VodafoneIdea vs BhartiAirtel - Q3FY20 comparison

A couple of days ago I read a headline in some business news media that Bharti Airtel has overtaken HDFC Bank in Market Cap terms with a value of nearly Rs.2.78 lakh crores. Then I checked the Market Cap of Vodafone Idea, which is a part of my #StocksLogicPortfolio, and found it to be around Rs.12K crores only, i.e. about 4% of Bharti Airtel's Market Cap. Then I thought of comparing some important Operational numbers of both companies to see if this super-wide gap in the way both companies are valued is fair or not.

Both Vodafone Idea & Bharti Airtel are telecom service providers and compete in the Indian Mobile Services market are mostly the only things common between them. Beyond that there are a lot of differences. While Vodafone Idea is primarily a Mobile Service provider with a very small scale Wireline/Broadband operation in India and has some stake in Indus Towers. That's it. On the other hand, Bharti Airtel has several business verticals: Firstly, it is a Mobile Service Provider in 18 countries in Asia & South Africa, with India forming nearly 75% of it's Customer Base. But apart from that, Bharti Airtel is a significant player in Wireline/Broadband, Direct-to-Home & Payment Bank services in India. Hence Bharti Airtel certainly deserves some premium for it's diversification into more markets for Mobile Services & into more services in India. It's Indian Mobile Services business contributes nearly 50% of it's Consolidated Revenues, as of #Q3FY20. This share is set to increase from #Q4FY20 onwards because of the tariff hikes effected from December'19 by the entire Indian Mobile Services industry.

Now lets look at some Important Numbers for Comparison in the table alongside. In terms of Wireless Customer base, Minutes on Network & Data Volume, Vodafone Idea's numbers are around the 70% mark of Bharti Airtel's numbers. But in terms of Total Income, Vodafone Idea is closer to 50% mark of Bharti Airtel, mainly because of the reasons I have mentioned in the previous paragraph. Vodafone Idea's EBITDA is lower at around 40% of Bharti Airtel, primarily because the former is still in the process of Integrating the two different networks of Vodafone India and Idea Cellular into one. By the end of Q3FY20, the company is said to have removed duplicate equipment from nearly 58,000 towers out of 73,000 towers which carried equipment of both individual operators at the start of integration process. We should see progressive improvement in this department for Vodafone Idea over the next 2 to 4 quarters, as it completes removing duplicate equipment from remaining 15,000 towers.

Coming to Net Debt figures, Vodafone Idea's figure is 10% lower than that of Bharti Airtel. But still the former's Interest Cost is 25% higher than that of the latter. Surprising, isn't it? It's clear that Bharti Airtel has raised Debt from lower cost sources compared to Vodafone Idea. Considering the current situation where world over the Central Banks are cutting rates to boost liquidity in the markets, Vodafone Idea can look for swapping it's higher-cost debt with lower cost ones. This can translate to substantial savings in terms of Quarterly Interest Cost & them help take on more Debt for it's AGR dues payout that will have to happen sometime soon. Let's hope to see some progress on this front too in the next couple of quarters.

Coming to Depreciation figures, it includes Depreciation provisioning for CAPEX done as well as the Lease rentals paid to Tower companies. With Vodafone Idea expected to exit duplicate tenancies from another 15,000 towers over the next 2 or 3 of quarters, we can expect reduction in Depreciation figures for the company progressively over the next 2 to 4 quarters. This will help bring down the % comparison figure with that Bharti Airtel, which currently stands at about 85%.

What should be the Valuation Comparison now & in coming Quarters: Considering all the negatives from this comparison for Vodafone Idea, like lower EBITDA %, higher Interest Cost, potential of significant jump in Debt post AGR issue closure, I think Vodafone Idea deserves a Market Cap of around 8 to 10% of Bharti Airtel, which currently stands at Rs.2,73,870 crores. That means Vodafone Idea's Market Cap should be (as per my estimates) between Rs.22K to 27K crores, translating into a share price of around Rs.7.80 to Rs.9.60. That means Vodafone Idea is currently trading at nearly half of my estimated value, in comparison to Bharti Airtel's value. If Vodafone Idea makes decent progress in the coming quarters on the above discussed parameters, in comparison with Bharti Airtel's respective figures, I will certainly push up the Market Cap % range for Vodafone Idea, compared to that of Bharti Airtel. I will try to present the above Comparison Table after the Results declaration for every quarter for both companies so that we can check if Vodafone Idea is making any progress or not in comparison to Bharti Airtel's performance.

Jio vs Airtel vs Vodafone Idea - Subscriber Numbers upto July'19

Every month we have been reading reports of Reliance Jio adding a few million subscribers and Airtel + Vodafone Idea losing a few million of theirs. July'19 is no different. Reliance Jio maintained it's subscribers momentum with addition of another 8.5 million subscribers in July'19, taking it's total to almost 340 million. Vodafone Idea lost a smaller number of users compared to the previous 2 months. It's total subscriber base now stands at 380 million, down by 3.4 million. Airtel has now included Tata Tele's subscribers in it's count. Tata Tele had about 11.5 million subscribers in June'19. But Airtel+Tata Tele's subscriber count has jumped from 320.3 million in June'19 to 328.5 million in July'19. That means Airtel also lost nearly 3.2 million subscribers during July'19.

All the three operators have seen their VLR % erode during July'19. Starting with Airtel, it's own VLR % at the end of June'19 was 98.5%, which dropped to 94.95% in July'19. This is mainly due to addition of Tata Tele's subscribers in it's total count. Most of these Tata Tele's subscribers were already using Airtel's network on Roaming. Hence this had helped boost Airtel's VLR % for the previous few months, as can be seen from the table alongside. Airtel's VLR base has dropped from 315.5 million to 311.9 million, i.e. a drop of 3.6 million active users. The same at the end of January'19 was 331.2 million. That means Airtel has lost close to 16 million active users during these 6 months.

Looking at Vodafone Idea, it is already tainted to be the worst performing Telecom operator in terms of subscriber & revenue growth in the recent months. The effects of large-scale Network Integration activity across several circles has had a severe impact on Vodafone Idea's active subscribers count post March'19. At the end of March'19, Vodafone Idea's Total subscribers were 395 million, which is now down to 380 million, i.e. a loss of just 15 million users in 4 months time. Nothing alarming. But during the same period, it's VLR % has dropped from 93.3% to 81.9%, in a staggered manner. This means it's active subscriber count has dropped from 368 million to 311 million over those 4 months, i.e. a loss of 57 million, which is large figure. An average of over 14 million a month!! This is substantially more than what Jio is adding every month.

Over the last month or so, we have seen several announcements from Vodafone Idea about launch of TurboNet 4G services in more & more cities across the country. TurboNet 4G is the brand they have adopted for announcing the launch of Integrated network for Vodafone & Idea combined. TurboNet 4G also represents the launch of a network which is expected to offer wider coverage & much larger capacity than before, with the help of the largest spectrum pool amongst all operators in India. This should help improve adoption of 4G services amongst Vodafone & Idea users and also attract users from rival networks. We may not see much of it's effect in August numbers, but I am sure we will start seeing a boost in numbers for Vodafone Idea from September'19 onwards. Apart from launch of TurboNet 4G, Vodafone Idea has also introduced lower denomination recharge options for users to remain active on the network.

Coming to Reliance Jio, it's monthly subscriber addition numbers have been very consistent. It seems as if the company is despatching only a limited number of simcards / Jio Phones every month. For the 6 months between January to July'19, Jio's Total subscriber base went up from 289 million to 340 million, i.e. 51 million new additions translating into 8.5 million every month. That is precisely the number they are adding every month. Even their VLR % is steady around the 83-84% mark. Looks like everything is working in a very measured fashion. Sometimes even raises a doubt in my mind whether these are genuine numbers or manufactured ones.

Airtel & Vodafone Idea are now neck-to-neck in terms of active subscribers. It will be an interesting race from September'19 onwards. Airtel might inch ahead in August as Vodafone Idea's TurboNet 4G marketing started only in the latter half of August. In about 4 to 5 months time, Jio will close the gap between it's Active base numbers and the other two, which currently stands at about 29 million. And most probably Jio will just zoom past both of them. Both Airtel & Vodafone Idea are unlikely to offer something like the Jio Phone, which is what is pulling major numbers for Reliance Jio since the last couple of years. Both Airtel & Vodafone Idea will prefer to expand their 4G network coverage to get closer to that offered by Jio currently and target the Smartphone users to upgrade to 4G or pull a few dis-satisfied users from Jio or BSNL.

That brings us to the comparison of Wireless Broadband numbers of the 3 operators. Jio's entire subscriber base is counted as Broadband user base as it's 4G-only network. In case of both Airtel & Vodafone Idea, it comprises of 4G and 3G subscribers. The 3G subscriber base for both operators is rapidly falling. Both have less than 25 million 3G users on their Networks as of July'19. By the end of this year, both operators are expected to shut down 3G networks as the same spectrum can be used to add to their 4G capacity. So all these 40 to 50 million 3G users will be forced to upgrade their handsets and start availing 4G services over the next 3 to 6 months.

Airtel's Wireless Broadband user base has been steadily increasing over the last 6 months. It went from 110 million in January'19 to over 121 million in July'19, i.e. at a pace of almost 2 million a month. On the other hand, Vodafone Idea had a tough time trying to maintain it's wireless broadband user numbers between February'19 to May'19, when it lost about 1.25 million users. It has seen some increase for the last 2 months of June & July'19. I am pretty sure that this will pick up pace from September'19 onwards & we could see Vodafone Idea adding 2 million+ Wireless Broadband users every month. This race between Airtel and Vodafone Idea will get very interesting by the end of 2019. I am excited to see which one of the two proves to be a bigger challenger to Jio in the year 2020. So far we all know that Airtel has performed better than Vodafone Idea. But there are reasons for the same. As Vodafone Idea starts pushing it's upgraded network services through formal advertisement channels, we should see the company numbers start improving.

Q1FY20 Telecom AGR update: BSNL is on a surprise comeback

TRAI announced the Q1FY20 Financial Numbers for all Telecom operators a couple of days back. I have considered the Adjusted Gross Revenue (AGR) numbers for the Top-4 Telecom operators in my analysis. For Q3FY19, Vodafone Idea was No.1 (31.4% Market-share), Bharti Airtel was No.2 (30.7%), Reliance Jio was No.3 (29.2%) and BSNL+MTNL was No.4 (8.7%). Things have changed substantially over the last 2 quarters.

Vodafone Idea was expected to lose some market share as it is undertaking a massive Network Integration exercise since November'2018. This has resulted in Vodafone Idea slipping to No.3 position with 27.2% market share in Q1FY20. Bharti Airtel had lost it's No.2 position during Q4FY19 due to some one-off adjustments. It has now regained the No.2 position with a market share of 29.6%. Reliance Jio has jumped to No.1 position in Q1FY20 with a market share of 30.2%. But all these developments were more or less expected. What is surprising is the fact that BSNL seems to be on a strong comeback. BSNL+MTNL combine had reported an AGR of just Rs.2864 crores in Q3FY19, which jumped to Rs.3546 crores in Q4FY19, which was a Q-o-Q jump of about 24%. BSNL+MTNL combine has managed to post an even stronger Q-o-Q growth in Q1FY20 to improve it's AGR to Rs.4703 crores, which is a jump of almost 33%. This strong growth has resulted in BSNL+MTNL combine's market share improving substantially to 13% in Q1FY20.

If we compare the Q1FY20 numbers with Q3FY19 numbers, Bharti Airtel has managed to increase it's AGR by 5.5%, but lost market share by 1.1%. Vodafone Idea has seen it's AGR dip by 5.5%, resulting in it's market share dropping by 4.2%. Reliance Jio has reported an AGR increase of 13% and a market share increase of 1%. On the other hand, BSNL+MTNL combine has managed to increase it's AGR by 64%, resulting in it's market share increasing by 4.3%. BSNL has managed to post such strong growth entirely on it's own since MTNL's performance continues to be disappointing. It will be interesting to see if BSNL manages to continue to post healthy positive growth in the coming quarters. Over the last few months we have been reading many reports of BSNL delaying salary payments to it's staff due to paucity of funds. Government of India is seriously considering some major boost to BSNL, including handing over of MTNL's operations to BSNL. If this happens soon, BSNL will be able to improve it's services & presence in the 2 important Metro circles of Delhi & Mumbai. This should help to further improve BSNL's quarterly numbers. Let's wait & watch how things pan out in the coming quarters for BSNL.

Coming to Vodafone Idea, the company is expected to improve it's performance from Q2FY20 onwards. It's Network Integration work has progressed well over the previous 2 quarters and the company continues to rapidly Integrate the networks in more & more towers in various circles. Very soon we will see the company increasing it's marketing efforts to spread the word of it's Stronger & Larger Network in several cities across the country. Initially this marketing effort will be more localised, limited to only those cities where the Network Integration work is over and the capacity has been increased. As the company gets closer to achieving the Network Integration work in over 80-85% of it's towers across the country, then we will see Vodafone Idea pushing for large scale advertisements across various mediums. I am expecting this to start before the end of December'2019.

Bharti Airtel & Reliance Jio continue to aggressively market their services across the country & also continue to incrementally increase their coverage & capacity. While Bharti Airtel has started switching off it's 3G network from some locations and utilise that spectrum for 4G service, Reliance Jio is simultaneously working on rolling out it's wireline services on a commercial basis next month. This might reduce some of it's aggression on the wireless front and we could see some slow down in subscriber addition on Reliance Jio's Wireless network in the coming months.

The next data point awaited is the Subscribers data for the month of July'19, which should be released in the 3rd week of next month.

Do Share your thoughts on this report or Views on the points discussed. Awaiting your Comments.

Green-shoots for Vodafone Idea in latest VLR subscribers Data

TRAI recently published the Subscriber base Report for all Telecom operators in India for the month of June'19. While it was widely reported that Airtel & Vodafone-Idea together lost over 4 million subscribers and Jio gained over 8 million subscribers in June'19, there is a lot more that one needs to know. Vodafone Idea alone lost 4.1 million subscribers in June'19, while Airtel's loss was negligible at less than 30,000 subscribers.

The above numbers are for Gross Subscriber base. I don't give too much importance to the Gross Subscriber numbers. The more important numbers to look at are the VLR (Visitor Location Register) subscriber numbers, i.e. the subscribers which were actually Active on the operator's network. This number is what matters more as these Active users are the ones that will generate Traffic as well as Revenues for the company.

Vodafone Idea has been consistently losing VLR subscribers ever since their merger took place in August'18. From over 400 million VLR subscribers in September'18, it is down to 322 million in June'19. A major chunck of this number will be the subscribers who were holding sim cards of both operators before the merger. Another larger number of subscribers leaving the network will be those who were using it as a Secondary sim, only for Income calls, and were recently forced to do minimum recharge of Rs.35 every 28 days to continue availing service.

Till March'19, Vodafone Idea's overall VLR % was over 93, which is a very healthy figure and also in the normal range for both Vodafone India and Idea Cellular, before merger. But over the last 3 months, i.e. by June'19, it has dropped to just 84%. Apart from the above 2 reasons, this drop in VLR % could also be due to the rapid Network Integration work that is going on at hundreds of towers at any given point. Service disruption for some time for several subscribers at so many locations will also affect the VLR numbers for the operator.

If we look at the overall change in VLR numbers for Vodafone Idea since March'19, the operator lost 9.1 mn subscribers in March'19, another 26 million in April'19, 8.6 million in May'19 and 11.2 million in June'19. While these numbers clearly suggest that Vodafone Idea continues to lose VLR subscribers at a rapid pace, there are lot of things worth noting when we look at Circle-wise VLR subscriber number changes. Last night I sat down to note down the number of circles that are losing or gaining VLR subscribers, in different Ranges like 0 to 0.2 million, 0.2 to 0.5 million, 0.5 to 1 million, 1 to 2 million and >2 million. Some very interesting developments can be noted from this Data that I have collated.

Vodafone Idea had reported a loss of VLR subscribers in all 22 circles for the months of March and April'19. Vodafone Idea had lost over 26 million VLR subscribers in April'19, when 11 circles had reported a loss of over 1 million users each. In May'19, things were much better with just 1 circle reporting a loss of over 1 million users and 1 circle even reported a gain of VLR users. The overall loss of VLR users was moderated to 8.6 million in May'19. But the number is again higher at 11.2 million in June'19. But the culprits are just 2 circles: Bihar (4 mn loss) and Andhra Pradesh (2.2 million loss). Apart from this, things seem to be improving for Vodafone Idea as a total of 6 circles have reported a Gain of VLR users during June'19. All these 6 circles (Himachal Pradesh, Kerala, Madhya Pradesh, Mumbai, Punjab and UP (West)) have reported a decent improvement in VLR %, resulting in a gain of VLR subscribers even when their Gross Subscribers numbers are down. What this suggests is that as Vodafone Idea's network integration work results in an improvement in Network's performance in terms of Coverage, Capacity & Speed, we could see more & more circles reporting positive change in VLR % and hence a gain of VLR users, in the coming months.

My take is that the worst in terms of loss of VLR subscribers is behind for Vodafone Idea. Things are set to improve in the coming months. In fact these are very interesting times for the company as we could start seeing first signs of benefits of their Integrated large-capacity network sometime soon, possibly from September'19 onwards. I will keep updating this Data as and when TRAI publishes the Subscriber numbers for every passing month.

Do Share your thoughts on this report or Views on the points discussed. Awaiting your Comments.

Rise in Telecom tariffs: When can we expect it?

Reliance Jio has been dictating the tariffs in the Indian Wireless services market, ever since it launched it's services in middle of 2016. Reliance Jio first introduced trial services sometime in April 2016, but to avail the FREE services one had to purchase their LYF branded handset. Then later in August 2016, Jio started offering it's 4G sim cards for FREE usage for users of 4G handsets from select brands. And finally on 5th September 2016, it opened the gates for everyone to walk into a Jio store & get a Jio 4G sim, which came bundled with FREE usage till the end of December 2016, which was further extended to 31st March 2017.

At that point, i.e. end of March 2017, Reliance Jio had managed to add over 100 million users on it's 4G-only network. Airtel had over 300 million subscribers and Vodafone + Idea had over 400 million users on their respective networks. It's been little over 2 years since then. Reliance Jio's user base has shot up to over 300 million, that too all 4G-only subscribers. Airtel's user base has marginally shrunk to little under 300 million, which comprises of 95 million 4G users, 25 million 3G users and the rest nearly 160 million 2G users. Vodafone-Idea's user base has shrunk much more to about 320 million, comprising of 85 million 4G users, 25 million 3G users and 210 million 2G users.

Coming to tariffs, Reliance Jio launched some very aggressive tariffs in April 2017. They just removed the concept of counting talktime in terms of minutes or rupees or the concept of Roaming & STD calling and Data usage in terms of MBs or GBs per month. Everything came Unlimited for a fixed fee. The most popular plan for Smartphone users on Jio network is the Rs.399 plan, which comes with a validity of 84 days, which translates into an ARPU of about Rs.140 per month. But now a large portion of incremental users joining Jio network are the Jio Phone users, which have generate a lower ARPU of possibly under Rs.100 per month. Reliance Jio's overall ARPU for June 2019 quarter stood at about Rs.122 per month. This is with an Average Data usage of over 10 GB per user per month and Voice usage of over 650 minutes per user per month.

Bharti Airtel, Vodafone & Idea Cellular enjoyed healthy ARPUs in the region of Rs.175 to 200 per month back in 2016. The Average Voice usage used to be about 450 minutes per user per month and Average Data usage per Data customer was under 1 GB per user per month. After launch of Reliance Jio's services & tariff plans, all these incumbent operators have been forced to introduce tariff plans that are almost in line with those of Jio's plans. But only about 30 to 40% of their users consume Wireless Data. Hence they do offer specific plans for their Voice-only users as well. The years 2017 & 2018 were periods of adjustment for these operators as well as their customers. Almost all of them have shifted to these newer Unlimited Plans or Voice-only plans, resulting in massive drops in ARPUs for these incumbent operators. Bharti Airtel's ARPU for June 2019 stood at Rs.129 per month, which is the best amongst all these operators. Vodafone-Idea's ARPU stands at just Rs.108 per month, the lowest amongst the 3 operators.The significant difference in ARPUs of Airtel and Vodafone-Idea clearly suggests that Airtel has better managed to upgrade it's users to the newer tariff plans and a higher proportion of Airtel users are using it as their Primary sim, compared to that of Vodafone-Idea.

The significant drops in ARPU of the incumbent operators has happened alongwith huge increase in Average usage per customer. The average Data usage per 3G/4G Data customer per month has shot up to about 10 or 11 GB per month. Even the average voice usage has jumped to over 650 minutes per user per month. After falling for several quarters since middle of 2016, the ARPUs of Airtel and Vodafone-Idea have finally started improving over the last couple of quarters. This increase is because of increase in number of 4G users, which are consumers of Wireless Broadband services. Both these operators will

now focus on upgrading their 2G/3G users to 4G networks. Currently only 26% of Vodafone-Idea's total users are on it's 4G network, while the proportion for Airtel is at 34%. Hence both operators have huge scope of improvement here. Both of them will be aiming to have 150 million users each on their 4G networks by the middle of 2020. This will help them improve their ARPUs by atleast 10 to 15%.

Tariff Increases: I think the tariff increase will depend on the capacity congestion on Reliance Jio's network. The operator continues to add millions of new users every month, but there is not proportionate increase in it's traffic handling capacity. This is certainly affecting it's quality of service in many regions. I myself was a Jio customer from May 2016 to June 2019. But I faced huge issues in terms of slow Data speeds for many months at my place, before I finally ported out to Idea 4G. I am sure there will be many more people like me who might be porting out of Jio because of poor Data speeds at their place. I don't know what Jio's management has in mind, but I would certainly have considered reducing the Data usage limits on the existing plans and introduce newer plans for those requiring higher usage at slightly higher price points. This should help improve quality of service for Jio and also boost it's profitability.

Any tariff changes done by Jio will be quickly reciprocated by Airtel and Vodafone-Idea. Even a 5 or 10% increase in prices of existing plans will do wonders to improve the financial health of these struggling operators. Now the BIG Question is: When will we see some increase in tariffs? I think that day is not very far. We could see first signs of tariff increases anytime in the next 6 to 8 months. By then Jio will be much closer to it's target of having 400 million users on it's 4G network. Let's wait & watch. But I would certainly expect and like to see the ARPUs of all these 3 operators stabilise in the range of Rs.125 to 150 per month. This will help them make some money and also allow them to offer decent quality of service to their users.

Do Share your thoughts on this report or Views on the points discussed. Awaiting your Comments.

Telecom Status Report: VLR numbers at the end of May'19

TRAI's report on Subscriber numbers at the end of May'19 is out. The numbers for Top-3 players, which together account for about 90% of the market-share, have progressed on expected lines. Reliance Jio continued to lead the charge with addition of 8.1 million subscribers in May'19. Bharti Airtel lost 1.5 million, while Vodafone Idea lost 5.7 million subscribers during the month.

The bigger news that grabbed the headlines was that Reliance Jio has now overtaken Bharti Airtel to become the No.2 player in the Wireless telecom industry, in terms of Total Subscribers. Reliance Jio's Total Subscriber count has reached 323 million, compared to Bharti Airtel's 320 million at the end of May'19. This is something that was expected to happen sooner or later. Reliance Jio is expected to topple the current No.1, Vodafone Idea, sometime before the end of end of this year.

But if we look at the Active Subscriber base count, i.e. the VLR base of each of these three operators, Bharti Airtel is still very comfortably placed in the No.2 spot, with 320 million active subscribers. It lost 4 million Active subscribers during the month. On the other hand, Vodafone Idea continued to lose Active Subscribers at a faster pace. After the big slump of 26 million in April'19, Vodafone Idea saw it's Active users base drop by another 8 million during May'19. It's lead over Bharti Airtel is now just 14 million.

At the same time, Reliance Jio's Active users base increased by a mere 3 million, compared to the 8 million of Gross additions it did. It still trails the Top-2 by a good margin, with an Active subscribers base of 268 million. If the current trend continues for a few more months, Bharti Airtel will become the No.1 player toppling Vodafone Idea, maybe in another 2 or 3 months, well before Reliance Jio catches up with these 2 and overtake them.

Vodafone Idea seriously needs to ramp up it's Integrated network rollout to more circles and simultaneously start with wider marketing campaign. Since it is currently focusing on the Network rollout part, it has stopped Advertising it's brand & services on a large scale. This is clearly hurting the operator's numbers month after month. The operator is said to have completed the Integrated network rollout, which is expected to have much larger Capacity & Speed, in about 10 circles. Vodafone Idea is expected to complete the rollout across the country by the end of this year.

Bharti Airtel has been Advertising it's brand & services very aggressively, which is helping it gain 4G subscribers month after month, though at a pace slower than Reliance Jio. Industry reports suggest that a major portion of Reliance Jio's subscriber additions are happening for the Jio Phone subscribers, which are actually low-revenue subscribers.

We will get more details on each operator's performance in their Quarterly Results presentations this month.

Vodafone-Idea rapidly losing Active Subscribers vs Airtel & Jio

TRAI recently came out with Subscribers Report for the period ending April 2019. The headline that most media channels flashed was that Jio added 8 million subscribers, while Airtel & Vodafone-Idea lost 3 million & 1.5 million subscribers respectively.

I decided to collate the Total Subscribers Data, alongwith VLR % Data for all the above 3 operators since January 2019, to arrive at the Active Subscriber base data for the last 4 months. The data shows that Reliance Jio's active subscribers base has grown by over 10% between January & April 2019 . Airtel's active subscribers count is also fairly steady with a marginal 2% drop during the same period. But Vodafone-Idea has seen a massive 11% drop in it's active subscribers count, with April 2019 proving to be worst month during the period.

As you can see from the chart alongside, Reliance Jio's VLR subscriber base increased from 240 million to 265 million during the 3 months period. It continues to be the No.3 operator in the country, but is now a lot closer to the Top-2 players. Vodafone-Idea could soon be losing it's No.1 position, atleast in terms of the VLR base. In January 2019, Vodafone-Idea had a comfortable lead of 54 million over Airtel and 145 million over Reliance Jio. Now the gap is down to just 18 million over Airtel and 77 million over Reliance Jio. Vodafone-Idea has been losing it's active subscribers every month. But the biggest drop happened in April 2019, when it's VLR % dropped from 93.27% to 87.03%. This resulted in an erosion of 26 million VLR subscribers count in a single month.

The exact reason for such a big drop in Vodafone-Idea's VLR % is yet unknown. But it could also be due to the massive Network overhaul activity underway for the operator in several circles. The VLR % might prop up again to over 90% once the Network stabilizes again. We could see another couple of months of low VLR % for Vodafone Idea, before we start seeing the effects of improved Network performance for the operator.

On the other hand, Airtel continues it's aggressive marketing alongwith improving it's 4G network coverage. Airtel is also a beneficiary of Vodafone-Idea's network troubles during this period of overhaul. Both the operators were in any case expected to lose substantial numbers after they introduced the minimum recharge plans, where every user had to recharge with atleast Rs.35 evey 28 days to continue availing service on their Airtel or Vodafone or Idea sim cards. During the 3 months period from January to April 2019, Airtel lost just 7 million of it's active subscribers count, while it's VLR % improved from 97.3% to 100.7%. Airtel is also probably receiving inflow from Tata Tele's subscribers base, with people losing patience of the delayed merger deal. Tata Tele subscribers are rapidly porting out their numbers to other operators, with Airtel probably getting a good share of it.

Reliance Jio continues it's steady march towards it's goal to become India's No.1 operator in terms of Revenues as well as Subscribers. It continues to see it's VLR % remaining steady around the 83 to 84% mark. Reliance Jio could become the No.2 operator in terms of Active subscribers by the end of December 2019, if not sooner. By then it could very well be the No.1 operator in terms of Revenues, that too by a decent margin.

Why are Reliance Jio and Vodafone Idea divesting their Fibre & Tower infrastructure?

Over the last few weeks we have seen announcements from both Reliance Jio as well as Vodafone Idea, about their actions or plans related to divesting their stake in their Fibre and Tower subsidiaries. Telecom Towers and Fibre Optic cables form the crucial backbone of Wireless telecom services. Then why are two of India's Top-3 operators in a hurry to reduce or divest their stake in their telecom infrastructure subsidiaries?

Each of the Top-3 wireless operators in India; i.e. Vodafone Idea, Bharti Airtel and Reliance Jio; have their network equipment working on nearly 2 lakh telecom towers across the country, which helps them to cover over 90% of the population of India with their 2G or 3G or 4G services. While Reliance Jio is a 4G-only operator, Bharti Airtel and Vodafone Idea are still offering 2G services with a population coverage of almost 95%. It is mainly being used to serve the people who are yet to upgrade to smart phones and mainly use their phones for voice calling service. 2G service is being used by many Smart phone users as well, where their primary sim is on 4G network, but their secondary sim has to be on 2G network. The secondary sim doesn't generate much revenues and is mainly used for incoming calls. And now we can see newer smart phones being launched with the ability to have both sim cards latched on to 4G networks.

Hence the days of 2G networks existence are now numbered. The 3G network will die even faster. Vodafone Idea and Bharti Airtel were having a 3G network mainly in areas of higher population density and was mainly used for Wireless Data services, before the advent of 4G networks. Now both the operators are focused on expanding their 4G networks, starting with areas of higher population density and busy highways, and then moving to lower density regions. While doing so, they are even re-farming their 2100 MHz spectrum (which was used for 3G service) for use with their 4G network in order to increase their 4G Data handling capacity. It goes without saying that the 4G network is lot more efficient than 3G or 2G networks and can now carry both Data as well as Voice traffic.

Since the traffic on 2G networks is also decreasing with every passing day, these operators are reducing the spectrum allocated for 2G networks (mainly 900 Mhz and 1800 Mhz bands) and re-farming major portions for use with their 4G networks. While Reliance Jio has already achieved a population coverage of nearly 90% with their 4G-only network, both Bharti Airtel and Vodafone-Idea are currently at about 65 to 70% with their respective 4G networks. As and when they approach 90% population coverage with 4G networks, these operators will start shutting down their 2G & 3G networks at a much faster pace, forcing their customers to upgrade their phones to receive better service.

Each of the three operators offering 4G service, are seeing an average monthly Data consumption of nearly 10 GB or more per customer. With nearly 450 to 500 million people already enjoying 4G services, there is humongous amount of Data traffic being carried by these operators. This is where the role of the Fibre Optic cables comes into play. While Reliance Jio has a higher proportion of their telecom towers connected with Fibre optic cables, it has a capacity advantage. Reliance Jio network design was planned to handle such huge amounts of Data traffic, right from Day-1. On the other hand, Bharti Airtel and Vodafone-Idea were relying more on Wireless micro-links for communication between different towers in a region and only a select few 'Node' towers were connected with fibre optic cables. They are now being forced to increase the fibre connectivity to higher proportion of their towers in order to be able to handle the hugely increased data traffic.

With the Towers and the Fibre infrastructure playing such an important role in the functioning of a wireless data network, Why are these operators in a hurry to reduce or divest their stakes in those subsidiaries?

And the reason is Monetisation. Reliance Jio has built nearly 1.5 lakh towers of it's own. On all these towers currently only Reliance Jio equipment is fixed. Most of these towers are said to have the capacity of have equipment of more than 1 operator. By having another operator putting up their equipment on a tower, Reliance Jio's tower company can start earning rental income, without any significant increase in operating costs. Whichever operator becomes a tenant on Reliance Jio's towers, would also be interested in sharing the Fibre optic cable that most of these towers are connected with. This way Reliance Jio's Fibre company will start earning lease income by leasing a portion of it's cables capacity. With progress in technology, Fibre optic cables have seen huge increase in their capacities and it's not too expensive to increase the capacities of older cables, that were laid a few years ago.

Bharti Airtel, Vodafone India and Idea Cellular had collaborated to form a company called Indus Towers, which has been India's largest tower company for many years now. Now Reliance Jio's tower company will give it a tough fight, in a number of towers department. Bharti Airtel has it's tower company too, i.e. Bharti Infratel, which also is amongst the larger tower companies in India. Indus Towers is an unlisted company with 42% ownership each with Bharti Infratel and Vodafone India and the remaining 16% with Idea Cellular. Indus Towers is now merging with the listed Bharti Infratel to regain the No.1 position in terms of number of towers. Idea Cellular's shareholding in Indus Towers is now a part of Vodafone-Idea JV. It's highly likely that Vodafone-Idea will encash their stake in the merged Bharti Infratel, as the merger concludes.

In the Fibre front, both Vodafone and Idea Cellular had their own respective Fibre optic cables laid across nearly a lakh kilometres each. After the merger, it is likely that they have several overlapping routes. Just last week, Vodafone-Idea have received the approval from NCLT to separate their Fibre optic cables capacity into a separate subsidiary. This is most likely in preparation to divest a part of their stake in it and then let it operate as an independent company, which can lease it's surplus capacity to other operators.

Monetisation and all is fine as of now. But the question in mind is that, since the Data volumes are increasing at a rapid pace, they will be using an increased portion of their Fibre optic capacity with every passing month. So whatever is said to be Surplus capacity today, might not remain Surplus maybe say 12 or 24 months from now. That time they might have to lease capacity from someone else. Or else build new capacities. Sometimes I think that these operators lack long-term foresight. A few years back, they did nothing when Reliance Jio was building a brand new 4G-only network with huge capacities for Data consumption. Airtel, Vodafone & Idea clearly were over-confident on their 2G & 3G services and thought that their customers are more than happy with the services they were offering. Reliance Jio spent about 3 good years building it's fibres, towers & network and with it's big bang launch, it completely changed the way people consumed Data and also the financial metrics of the entire industry.

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.

Bharti Airtel Q3 Numbers - Finer Details

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

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

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

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

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

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

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

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

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

Reliance Jio's Happy New Year Offer - Bad news for everyone!!

Reliance Industries' Chairman made another 'Big' announcement yesterday about Reliance Jio. And it turned out to be just another new offer 'Happy New Year Offer', where Jio customers will get access to Free services till 31st March'2017. The main reason for extending Free services for another 3 months was said to be that the company was not very happy with the Quality of Service some of it's customers were getting,

primarily due to 2 factors: 1) The Voice Calling experience still wasn't as smooth as expected due to lack of cooperation from incumbent operators; 2) The Data speeds for some customers was below acceptable levels as nearly 20% of the subscribers were exploiting the existing FUP limits to the maximum.

To counter these, on one hand Reliance Jio will continue to work with regulator & other operators to enhance the Interconnect Capacities to bring down Call Failure rate to under 0.5% level; and on the other hand Reliance Jio is lowering the FUP limit to 1 GB per day under the new Happy New Year Offer. This offer opens for new enrollments from 4th of December'16 as TRAI had asked the company to end it's Welcome Offer after 90 days of introduction, i.e. on 3rd December'16. Subscribers of Welcome Offer will continue to enjoy benefits of the same till 31st December'16 and then will be migrated to Happy New Year Offer on 1st January'17. Hence from 1st January'17, every subscriber on the Jio network will have a FUP limit of 1 GB per day, which is expected to improve the quality of Data service for most users.

Why am I disappointed? : As a user of Jio's service, I am happy to be able to enjoy the Free service for 3 more months and in turn save couple of thousands more. But I was actually eagerly looking forward to the day when Jio's Free service ends and how it performs once people are supposed to start recharging/paying to continue using Jio's Data & Voice service. In the current situation where over 50 million subscribers continue to use/abuse Jio's Free service, it is quite an unfair comparison between experience of Jio's network with that of others'. Average Daily Data usage of a Jio user is well above 500 MB, whereas the average Monthly Data usage of a 3G/4G user of other operators is about 1 GB. Jio's user base has already crossed the 3G/4G user base of Airtel, making Jio the top Wireless Broadband service provider. That means the Data Volume on Jio's network will be in the range of about 20 to 30 times the Volume on networks of the other incumbent operators. In such circumstance, the Quality of Data service is bound to drop especially in high density regions.

The other reason for feeling bad is that this extension of Free Service period will mean even more pain in an already troubled Telecom sector. Only the Top-3 operators (Airtel, Vodafone & Idea) were making some kind of decent Cash Profit before the Jio Tsunami hit the sector about 3 or 4 months ago. All the other smaller operators were already struggling to cover their Operating Costs with their Revenues, with that situation expected to worsen much much more during the 6 months period from October'16 to March'17. In fact we could see a couple of operators to just Shut shop (either partially or fully) due to Liquidity issues as Banks will also be reluctant to fund them more, without the promoters willing to infuse more money in the business. All these existing operators (including PSUs BSNL & MTNL) are struggling to retain a substantial portion of their customer usage, especially the ones with a 4G smartphones. With over 50 million users already having shifted their Data as well as Voice usage (either partially or fully) to Jio, all the existing operators are bound to feel substantial pain in revenue momentum. In my earlier posts, I had mentioned that I am expecting the Top-3 operators to post a drop of about 10-15% in their Revenues in December'16 quarter compared to June'16 quarter numbers. Now the March'17 quarter could prove to be even more painful with the drop extending to about 15 to 20% of Revenues quite easily. Such large drops in Revenues at a time when these operators are investing in CAPEX for expanding 3G/4G capacities could mean that even these Top-3 operators could post Cash Losses or very negligible Cash Profits in either December'16 or March'17 quarter. This is also not good news for shareholders of Reliance Industries as the company will need to Capitalise another quarter's Operating Costs for Jio, which could be around $ 1 Billion, leading to higher Interest burden and Depreciation Costs once Jio's revenues & costs start being consolidated with Reliance Industries' Quarterly numbers. Ofcourse this additional $ 1 Billion is quite small to the size of the total CAPEX undertaken by the company for Jio in total. But even shareholders of Reliance Industries must be very eager to see how Jio's financial performance progresses, and this extension will mean a further delay for the same.

I am expecting all these existing operators to approach TRAI / DoT to appeal that Reliance Jio cannot be allowed to offer Free Service for another 3 months. Even I am not sure if Reliance Jio's new offer will get permission from the regulator or not. We should know about it in the next couple of weeks for sure. Let's wait & watch.

Bharti Airtel vs Idea Cellular (India Mobile business progress comparison) post Q2-FY'17.

As we all know that Idea Cellular's business is purely it's India Mobile business, but in case of Bharti Airtel, it's business includes not just it's Mobile business in 18 countries, but also smaller India businesses like Digital TV, Home Broadband, Enterprise Solutions, etc. For Bharti Airtel, it's India Mobile business contributes nearly two-thirds of it's Consolidated Revenues and possibly a higher proportion of it's Profits. Hence the good or bad performance of it's India Mobile business does have a substantial impact on the company's overall numbers.

For my analysis, I have divided the Total Revenues (India Mobile business only) of the two companies into two parts: Data Revenues & Non-Data Revenues. The latter part will comprise about 95% of Voice business & rest from VAS like SMS, Ringtones, etc. Let's first check out the

Quarterly progress of the Non-Data Revenues. Both the companies have seen their Quarterly Non-Data Revenues hover within a range over the last 10 quarters. Idea Cellular has performed slightly better than Bharti Airtel. Idea's Sept'16 number of Rs.7420 crores is nearly 14% higher than it's Sept'14 number of Rs.6525 crores and nearly 5% higher than it's Sept'15 number of Rs.7035 crores. On the other hand, Bharti Airtel's Sept'16 number of Rs.11,158 crores is only 3% higher than it's Sept'14 number of Rs.10829 crores and nearly 3.6% higher than it's Sept'15 number of Rs.10762 crores. In Sept'14, Idea Cellular's Non-Data Revenues were about 60.3% of Bharti Airtel's corresponding number. But the same has now improved to 66.5% in Sept'16. Idea Cellular has clearly outperformed Bharti Airtel on the Voice business front over the last 2 years. Both the companies have also reported a small Q-o-Q dip in Sept'16, with Bharti Airtel's number dropping 3.2% and Idea Cellular's number dropping 2.2%. In case of Bharti Airtel, the Non-Data portion forms 75.7% of it's India Mobile business revenues, while the same for Idea Cellular forms 78.7%.

Coming to the primary growth driver of all Telecom operators across the world, i.e. Data Revenues, the developments in Sept'16 quarter have been exactly as per expectations. The steady growth that both Bharti Airtel & Idea Cellular were reporting quarter after quarter over the last

2-3 years, is clearly showing signs of coming to a screeching halt in Sept'16. I had mentioned this in my previous post on this topic. Have a look at the chart alongside. The sudden collapse of incremental growth rate was expected due to availability of Reliance Jio's Preview Offer since June-July16 and then the Welcome Offer launch on 5th September, when 4G Smartphone owners started scrambling for a Jio simcard. Let us try & check which one of the these two have done better so far. Bharti Airtel's Sept'16 Data Revenue of Rs.3577 crores is 98% higher than Sept'14 number and 23.6% higher than Sept'15 number, but only 1.4% higher Q-o-Q. On the other hand, Idea Cellular's Sept'16 Data Revenue of Rs.2009 crores is 92% higher than Sept'14 number and 19.2% higher than Sept'15 number, but only 2.2% higher Q-o-Q. Bharti Airtel has noticeably posted a little better growth in 2-years or 1-year comparison, but Idea Cellular has posted marginally better Q-o-Q growth number.

Bharti Airtel has a much wider 3G as well as 4G spectrum footprint when compared to Idea Cellular. Hence Airtel is expected to post much better Data Revenue/Volume growth. But it seems like either Airtel is not able to properly utilise it's spectrum advantage or Idea is doing much better even with 3G/4G coverage is limited circles. Let us look at how the Data Volume growth is panning out for the two operators.

Both operators have seen a stupendous surge in Data Volumes over the last many quarters. Bharti Airtel's Sept'16 Data Volume of 178.1 million GBs is 163% higher than Sept'14 number, 54.9% higher than Sept'15 number and 12.7% higher Q-o-Q. At the same time, Idea Cellular's Sept'16 Data Volume of 107.4 million GBs is 173% higher than Sept'14 number, 49.2% higher than Sept'15 number and 15.4% higher Q-o-Q. That means Idea Cellular has managed to outperform Bharti Airtel in Q-o-Q as well as 2-years comparison, but lagged only in the 1-year comparison. I find this to be a big achievement for Idea Cellular as it has a clear disadvantage when it comes to 3G/4G spectrum footprint. Bharti Airtel has been offering 3G in 21 circles on it's own spectrum, while Idea Cellular does the same in only 13 circles. Even on 4G front, Bharti Airtel has been offering the services in 15 or 16 circles for more than a year now, while Idea Cellular started rolling out it's 4G services only in December'15, that too limited to about 9 or 10 circles. Despite this spectrum holdings advantage, Bharti Airtel has not been able to report superior performance on the Wireless Data business front. At this point, I would rate Idea Cellular's overall performance to be superior to Bharti Airtel's.

Despite it's spectrum disadvantage, Idea Cellular has been very aggressive on the rollout of 3G/4G services in it's circles of strength. I had mentioned this in an earlier post on Idea Cellular in June'16. The observations that I had shared in that post are certainly the reasons behind Idea's strong performance despite spectrum disadvantage. During the recently concluded Spectrum Auctions, Idea Cellular has not just managed to strengthen it's spectrum position in the circles of importance, but also increased it's 3G/4G reach into newer circles. If Idea Cellular does manage to replicate it's success in it's strong circles (even to a small extent) in the newer circles, Bharti Airtel will have more reasons to worry. And we cannot forget Reliance Jio and Vodafone. Bharti Airtel clearly needs to buckle up and prepare for more aggressive network rollout and use it's spectrum advantage to the maximum. It has clearly failed to do so until now.

All-Out War for Wireless Data traffic now begins!!

As per Quarterly Reports presented by Bharti Airtel & Idea Cellular post June'16 Result announcements, the No. 1 & No. 3 operator were carrying approximately 60 million GBs and 35 million GBs respectively on a monthly basis. At an average realisation rate of about Rs.220 per GB, it translated into a monthly revenue of about Rs.1300-1350 crores for Bharti Airtel and about Rs.750-800 crores for Idea Cellular.

Reliance Jio entered the scene in the second half of the June quarter, when it started issuing a Jio Sim with 90-days Preview Offer alongwith all LYF handsets. By June-end, Jio had activated an additional about 1 million Sim cards under this offer, taking it's active user base to 1.5 million. The average usage of these 1.5 million users was said to be about 1 GB per day!! That means Reliance Jio's network must have carried approximately 35 to 45 million GBs of Data during the month of June'16, making it the 2nd largest Wireless Data carrier in India at that point of time. And this was just the start. Reliance Jio is expected to have added another 1 million users in the month of July'16 under the LYF-bundled Preview Offer. It's Data traffic must have been in the region of 70 to 80 million GBs for July'16, making it the No. 1 Wireless Data operator in India in terms of Traffic alone. Theoretically, Jio wasn't making any money from this traffic as it was all Free for the buyers of LYF handsets. In the 2nd fortnight of August'16, Reliance Jio opened the floodgates by allowing other 4G handset owners to also receive a Jio Sim with the 90-days Preview Offer.

By the end of August'16, the active user base on Jio's network is expected to have touched close to 5 million with a monthly Data Traffic in excess of 150 million GBs, more than double that of Airtel's expected Data traffic number for the month. It is highly unlikely that existing operators like Bharti Airtel & Idea Cellular or anyone else, must have seen any significant growth in monthly Data Volumes during the current quarter, i.e. Sept'16 quarter. A small portion of the heavy Data users had already bought the LYF handset and were enjoying the Unlimited Data benefits on Jio network. The massive rush for Jio Sims, which started in the last week of August, has continued in September after the Chairman of RIL announced full scale launch from 5th September with Welcome Offer where all users will be eligible to get 4GB per day of 4G Data & Unlimited Voice Calls & SMS till 31st December'16. Reliance Jio's user base is expected to touch around 15 million by the end of Sept'16 with a monthly Data Volume of around 250 million GBs

How is the Competition reacting to Reliance Jio's aggressive Usage growth?

With Reliance Jio zooming past all the existing operators in terms of Network Traffic numbers, it was just obvious that all the existing operators will feel varying degrees of pain. At least 10 to 20% of Traffic on Jio's network must have directly come from competitors' traffic numbers (remaining 80-90% volume was either Splurge usage or replacing Broadband/Cablenet traffic, as everything was Free on Jio's network). Before Jio came in, monthly Wireless Data volume on 2G/3G/4G networks must have been in the region of 150 million GBs and it was growing at a pace of 3 to 5% M-o-M. That means incremental growth in Volume of about 5 to 10 million GBs. That means Jio must have gulped down not just the incremental Volume, but a small portion of existing volume number too, by now. The existing operators must have detected exhaustion of growth in Data volumes in July itself. Hence their first step towards protecting volumes came around end of July in terms of increasing Data limits on packs of denomination higher than Rs.300 or 350. Where they were earlier offering 2 GB Data limit, it was revised to 3 GB and in the regular 3 GB Data pack, the limit was raised to 5 GB, and then 10 GB 3G/4G Data pack was now priced just under Rs.1000/-, which was earlier costing anywhere between Rs.1300 to 1800. 

This step might have helped retain Data volumes for some time. But after Jio unleashed the Sim card eligibility to almost all 4G handset owners in the last week of August, leading players like Bharti Airtel & Idea Cellular, who both had reasonably large 4G network in place, had to take the second step. Both of them announced something like the Mega Saver Pack costing around Rs.1498/- by the end of August, which came with upfront 1 GB Data limit & gave the subscriber the eligibility to get 1 GB/ 2 GB/ 5 GB recharges at highly discounted rates of about Rs.51/ 101 / 251, any number of times over a 12 months period. Seems like this Mega Saver pack wasn't helping these operators in arresting fall in Data Volumes much, as people across all major cities & towns continued thronging Reliance Digital stores to grab a Jio Sim at the earliest. Both Airtel & Idea further sweetened the Mega Saver pack by hiking the upfront Data limit to 6 GB, just 2 weeks after announcing the packs around August-end. Seems like this too wasn't helping the operators much as today Bharti Airtel is said to have announced another pack priced at Rs.1495, which will give the customer 30 GB of 4G Data with 90 days validity, bringing the effective Data rate to just Rs.50 per GB. This pack is said to be available in Delhi from today & will be rolled out to other circles over the next few days. I won't be surprised if Idea & Vodafone too follow Airtel in announcing a similar pack in the coming few days.

My View: 

Reliance Jio's offer includes both Free Data & Free Calling and SMS till the end of this year. This is kind of a double-whammy for all existing operators as a major usage shift of existing mobile users to Jio's network will start pulling down the former's revenues. Hence the Top-3 operators have undertaken a 2-pronged strategy to counter this: 1st is to try & spoil Reliance Jio's name as much as possible as far as Voice calling is concerned. Reliance Jio has been crying foul since even before it's commercial launch that Airtel, Vodafone & Idea have been deliberately not giving enough Points of Interconnect to enable smooth transfer of Calls from Jio to their networks & vice-versa. This might have been one reason why Jio was forced to announce Commercial operations from 5th September, coupled with Welcome Offer of Free usage to it's subscribers till year end. After announcement of Commercial operations, Jio must have signed requisite Interconnect agreements with each operator & started paying IUC @ 14 paise per min for each outgoing call to other operator. At the same time, the other operators will have to provide enough Points of Interconnect in line with increase in Call traffic between them. It's been close to 3-weeks since Jio's commercial operations have started, but the Voice calling to other operators, especially the Top-3 ones, is still not anywhere near smooth. 

Reliance Jio has been desperately pushing each of the other operators for enabling more PoIs at the earliest. But the more they delay it, the more damage will be inflicted on Jio's brand image and better their chances of retaining their customers. But this can't go on for long & very soon we will see a substantial improvement in Voice Calling from Jio numbers to those of other operators. Jio will try to streamline all their Voice Calling operations well before the Welcome Offer period ends. If Jio's active customers do get a good Voice Calling experience for atleast the last 3 to 4 weeks during this Free period, then there is a higher probability of these customers getting converted into Paying customers from 1st January'17. And once the word spreads that Voice Calling is also now normal from Jio network, many people will start thinking of porting their primary mobile numbers too.

The 2nd part of the strategy adopted by existing operators is to try & offer higher Data limits for higher denomination packs. By doing this they are trying to maintain some minimum level of Average Monthly Revenues, even though the Data Volume might get a big boost. Look at the Mega Saver pack for example. If a customer does recharge with Rs.1498, he gets 6 GB 3G/4G Data upfront with 12 months validity. This ensures an ARPU of about Rs.125/month to the operator. Suppose this customer needs atleast 5 GB of Data per month, that means he will be consuming about 60 GB in a year. That means he will need to do a recharge of Rs.251 or 252 every month from the 2nd month onwards. That means the operator will receive a total revenue of about Rs.4200 to 4300 (1498 + 2770 approx.) from this customer over the year, translating into a monthly ARPU of around Rs.350/-, which is a decent number. The other pack that Bharti Airtel announced today, which offers 30 GB of 4G Data for 90 days at Rs.1495, is again aimed to ensure around Rs.500 per month in ARPU for the operator. This pack will most probably be a limited period offer as it is an attempt to retain High Usage customers from shifting their usage to Jio. 

But the big question is: How successful will all these moves be to ensure minimum loss of revenues for all these operators for Sept & Dec quarters? 

I think all these existing operators who have millions & millions of subscribers on their 2G/3G/4G networks, will not lose much of their Voice revenues, atleast during the Sept quarter, because of 2 reasons: 1) Jio is expected to enroll just about 15 million users by Sept-end, which is just about 1.5% of the total active subscriber base; 2) Voice Calling experience on Jio is still not smooth, though it is expected to improve in the next few weeks. The existing operators will certainly lose some portion of their Voice Revenues during December quarter as Jio's user base is expected to expand from 15 million to well over 50 million over the 3-months period. And the Voice Calling experience should be much better during most part of the December quarter. I am estimating a drop in Voice Revenues to the tune of 3 to 8% across all existing operators. The drop in Outgoing Calls volume could be larger than drop in Revenues, but all these operators are expected to be Net-receivers of IUC from Reliance Jio as Calls from Jio to their networks are expected to remain 5 to 10 times higher than calls in the reverse direction, atleast in the initial few quarters. Gradually this multiple could come down to about 2-3 times over the next 1 or 2 years.

Coming to Data Revenues, this is where the impact will be much bigger on all existing operators. As of June'16-end nearly 70% of the Total Wireless Data traffic & 95% of the incremental traffic was from 3G/4G customers. Bharti Airtel had about 36 million & Idea Cellular had about 27 million 3G/4G Data customers at the end of June quarter. That means the Total 3G/4G Data customers in India should be around 100 to 110 million by the end of June'16. Out of this number, nearly half of them are expected to have a 4G handset, making them a potential customer for Reliance Jio. Apart from that, nearly 8 to 10 million new Smartphones are sold in India every month and most of them now are expected to be 4G compatible phones. That means Reliance Jio's potential customers are growing in numbers at a rapid pace. By the end of December'16, the number of 4G handsets in India could be crossing the 100 million mark and there could potentially be a Reliance Jio Sim card in half of those. Since Reliance Jio is offering all it's services Free of charge till December-end, almost all the 4G handset owners would like to try their services. So it's a matter of how many enrollments Reliance Jio is able to handle over these 3 to 4 months. I am estimating that Reliance Jio could be able to activate anywhere between 10 to 15 million Sim cards every month, which should translate into a User base of between 50 to 60 million by end of December'16. Even if this turns out to be true, then Reliance Jio could possibly become the largest Wireless Broadband player in India (in terms of Subscribers too) even before the end of this year. This will certainly have a serious impact on the Data Volumes of all existing 3G/4G operators in the country.

The existing operators are already seeing a substantial portion of their 3G/4G customers shifting their usage to Reliance Jio and hence are being forced to offer increased Data limits to their customers in order to try & retain as many Data Consuming users as possible. This action will help them in somehow maintaining the overall Data volumes on their networks, but it will certainly pull down the Net realised rate per GB of Data. I am expecting the June-quarter average rate of about Rs.220 per GB to fall to around Rs.180-190 per GB for September-quarter and to a level of below Rs.150 per GB for December-quarter. That means the Average rate per GB is expected to fall by about 30-35% over these 2 quarters. Hence in order to maintain Data revenues at same level as June-quarter, these operators will need to ensure a Data volume growth of around 30-35% over these 2 quarters, which I think will be very difficult to manage on the face of Free Usage offer from Reliance Jio during this period under consideration.

But things could be a bit different from January onwards. The Top-3 operators, who are continuously expanding their 4G network coverage currently, could recover a part of the Data Traffic market share lost during the Sept & December quarters, as Reliance Jio users will also need to pay to use their services. I have already shared my opinion on the Tariff Plans announced by Reliance Jio earlier this month. Click here for that post. Those tariff plans are more suited only to certain categories of users, like the ones who talk a lot and those who live in urban areas & have regular access to Jionet WiFi services. Those plans are clearly not suited to those who were looking for pure 4G Data packs. Unless Reliance Jio tweaks those tariff plans or introduces new pure 4G-Data packs, it is bound to lose a substantial chunk of it's user base post 1st January'17. Reliance Jio will certainly consider the traffic flow on it's networks for a couple of weeks post 1st January'17 and can then easily introduce new Data packs to bring back the users who had stopped using their services due to lack of suitability.

All in all......this massive competition amongst the incumbents & Reliance Jio for increasing Wireless Data traffic is currently benefiting the Data customers tremendously. India's Wireless Data volumes could be hitting a record high during the Oct to Dec'16 quarter, which might remain a record even for another year or more. This is Bonanza period for Customers, but equally a painful period for Shareholders of all these Telecom companies. 'Survival of the Fittest' will be tested in this sector over the next few quarters.