for June'16 quarter. This is probably the last quarter before Reliance Jio starts making a noticeable impact on numbers for all other existing operators. Hence it becomes important to see which operators have gained pace just before the real war begins. In my analysis here, I have considered the Circlewise Adjusted Gross Revenues for all operators. (RCom has not declared it's numbers for June'16. Hence I have considered a 3% drop from it's respective March'16 numbers, just to get some approximate value. In any case RCom forms just about 3.3% of the Industry's AGR. Hence it's not going to impact the actual numbers much.)

The AGR numbers for the entire industry has posted a Q-o-Q growth of around 1.3%. As expected the Top-3 operators have managed to grow at a better rate with Airtel leading the growth charts, followed by Vodafone (surprisingly) & then Idea. Tata Tele and Telenor too have posted marginal Q-o-Q growth, while Aircel has posted a marginal drop. The biggest shocker came from BSNL/MTNL combine. It's AGR numbers are down by nearly 19-20% Q-o-Q, after having posted a strong 10+% growth in March'16 quarter. It seems as if BSNL/MTNL booked some advance revenues during March'16 quarter in order to make the numbers for the previous fiscal look good. Will be interesting to see the numbers & market share BSNL/MTNL manage to post for Sept'16 quarter. BSNL was the first to announce super-aggressive 3G tariffs offering 10 GB Data for just Rs.549/- and Unlimited (No FUP) Data for Rs.1099/-. These tariffs have become applicable from 25th August.

Metro Circles: Thanks to the massive fall reported by BSNL/MTNL, all other operators have seen their market share jump up Q-o-Q. Vodafone continues to lead here with over 34% market share & a healthy growth number too. But Airtel clearly seems to be catching up with stronger growth. Both Airtel & Vodafone are offering 3G as well as 4G service in Mumbai, Delhi & Kolkata circles. Idea is clearly losing this race, first by being a late entrant and now because of inability to offer 4G in all the 3 circles and No 3G in Mumbai circle. Surprisingly Tata Tele has managed to post marginal growth despite offering only CDMA services in Delhi and only 2G GSM services in Mumbai & Kolkata circles. It's Wireline business seems to helping it here. But still it's commendable to see Tata Tele fighting for the 3rd spot in the Metro Circles category with No 3G or 4G service.

Category-A Circles: Despite substantial fall reported by both BSNL and Telenor, the AGR for Category-A Circles has posted a 1.2% growth. Airtel has extended it's market share lead with fastest growth rate. Airtel now commands a third of the revenues in this category, a full 140 bps improvement over March'16 number. Vodafone & Idea too have seen 50 bps and 20 bps improvements. Vodafone growing faster than Idea in Category-A surprised me. I was expecting Idea to do better as it had 4G presence in more circles in this Category than Vodafone. Let's see if things change in the current quarter. Tata Tele has again done a decent job here. Telenor's performance in Maharashtra & Gujarat circles was quite disappointing in June quarter.

Category-B Circles: This category has proved to be the fastest growing one during the June'16 quarter. Airtel has posted a super-strong near 10% Q-o-Q growth in AGR, but is still in the 2nd spot in this category. Idea continues to lead in this category despite a lacklustre 1.7% growth. While Idea lost 80 bps in market share, Airtel has gained 140 bps, thus bridging the gap considerably. Vodafone & Telenor too managed to post healthy growth rates in this category, which helped them enhance their market shares by a small extent. Vodafone again managing to outpace Idea's growth even in this category is really commendable. It will be interesting to see if Vodafone can manage to hold on to this momentum in the coming quarters. Telenor's UP(E) & (W) circles continue to do well and the operator is now comfortably placed at the 4th spot in these 2 circles with near 9% market share.

Category-C Circles: Airtel has taken another big leap here and is just a fraction away from the 50% market share mark. The rest of the 6 operators have managed to hold on to just over 50% of the market in this category. Vodafone, Idea, Aircel and Telenor have all posted decent growth and have also managed to inch up their market shares, all at the expense of BSNL. Another interesting point is: Telenor, which operates only in Bihar circle in this category, is now about 3 times bigger than Tata Tele in that circle, despite being a very late entrant. Telenor now commands a respectable 7.3% market share in Bihar circle. This is the only category where Aircel has managed to post some decent growth in AGRs. Tata Tele is the smallest operator here and may seriously look to close down it's operations in these circles in the near future.

Summary:

Airtel has clearly gained good momentum in June'16 quarter and is seriously pitching itself for some tough competition with RelJio. The announcement of the 'Mega Saver' pack earlier this week was one big step in that direction. Each of the existing operators is going to get hurt due to RelJio's services, but Airtel will clearly be hurt the least. It will be very interesting to see how Airtel's 2G+3G+4G operations across almost all 22 circles will fare against RelJio's pure 4G operations across all 22 circles. With aggressive Data packs, Airtel is trying it's best to retain it's Data subscribers. But RelJio is not looking at just Data subscribers, who are mainly focused in Urban & Semi-urban locations. RelJio is pretty serious about Voice Calls business too and hence has already built excellent 4G coverage even in Rural and remote areas.

I am expecting RelJio to grab the No.5 spot in terms of AGRs within 6 months of launch. RelJio is already having over 6 million active users on it's networks and it could easily be having around 20 to 25 million users by the times it completes 6 months of Commercial operations. With ARPU expected to be a minimum of Rs.300, RelJio could be generating quarterly Revenues of over Rs.2000 crores by then. But while doing so RelJio is expected to put a bigger hole in the combined AGRs of the rest of the operators as the over-competitive environment will bring down tariffs in a knee-jerk manner, while the increase in usage will happen only over a period of time.

As of now all eyes are set on RIL's AGM tomorrow, i.e. 1st September, when everyone is expecting to hear a definite date of RelJio's Commercial launch. My hunch is that it is not very far from now. Possibly well before the end of September'16.

Idea Cellular & Bharti Airtel's Data consumption & Data Revenues progress

There was virtually no impact on the India (wireless) businesses of Bharti Airtel & Idea Cellular from waiting-in-the-wings operator Reliance Jio until the end of March'2016. Till that point Reliance Jio had offered sim cards only to it's employees & some business partners, totaling just about half a million in number. But in the month of May'2016, Reliance Jio opened the gates for outsiders to also get an opportunity to use their 4G services via the Preview Offer, where a customer buying a LYF handset (in-house brand) would get a complimentary Jio sim card with 90 days of Unlimited usage of Data, Calling & SMS. The news of the availability of Preview Offer started spreading and by the first half of June'16, thousands of heavy Data consumers across the country were buying the LYF handsets everyday, purely to enjoy unlimited 4G service for 90 days. It is expected that Reliance Jio enrolled about 1 million 4G customers in the month of June alone and July to be better. By now we are seeing Jio's signboards even in all small towns and even many villages along the highways. The operator seems to be almost ready for a commercial launch now.

Coming back of Bharti Airtel & Idea Cellular, their June-Quarter results have thrown up many important signals of things to come. (In this analysis I have focused only on the India Wireless Data business of the two operators.) These signals are not surprising at all as I have been saying it since last year that All Existing Operators will take substantial hit because of Reliance Jio's entry into the market. We just have to

keep an eye on how efficiently each operator is facing the competition. Let's start with growth in 3G/4G Data subscriber base of the 2 operators:

Bharti Airtel's 3G/4G subscriber base was just 7.4 million in Sept'13, which has now increased to 36.6 million by June'16, that means an addition of 29.2 million subscribers in 11 quarters at an average of 2.65 million per quarter. The Dec'15 quarter was the best for the company when it added 7 million new users in this category, followed by addition of another 4.6 million in March'16 quarter. But Airtel has quickly lost all momentum with addition of a paltry 1.1 million Wireless Broadband (3G/4G) subscribers in June'16 quarter. Idea Cellular has had a much more linear growth even in the recent quarters. It's 3G/4G subscriber base has increased from just about 5 million in Sept.'13 to 27 million in June'16, that means an addition of 22 million users in 11 months at an average of 2 million per quarter. And June'16 proved to be it's best quarter here when it added 3.4 million Wireless Broadband users. Out of these 3.4 million new users that Idea Cellular added, about 1.1 million were on the 4G network, after having added about 0.7 million 4G users in March'16 quarter. That means the aggressive rollout of 4G network in 10 circles, where Idea holds 4G compatible spectrum, seems to be helping the company add more users than it's larger competitor, which now has 4G compatible spectrum across all 22 circles of the country. After the recent acquisitions of Videocon's 1800 MHz and Aircel's 2300 MHz spectrum in nearly a dozen circles, Airtel now becomes the only operator other than Reliance Jio to hold a pan-India 4G compatible spectrum in either 2300 MHz or 1800 MHz bands or both (in a few circles). Now a lot depends on how quickly it manages to roll out 4G networks using these spectrum bands and also the quality of it's coverage. Idea Cellular has done a superb job of 4G network rollout in several cities & towns in the 10 circles that was possible to the operator.

Strong subscriber addition number for Wireless Broadband services in a particular quarter not just has an impact on the Data consumption

in that quarter, but also has a spillover effect in the following quarter. Have a look at the chart alongside. The Quarterly Data consumption on Bharti Airtel's networks (2G/3G/4G) has multiplied four & half times in the last 11 quarters from about 34 million GBs in Sept'13  to about 158 million GBs in June'16. Nearly 90% of this growth has been propelled by the proliferation of 3G networks initially and 4G networks in the recent couple of quarters. The situation is even better with Idea Cellular, which has seen it's Quarterly Data consumption on it's networks to multiply five & half times over the last 11 quarters. It was just about 17 million GBs then, which has now reached 93 million GBs. Idea's Data consumption number had posted an extremely weak growth in March'16 quarter on the back of nearly 10% Q-o-Q drop in 2G Data volume and a relatively slow 7.5% growth in 3G/4G Data volume. But the operator has bounced back smartly with over 16% Q-o-Q growth in 3G/4G Data volumes and over 13% growth overall in June'16. That is a big outperformance over Bharti Airtel's volume growth of under 8% in June'16. Out of the most recent 9 quarters, Idea Cellular has managed to post better Q-o-Q Data volume growth than Bharti Airtel in 5 quarters. With wider 3G & 4G coverage across all 22 circles, Bharti Airtel is certainly expected to do better than Idea Cellular in both subscriber additions as well as Data Volume growth. But it seems Idea Cellular is not going to take it lying down with superior performance in the 17 circles where it holds either a 3G license or a 4G license or both. This fight will be very interesting in the coming quarters. Both operators have recently announced substantially higher usage limits on existing Data plans, which is probably the initial steps to counter the pressure being felt from Jio's Preview Offer. We could see more upward revisions in the usage limits in the coming few weeks as the pressure keeps piling up as Jio's commercial launch gets nearer. This is the only way that the existing operators can try & maintain it's Data Volume growth.

Both Bharti Airtel & Idea Cellular have seen their Quarterly Data Revenues multiplying about three and half times over the last 11 quarters. With Reliance Jio effect expected to start kicking in from Sept.'16 quarter onwards, it will be interesting to see how long do these operators manage to continue posting growth in their Quarterly Data revenues. Frankly I am expecting almost all existing operators to report Q-o-Q drop in Data revenues over the initial couple of quarters of full-scale commercial launch by Reliance Jio, though of varying degrees. The drops experienced by each operator will depend on how well these operators are able to offer Good Quality of service at not-so-expensive tariffs compared to Reliance Jio.

I am expecting the Drops to be more severe for smaller operators like Aircel, Tata Tele & Uninor, who offer 3G or 3G-like services in very limited number of circles. Amongst the biggies, Vodafone is expected to take the biggest hit mainly because of it's limited 4G presence currently. Vodafone is expected to be the most aggressive participant in the upcoming Spectrum Auctions scheduled to start on 29th September'16. Both Idea Cellular & Bharti Airtel are a little better placed at the moment, but both of them will still experience some bit of drop in Revenues. Reliance Jio's 4G coverage across the country is expected to be currently way superior to 3G/4G coverage of any of the existing operators. Data Speeds on Reliance Jio's 4G network may not be the best at all locations, but it will certainly be better than 3G speeds offered by any of the existing operators, and priced much more aggressively. Apart from Data speeds, Reliance Jio is expected to offer Free Jio-to-Jio VoLTE calling across the country, bundled with it's Data packs. That means the existing operators have not just the Wireless Data business to worry about, but even it's bread-and-butter Voice business too.

Let's see how Reliance Jio's commercial launch unfolds (hopefully in this quarter) and how the Sept.'16 quarterly numbers turn out for Bharti Airtel & Idea Cellular.

Telecom Analysis - Performance of operators in different Circle-Categories.

Indian geographical territory is distributed in 22 different Telecom Circles. And these 22 Circles are then Categorised in 4 sections: Metro Circles, Category-A, B & C circles, depending on their Revenues generating potential. Even the Spectrum Auctions have seen much higher bids for Metro & Category-A circles, compared to Category-B or C circles. Hence it is very interesting to see how different telecom operators are performing in different Circle-Categories.

I have considered Gross Revenue numbers for Top-8 operators only as these operators constitute about 99% of the Industry's Revenues. No.1 being Airtel and No.8 being Telenor. Operators that have been ignored include Jio, MTS, Videocon & Quadrant. Jio is yet to report any noticeable revenues. MTS is on the verge of getting merged with RCom & Videocon has shut down it's operations in most circles recently.

Even though Telenor is the smallest operator amongst the 8 operators I have considered for this analysis, it is small only because of it's 6-circles operation. All other operators have a presence in all 22 circles, excluding Aircel (20 circles) and Tata Tele (19 circles). Telenor commands just 2.3% of Industry's Gross Revenues, but it has managed to be amongst the Top-4 operators in 3 out of it's 6 circles of operation. Telenor commands a very respectable 9.1% market share in circles of UP (E) and UP (W), despite being the last entrant in these circles.

Coming back to Circle-Categories, following is the distribution of the 22 circles in the 4 different Categories:

Metro Circles - Delhi, Mumbai & Kolkata. (Chennai's numbers are included in Tamil Nadu's numbers).

Category-A Circles - Andhra Pradesh, Gujarat, Karnataka, Maharashtra & Tamil Nadu.

Category-B Circles - Haryana, Kerala, Madhya Pradesh, Punjab, Rajasthan, UP (E), UP (W) & West Bengal.

Category-C Circles - Assam, Bihar, Himachal Pradesh, North-East & Orissa.

The Metro Circles contributed 18% of Telecom Industry's Gross Revenues for the March'16 quarter, with Delhi circle being the largest contributor & Kolkata being the smallest contributor. The Metro Circles reported a 7.9% Y-o-Y Growth in Gross Revenues for March'16 quarter. This is the fastest growth reported amongst all 4 Circle-Categories. The strongest growth was reported by MTNL, which posted an unusual & surprise jump in Gross Revenues for March'16 quarter. Whether this was a fluke or not will be known once the June'16 quarter numbers are declared. Apart from MTNL, Airtel was the next fastest with 10.7% Growth. This helped Airtel to increase it's market share in Metro Circles to 27.2% and inch closer to the leader Vodafone, which itself reported a disappointing growth of just 2.8%. Vodafone's market share in Metro Circles dropped by over 1% & now stands at 28.5%. Vodafone has recently launched it's Supernet 4G service in all the 3 Metro circles as a step to protect it's market share. Idea Cellular managed to post Industry-matching growth of 7.9% and maintained it's market share at 10%. Idea has launched it's own 3G network on the recently acquired 900 MHz band in Delhi circle late in 2015 and will now hope to grab some more market share there. Tata Tele lost almost 8% revenues in the Metro Circles, primarily because of lack of 3G/4G service offering. It doesn't even have a GSM service offering in Delhi circle. Tata Tele's CDMA-based photon high-speed service is losing steam in front of strong competition from 3G & 4G networks. Tata Tele has acquired some liberated 850 MHz spectrum last year for Delhi & Mumbai, which can be used for 4G service. But Tata Tele's strategy is still unknown on this front. RCom is the biggest disappointment here. Despite winning a 3G license for both Mumbai & Delhi in the first auctions and shelling out thousands of crores for it, RCom's performance has been extremely dismal. In the March'16 quarter it lost another 2.8% of it's revenues and pulled down it's already-low market share even lower now. Aircel has managed to post a not-so-bad 4.7% growth in revenues in the Metro Circles, possibly partly because of it's 3G-roaming tie-up with RCom.

The Category-A circles contributed the largest chunk of Industry's revenues with 37.5% contribution. It's Y-o-Y Growth for March'16 quarter was a little slower than Metro Circles at 6.6%. An interesting fact is that the Maharashtra&Goa circle (excluding Mumbai) generates more revenue than even Delhi circle. And Tamil Nadu, Karnataka & Andhra Pradesh circles generate more revenues than Mumbai circle, but less than Delhi circle. Airtel is again the biggest gainer here with 10.8% growth, improving it's market share by over 1% to reach 30.9%. Idea was the next biggest gainer with 10.3% growth, taking it's market share to 18.8%. Vodafone still holds No.2 position despite a drop in market share to 20.9% on the back of much slower growth of just 2.9%. With both Airtel & Idea aggressively launching their 4G services in most of these Category-A circles, Vodafone's market share is expected to come under further pressure in coming quarters. BSNL was the next biggest gainer with a smart 8.3% growth, followed by Telenor with a near similar 8.2% growth. Aircel & Tata Tele managed near 1% growth only and saw their market shares erode by a small extent. Here as well RCom saw it's revenues drop by 5% and it now commands less than 4% market share in Category-A circles. Alongwith the Metro circles, the Category-A circles are expected to lead the adoption of 3G & 4G services in the coming quarters. Hence operators with ability to offer good quality 3G & 4G service will certainly gain further ground in these circles.

The Category-B circles generate the 2nd biggest contribution to Industry's revenues with nearly 33% contribution. But with a Y-o-Y growth of 4.5% in March'16 quarter, it is slower than Metro & Category-A circles. The biggest gainer (by a large margin) here is Idea Cellular with 12.6% growth. This has propelled Idea's market share by almost 2% to touch a figure of 26%. Idea is now within 1% of leader Airtel's market share number. Airtel too has managed to increase it's market share to 26.9% on the back of 6.7% growth in revenues. Vodafone is at No.3 and has managed to maintain it's 22.6% market share with a Category-matching 4.4% growth. Both Aircel & Telenor too managed to maintain their market shares at little under 3%, with a near 5% growth in revenues. Tata Tele reported a 1.6% drop in revenues, followed by BSNL, which reported a 6.9% drop in revenues and followed by RCom, which posted a whopping 14.6% drop in revenues. All three of them saw their market shares decline by varying degrees depending on their revenue loss.

Coming to the smallest Category-C circles, which contributed just about 11.6% of Industry's revenues in March'16 quarter. This category too posted just 4.5% growth in revenues. Here the No.1 player is again Airtel, but the strange part is that it's market share of 43.4% is nearly 3 times that of the No.2 player Vodafone's market share of 15.5%. Airtel reported a revenue growth of 8.4% here, which helped it expand it's market share by 1.5% since March'15. Vodafone was the fastest growing operator in these circles with a growth of almost 23%. It improved it's market share by over 2% over the last one year. Idea too reported a very strong growth of 22%, thus improving it's market share to almost 10% now, but is still the No.4 player here. Aircel is No.3 in this category with 12.4% market share, but it's growth rate was slower at 7.4%. BSNL comes next with 8.5% market share, but has lost about 8% of it's revenues. Tata Tele is the smallest operator here with limited presence in Category-C circles. Tata Tele's market share is now even lesser than that of Telenor. While Tata Tele lost 10.5% of it's revenues, Telenor gained 6.1% compared to last year, thus handing over the last position tag to Tata Tele. RCom lost a whopping 43% of it's revenues compared to last year, mainly because of non-renewal of it's 900 MHz spectrum in many Category-C circles.

Summary: 

Idea Cellular has managed to post strong double-digit growth in 3 Categories, excluding the Metro Category. With decent 3G & 4G spectrum portfolio in Category-A & B Circles, Idea Cellular will try to maintain this level of performance in coming quarters. While it will bank on it's strong Brand image & improving coverage to garner more of 2G voice market share in Category-C circles. Airtel has done a decent job everywhere with better than Industry growth in all Circle-Categories. With a super strong spectrum portfolio comprising of 3G & 4G capable frequencies, Airtel's further performance will purely depend on it's network rollout pace & quality of service. Vodafone is clearly the worst performers amongst the incumbents with lower than Industry growth in Top-3 Circle-Categories. Vodafone needs to spend a lot more in the upcoming spectrum auctions to boost it's 3G/4G spectrum portfolio. Vodafone is already on the verge of losing it's No.1 position in Metro circles & No.2 position in Category-A circles. Looking at BSNL's performance, it seems like in the initial phase of it's business revival plans, it is focusing on Category-A circles. It has managed a healthy growth only in this category, while it has reported a decline in the other two categories. Amongst the remaining players, it is only Aircel & Telenor who have managed to post some growth in revenues in all categories they are present in. Aircel is in talks to combine it's operations with RCom's wireless business unit. The only benefit from this combination is larger scale of operations. But RCom is a seriously struggling business unit. Don't know if Aircel will benefit from this merger or not. Telenor too is experiencing sluggishness in it's growth, possibly due to lack of 3G/4G service offerings. It's narrow-band 4G experiment, if successful, might get rolled out across several cities & towns in it's circles of operation in the near future. With it Telenor is able to offer 3G-like speeds at very attractive price points. But sooner rather than later Telenor will need more spectrum to be able to handle more traffic. Hence it might need to get active in the upcoming spectrum auctions.

Are things really that bad for Idea Cellular?

Amongst the Top-2 listed Telecom stocks, i.e. Bharti Airtel & Idea Cellular, the comparison of their respective stock price movements over the last 12-15 months is quite interesting. Bharti Airtel's stock did hit a high of around Rs.450 sometime in the month of July'15. It is currently trading at a little under Rs.360, which is a 20-21% erosion from those peaks.

(Image from Moneycontrol.com)

On the other hand Idea Cellular's stock had hit a high of just over Rs.200 sometime in the month of April'15. It is currently trading at just over Rs.100, which is a 50% erosion from those levels. All this despite the fact that Idea Cellular has posted superior growth than any of it's large or small peers over the last few years.

Then why has Idea Cellular's stock price massively under-performed that of Bharti Airtel over the last 1 year or so? Is the market suggesting that Idea Cellular is going to face much more worse times in the coming quarters, as compared to Bharti Airtel, possibly due to upcoming competition from Reliance Jio's 4G launch. Even I have been saying in my recent posts on Telecom stocks/industry that Bharti Airtel is better placed than any other existing operator to face the upcoming competition. But certain developments in the recent weeks made me think that one needs to see how Idea Cellular is preparing itself for the upcoming competition.

I am a resident of a small coastal town in Maharashtra. In this telecom circle of Rest of Maharashtra & Goa, Idea Cellular is the undisputed No.1 player with about 33% revenue market share, followed by Vodafone with about 24% and Bharti Airtel at No.3 with just under 13% market share. In the first round of 3G spectrum auctions over half a decade ago, Idea Cellular & Vodafone, amongst the Top-3, grabbed 3G licences for this circle. Idea Cellular was the most aggressive in rolling out it's 3G network and I got to experience 3G in my little town sometime in late 2013. Vodafone's 3G arrived over 6 months later and Airtel had a ICR agreement with Vodafone so that Airtel's subscribers could enjoy 3G on Vodafone's network. Airtel acquired it's own 3G spectrum for RoM&G circle last year and now even my town has Airtel's 3G network since the last few months. Despite strong competition in 3G space, Idea Cellular has not just managed to maintain it's lead in this circle, it has even managed to improve it's market share over the recent years.

Coming to 4G situation, Airtel has been holding the 2300 MHz BWA spectrum for Rest of Maharashtra & Goa circle since the last 6 years, but did not lay the 4G network beyond a few important cities until last year. Airtel got aggressive on 4G rollout only in the middle of last year, when Reliance indicated the mammoth size of it's network rollout. It's been almost a year since Airtel started rolling out 4G network in more & more cities/towns at an aggressive pace, but it still hasn't reached my little town. We have had Jio's 4G signal for the last year or more. On the other hand I was pleasantly surprised to see Idea's 4G signal being detected in my town since the last few days. Then I had a look at Idea Cellular's website for 4G coverage information. Even though it has 4G capable spectrum in only about 10 circles and it started rolling out it's 4G network only about 6-7 months ago, Idea Cellular has certainly been way more aggressive in expanding it's 4G coverage than Bharti Airtel. Considering the super aggression in it's 4G network rollout, I think Idea Cellular is doing it's best to protect it's market position as much as possible, especially in the circles where it already is the strongest player in terms of market share.

Another point to consider is Idea's ability to offer 3G or 4G or both services in the circles that matter the most to the company. Idea is capable of offering both 3G & 4G service in 7 circles (including the important ones like Maharashtra, Kerala, MP, AP), which together contribute about 59-60% of the company's Revenues and a much higher proportion of it's profits. Then there are another 6 circles (including Delhi, Gujarat, both UP circles & Kolkata) where Idea Cellular is offering only 3G service and these circles together contribute about 23-24% of it's Revenues. Then there are another 4 circles (including Tamil Nadu & Karnataka) where Idea Cellular will be offering only 4G service. These 4 circles currently contribute just about 6% of it's revenues, but have the potential to grow strongly with the introduction of 4G. That means Idea Cellular has the ability to offer either 3G or 4G or both services in 17 circles, which together contribute almost 89% of it's AGR. All this supported by it's well entrenched 2G network, which is spread across all 22 circles. Ultimately 2G network will be used purely for Voice calls as it is lot more efficient for the operators to carry Data on 3G or 4G networks.

Coming to Financials, have a look at the Trailing-Twelve-Month charts alongside. The strong growth in Total Income & EBITDA will vanish once Reliance Jio comes in. But I am not expecting it to go really bad for Idea Cellular. Over the initial 4 quarters of Jio's launch I am expecting Idea's Total Income to drop by about 5-10% at the most and EBITDA to drop by about 20%. Idea's EBITDA could still remain above Rs.10,000 crores mark. The company's T-T-M Interest Cost, which currently stands at about Rs.1882 crores, is expected to peak out at about Rs.2800 to 3000 crores over the next few quarters. This will still leave Idea Cellular with a comfortable Cash Profit of around Rs.7000 crores. All this estimates are mainly because of the initial hit that all existing operators are expected to take due to Reliance Jio's launch. But things will stabilise after a few quarters and I am expecting the numbers to start improving again for Idea Cellular. A part of the reason for this expected improvement is that by then some of the smaller operators could be looking to exit, leaving the market for the larger players.

At the current share price of about Rs.100, the market cap of Idea Cellular stands at just about Rs.36,000 crores, which is less than 4 times it's current T-T-M Cash Profit. I have a feeling that the market has under estimated Idea Cellular's ability to compete in the face of increased competition. Yes, Idea Cellular's financials will get worse initially once Reliance Jio is in the ring, but things will start improving again after the initial impact. We cannot ignore the fact the Idea Cellular has very strong brand recall across the country. Idea is the No.1 operator in 4 important circles and No.2 in another 6 circles. Idea does have a strong connect with Rural India and any improvement in Rural lifestyle will directly benefit the company. Also a lot depends on how aggressively Reliance Jio prices it's 4G services and what kind of customers it targets and how the market accepts it's services. Hopefully we will have a better idea of it by the end of this calendar year.

Telecom AGR: Q4 Analysis - BSNL/MTNL & Idea are biggest gainers.

TRAI released the Gross Revenue & AGR details of all telecom operators for the March'16 quarter this week. It is very interesting to see the kind of progress made by different operators & different circles. The Industry wide AGR has jumped 4.4% Q-o-Q and 11.25% Y-o-Y to touch a figure of Rs.39985 crores in March'16. This is a healthy growth rate & the Industry should be happy about it. The Top-3 circles in terms of contributions to the AGR continued to be Maharashtra, Andhra Pradesh & Karnataka, who together contributed about 25.6% of Total AGR of all 22 circles. Despite their size, these circles have reported a Y-o-Y growth in AGR of around 16%, which is noticeably higher than National AGR growth rate. The Top-3 circles in terms of fastest Y-o-Y growth rate were the relatively smaller circles of Himachal Pradesh, J&K and North-East, who have grown at 21-22% and have seen their combined contribution to National AGR improve from 2.3% in March'15 to 2.5% in March'16. With increased economic activity even in these regions, we should see them continue with the strong progress.

Coming to operator-wise performance, I have focused my attention studying details of only the Top-4 operators as they together contribute about 82% of Industry-wide AGR.

1) Bharti Airtel : Airtel's Y-o-Y AGR growth was healthy at 15.26%, but the Q-o-Q growth was disappointing at just under 3%. This Q-o-Q disappointment resulted in it's Market Share slipping from 30.5% in Dec'15 to 30.1% in March'16. Nevertheless Bharti Airtel's market share has still managed a 110 bps improvement Y-o-Y, which is still commendable for a company of it's size. Bharti Airtel also crossed the Rs.12000 crores Quarterly AGR mark during this quarter. In fact Airtel's one quarter's AGR is even larger than the Annual AGR of No.5 operator in the country!!

The largest contributing circles to Airtel's AGR are: Karnataka (12.9%), Andhra Pradesh (11%) and Tamil Nadu (9.5%). These 3 circles together contributed over Rs.4000 crores in AGR during March'16. In terms of Market Share, Airtel commands over 40% share in 9 of the 22 circles in the country, but most of them are the relatively smaller ones. The most disappointing circle for Airtel is Kerala, where it commands just 7.6% share and has lost about 2% in the last 1 year. The reason could be the lack of 3G license for this circle. Airtel is trying to correct that with an aggressive 4G rollout across the state of Kerala and we could see things turning around for the operator even in this region.

The circles where Airtel has gained over 2% market share in the last 1 year include Kolkata (+7.6%), Mumbai (+4.7%), Haryana (+3.3%), Gujarat (+2.8%) and Tamil Nadu (+2.1%). Most of these circles have seen aggressive 3G/4G rollout by Airtel during the last few quarters. Acquisition of Loop's Mumbai operations did boost Airtel's standing in the crucial Metro circle.



2) Vodafone India: India's No.2 operator has had a relatively disappointing year. Even though Vodafone managed to match Q-o-Q Industry growth with 4.6% AGR growth, it's Y-o-Y growth at just 10% was lower, which has resulted in 30 bps reduction in it's Market share from 21.8% in March'15 to 21.5% in March'16. Another worrying factor for Vodafone India is the limited circles where it can offer 4G service currently, that too on very limited spectrum. It will certainly need to open it's purse strings during the upcoming auctions to become more competitive in the 4G space in the country.

The Top-3 contributors to Vodafone's AGR during March'16 were Gujarat (10.6%), Maharashtra (10.4%) and Tamil Nadu (9.7%). Vodafone commands over 25% market share in 8 of the 22 circles, which includes a few prominent ones like Delhi, Gujarat, Mumbai & UP(E). The circles where Vodafone has managed to improve it's market share over the last 1 year are: Assam (+4.6%), North-East (+3.3%), Orissa (+2.2%), Bihar (+1.7%) and Himachal (+1.1%). Most of these are insignificant circles. In most other circles Vodafone has either barely managed to maintain it's share or has even lost significant share. Vodafone has even lost some share in the Top-3 contributors to it's AGR, i.e. Gujarat, Maharashtra & Tamil Nadu. It has also lost 1.7% market share in Delhi and 1.1% in Andhra Pradesh circle.

Vodafone certainly needs to get it's act together soon. It needs to do something to stop the market share erosion in circles which are very important to it like Delhi, Gujarat, Maharashtra, Mumbai, Tamil Nadu & UP(E). It is already facing the heat from existing competition and things will get even tougher with new competition coming in.




3) Idea Cellular: India's No.3 operator has been the best & most consistent performer over the recent many quarters. With Y-o-Y AGR growth of 19.8% and Q-o-Q Growth of 6.84%, Idea Cellular has once again demonstrated it's superior growth. Idea Cellular's market share has grown from 17.8% in March'15 to 18.7% in Dec'15 and now to 19.2% in March'16. That means a 140 bps improvement in the last 1 year. Idea Cellular is rapidly catching up with the No.2 operator. The gap between Vodafone & Idea's AGR in March'15 was about Rs.1430 crores, which is now down to just about Rs.960 crores in March'16.

The Top-3 contributing circles to Idea's AGR are: Maharashtra (15.9%), Madhya Pradesh (11.8%) and Kerala (11.8%). These 3 circles together contribute close to 40% of Idea's Total AGR. The smallest contributors to Idea's AGR are circles like Assam, Himachal, J&K, Kolkata, North-East, Orissa, Tamil Nadu & West Bengal. These 8 circles together contributed just 5.5% of Idea's Total AGR in March'16. But their contribution was just 3.4% during March'15. The AGR from these 8 circles has almost doubled in the last 1 year. Idea has probably started operations in these circles on it's own network in the recent couple of years.

Idea Cellular commands over 40% market share in 2 circles of Kerala & Madhya Pradesh, while it commands over 30% market share in 3 other circles of Maharashtra, Punjab and UP(W). Idea Cellular has managed to increase it's market share by over 2% in 6 circles over the last 1 year, which include prominent ones like Bihar, Kerala, Punjab, Tamil Nadu & UP(W). Even in Metro circles of Delhi & Mumbai, where it entered very late, Idea has managed to improve it's market share by about 1% each. During the last couple of spectrum auctions, Idea Cellular did the smart thing of bolstering it's 3G/4G capable spectrum holdings in all the large revenue contributing circles. Idea Cellular has 4G capable spectrum in 10 of it's important circles, which should help it insulate to some extent from aggressive competition.

4) BSNL/MTNL: The famous Sleeping Giant of the Indian Telecom industry, which slept through nearly a decade of strong industry growth, is certainly showing signs of waking up from it's long slumber now. After many many many quarters of either negative or zero growth in AGR, the PSU behemoth has shown signs of stability or positive growth in the recent few quarters. BSNL/MTNL combine reported 14.5% growth in AGR during March'16 quarter, both Y-o-Y as well as Q-o-Q. There has been a sudden jump in AGR reported by MTNL for both it's Metro circles. MTNL reported over 21% Y-o-Y and an astonishing 56% Q-o-Q growth during this quarter. Looks very very unusual and it seems like many of it's customers have suddenly come out of dormancy and started generating revenues for the company. Things will be more clear after the AGR numbers for June'16 quarter are announced.

Excluding MTNL circles, BSNL still did a fairly good job on the growth front during March'16 quarter. BSNL's 20 circles reported 12.8% Y-o-Y and 6.6% Q-o-Q growth in AGR, both of which have been better than the Industry growth rates. This is something that BSNL must have delivered for the first time in the last many years. Apart from Mumbai & Delhi, the 3 biggest AGR contributors for BSNL during March'16 quarter were Maharashtra, Kerala and Tamil Nadu. Out of the 20 circles, BSNL's 13 circles reported Q-o-Q growth, 11 of which posted strong double digit Q-o-Q growth. These are very very positive signals coming from BSNL. Hope that this is not a one-off and the company is able to sustain decent growth rates in the coming quarters.

BSNL/MTNL combine managed to grab 11.2% of market share in March'16 quarter, which is higher than the number in March'15 as well as Dec'15. BSNL/MTNL's market share across the 22 circles is well spread out with the combine managing to grab over 15% market share in only 6 circles. The circles where BSNL/MTNL managed to increase their market share by over 150 bps are: Andhra Pradesh, Delhi, Haryana, Maharashtra, Punjab & West Bengal, most of which are relatively larger circles. Lets see how BSNL/MTNL consolidate on this growth momentum in the coming quarters.


Summary: The Top-4 players in the Indian Telecom Industry have been increasing their dominance with their combined AGR Market Share increasing from 79.5% in March'15 quarter to 81% in Dec'15 quarter and 82% in March'16 quarter. The AGR numbers over the recent quarters have clearly proved that Idea Cellular is currently best performer in the Industry, followed by Bharti Airtel. The combine of BSNL/MTNL could prove to be a strong challenger, but it needs to show more consistency. Vodafone India, after having been on a very strong footing for many years, is showing slight signs of weakness compared to it's immediate peers. But this cash-rich operator certainly has the ability to bounce back, but might need a good outcome in the upcoming spectrum auctions and a few quarters of time to do so.

Amongst the smaller operators, who have been losing market share repeatedly, there is a possibility of a strategic merger between RCom, Sistema (MTS) and Aircel getting completed in the near future. But the merged entity is expected to hold the No.5 position in AGR market share, a little behind BSNL/MTNL. The possibility of a merger/acquisition between Tata Tele & Telenor is still uncertain as neither of the management's have uttered anything about it. Until these things work out, we will continue to focus on the Top-4 players. Reliance Jio will join the fray, hopefully before the end of this year. Once it does, it will be interesting to see how the numbers start changing for the Top-4 players.

Idea Cellular Ltd. - Q4-FY'16: Worse than Airtel's performance.

While writing about Bharti Airtel's Q4 performance, I was highly critical about the way the growth in Data Volumes & Revenues has dropped sharply for the company. But after going through the Idea Cellular Q4 result, I think Bharti Airtel did a much much better job. Both these companies are part of the incumbent group and hence are being hit by smaller competition in several circles. All these incumbents charge premium rates for their services, which is certainly driving away a small portion of their high-usage customers to networks of regional 3G operators, who offer rates which are easily 30 to 40% lower.

If you look purely at the P&L numbers, Idea Cellular has done well with over 5% Q-o-Q increase in Revenues. Couple this with excellent control on Operating Costs and the company managed to grow it's EBITDA by over 15% Q-o-Q!! The company probably posted it's best EBITDA margins in several past quarters at over 38%. But a sharp jump in Interest Cost and Depreciation provisioning lead to a near 25% Q-o-Q fall in it's Net Profit. With Idea Cellular needing to do substantial CAPEX as well as prepare for July Spectrum Auctions, I think the pressure via Interest Cost & Depreciation is not going to ease away anytime soon. Idea Cellular does not have 4G compatible spectrum in more than half the circles & hence will have to bid aggressively during the auctions, atleast to win spectrum in a few crucial circles which contribute substantially to it's revenues.

Have a look at the charts alongside. Idea Cellular has done well in terms of adding/upgrading 2.4 million users to it's 3G/4G customer base during the quarter, which is an increase of almost 12% Q-o-Q. But then look at the Q-o-Q growth in Total Data consumption, which is PATHETICALLY Low at just about 1.5%!! This clearly means that many of it's Data consumers are using less Data on it's network and have started shifting their usage to other networks. I think there has been an increase in a proportion of first-time Data users on Idea's network, people who generally consume less than 500 MB in a month. These people opt for smaller Data packs, which I think has lead to the slight increase in Idea's Average Rate per MB. This is certainly not good news for Idea Cellular. I seriously think that as people start using more & more data, they start thinking of moving to another operator like BSNL or Tata DoCoMo or Aircel, who offer cheaper Data packs for large users.

Now look at the chart showing Q-o-Q % growth in Data Revenues. The Growth rate has been sliding rather sharply for Idea Cellular. With an increasing Base for comparison, the growth rates are normally expected to reduce with every passing quarter, but in case of Idea Cellular, the slide can be called a Collapse. All this even before the true impact of RelJio yet to be seen!! With RelJio now introducing an invite-system, where employees can invite upto 10 people onto Jio's network, I think the operator is moving couple of steps closer to full commercial launch in the next 3 to 4 months or so. Idea Cellular will have to act fast to keep the Volume growth momentum going. The high-usage customers also offer much better ARPU. Nobody can ignore them, just because someone is able to attract attention of first-time users. Data usage is addictive and almost every user starts consuming increased amount of Data with every passing month. Most of these first-time users will be consuming several times more Data in another 12-months time & if an operator does not have appropriate Data packs to entice these customers enough, then there will always be a competitor ready to welcome such consumers.

Coming to Valuations: At the current share price of around Rs.115/-, Idea Cellular's Market Cap stands at about Rs.41,400 crores. At this Market Cap, it trades at little over 3 times it's T-T-M EBITDA and little over 4 times it's T-T-M Cash Profit. These valuations are not expensive even if the company is able to hold on to this EBITDA and Cash Profit level. But that is not going to be the case. I am expecting substantial pressure on Idea Cellular's Revenues, EBITDA and Cash Profit in the coming quarters, especially in the second half of this fiscal. On a conservative basis, I am expecting atleast 5-10% downside to Idea's Revenues, while the downside on it's EBITDA & Cash Profit will be larger at about 20% or so. The true impact will depend on When RelJio opens it's gates for general public. Even apart from RelJio, we are already seeing BSNL getting aggressive in the market & is already posting decent growth rates. The other smaller operators like Tata DoCoMo & Aircel & Telenor are getting aggressive in an attempt to survive. They will have to look at consolidation sooner or later. One possibility for them is to focus their resources on few strong circles, where they can offer good 3G or 4G service. Competing with larger players across the country is certainly draining their resources very badly. Let's see how things pan out, but we will certainly get to see lots of action on M&A front in the coming few quarters. We have already seen Videocon Telecom winding up it's operations by selling it's 4G compatible spectrum to Bharti Airtel. 

Bharti Airtel Q4FY16 - Voice growth saved the day!!

Bharti Airtel reported a strong 3.6% Q-o-Q growth in Total Income for Q4-FY'16, mainly on the back of 4.8% Q-o-Q growth in it's India Wireless business, which alone contributes to around 59% of the company's Topline. But unlike many of the recent quarters, this strong 4.8% Q-o-Q growth was not powered by it's Wireless Data business, but by it's Voice services business.

In the last 8 to 10 quarters, Airtel's Wireless Data business was posting a double-digit Q-o-Q growth, which was single-handedly driving the company's Topline growth in it's India business. But there has been a very sharp deceleration in Airtel's Wireless Data Revenues growth during the March'16 quarter. This wasn't expected to happen, especially because the long-delayed commercial launch of RelJio's 4G service is still in 'Coming Soon' mode. The Q-o-Q growth in Bharti Airtel's Wireless Data Revenues has dropped to a lowest ever figure of just 5.4%. This is despite the fact that the company managed to grow it's 3G/4G Data subscriber base, which now stands at over 35 million, at a healthy rate of almost 15% Q-o-Q. But despite this strong growth in Mobile Broadband user base, the volume of Data consumed grew by just 9.6% Q-o-Q. This lower growth in volume coupled with further 3.8% erosion in Average Rate per MB led to a very disappointing growth of just 5.4% in Bharti Airtel's Wireless Data Revenues.

Now the question is: Why is Bharti Airtel's Data consumption not growing fast enough? If you look at the stats, the Average Data consumed by a Data user of Airtel is just around 850 MB per month. Even in case of 3G/4G customers, the average consumption must be around 1 GB to 1.2 GB per month. With this kind of low usage, most customers are still not using much of Wireless Data for things like watching Videos or Live TV, Video Calling, etc., which will ultimately propel Average Data consumption in the country. And the primary reason most people are not even trying to use these services is the COST. Even after the recurring drops in Average Rate per MB charged by Airtel, 1GB of Data still costs over Rs.220/-, which is quite exorbitant for large scale Data usage. Many of the smaller 3G players like BSNL, Tata Tele, Aircel and RCom are offering plans which are 30 to 40% cheaper than those of incumbents like Airtel, Vodafone or Idea. Hence a portion of the heavy Data users have shifted their consumption to operators which suite them in their region. Most of them also have a sim card of the larger operators, to be used as a back up option.

In many cases, users start to experience high-speed Data service with the larger operators like Airtel or Vodafone or Idea. But as their consumption starts going up and the high rates start pinching them, then they quietly shift their usage to one of the smaller operators. Remember....many of these smaller operators may not have extensive Nationwide 3G coverage, but they do have good coverage in their operational 3G circles. And their networks are almost on par with that of the incumbents in all major cities & towns in those respective circles. I think that severe competition from all existing operators too is pinching Airtel and hence the company is not able to grow the Data consumption on it's network at a rapid pace.

Bigger Worry still lurking around: The bigger worry for Airtel and all other existing operators is still the 'Upcoming' launch of RelJio's 4G service. The continued delay in it's commercial launch has allowed more breathing space for all existing operators. Operators like Airtel & Idea and to some extent even Vodafone, are doing their best to protect their customers & revenues. But if the soft-launch stats announced by RelJio during the recent result announcement are anything to go by, then it's going to be a very very Big Thing to Worry for all existing operators. RelJio already has about half a million (friendly) users on it's network and the Average Data consumption is around 18 GB per user per month!! And RelJio now wishes to add a few more million (friendly) users to it's network in these 2-3 months and then upgrade this soft launch to a full commercial launch. Apart from these (friendly) users, RelJio has put up WiFi Hotspots are several public places across the country, where usage is currently free. All this is also indirectly hurting Airtel as well as all existing operators, atleast to some extent. RelJio is promising to offer a high-quality experience to it's users. And since they are targeting to reach millions of users across the country, they cannot price it at a premium. RelJio is planning to offer not just Data service, but the whole package of Information + Communication + Entertainment alongwith things like e-commerce, digital wallet, e-education, etc. at competitive prices. If rumours are to be believed, RelJio has already built a huge repository of content & apps for most of it's services that it intends to offer.

Players like Airtel, Vodafone & Idea, as well as all other operators, are certainly going to find it difficult to avoid a small portion of their user-base shifting to RelJio with every passing month post the latter's commercial launch. Even though they might be able to bring down their tariffs to something closer to what RelJio offers, but they will need time to match the rest of the services package. Imagine this: Even if just about 1% of Data user base of all existing operators starts shifting to RelJio every month, it will start impacting the traffic on their networks. Couple this with sharp reduction in tariffs and it's a scary few quarters for all existing operators. Forget about growth in Data Revenues, most operators will be facing erosion in their quarterly data revenues for the initial few quarters. Though the Data traffic may not decline as sharply lower tariffs could lead to substantial increase in usage from subscribers who remain with these operators.

The Only Question is WHEN will RelJio start commercial operations?? Till then Airtel has to battle it out with the existing competition, which in itself is giving it headaches.