Vodafone Idea will find it challenging to compete with Reliance Jio and Airtel. Improving margins and sustaining capex will be critical for its sustenance.
- Vodafone Idea posted its second straight quarterly loss of Rs 5,000 crore in the quarter ending December 2018.
- Chairman Kumar Mangalam Birla has asked for some relief from the government on spectrum dues.
- Despite being the largest player in terms of subscriber base, Vodafone Idea finds itself at a disadvantage vis-a-vis Reliance Jio and Bharti Airtel.
- Vodafone needs to shed the delusive advantages of size and focus on quality of its suscriber base.
The Vodafone Idea merger was necessitated by the entry of Reliance Jio in the market. The merger has created the largest player in the Indian telecom industry. But look more closely and you find that sheer size does not really indicate the internal weaknesses that the company is facing.
While Vodafone Idea has recently decided to raise Rs 25,000 crore to finance its growth amidst intense competition, the financials continue to remain under pressure due to falling revenues and huge losses. In such a scenario, will Vodafone Idea be able to withstand the challenges that have been the undoing of many players in the Indian telecom industry?
LEADER ON A STICKY WICKET
Vodafone Idea posted its second straight quarterly loss of Rs 5,000 crore during the quarter ending December 31, 2018. In the quarter ending September 2018, the company had posted a loss of Rs 4,973 crore.
To further compound its difficulties, the company’s cash and cash equivalents stood at Rs 8,904.4 crore while its spectrum liabilities are at Rs 9,500 crore in 2019.
Chairman Kumar Mangalam Birla met officials at the PMO to request for a deferral of the spectrum dues. Officials have said that they may not be able to provide company-specific relief, as the telecom sector is not united in its demand. In particular, Reliance Jio is an exception, while both Vodafone Idea and Bharti Airtel have asked for help.
Cellular Operators Association of India (COAI) has requested telecom minister Manoj Sinha to offset spectrum charges with the Rs 35,000 crore input tax credit that the government has to give to telcos. It highlighted that telecom sector financials are under stress despite having invested Rs 10.4 lakh crore over the years.
The quarterly revenues of companies had fallen by 32% in April-June 2018 compared to the same period in 2016. Due to decline in revenues, output GST is unable to absorb input credits that are available. But ironically, Reliance Jio is not in agreement on this matter either.
Balesh Sharma, CEO, Vodafone Idea asserted that despite the market situation, the merger was progressing well and “faster than expected”. He further added, “We remain focused on fortifying our position in key districts by expanding the coverage and capacity of our 4G network, and target a higher share of new 4G customers… The proceeds from the announced capital raise will put us in a strong position to achieve our strategic goals.
Vodafone Idea has given up on customers who weren’t paying minimum recharge of Rs 35 with 28 days validity. This has led to reduction of its subscriber base by around 3.5 crore during the quarter. With this, incoming only customers moved to single SIMs. On the other hand, ARPUs increased by around 1.5% during the quarter. However, customers continue to move to lower ARPU plans.
On the positive side, EBITDA grew by 16.3% over the previous quarter to Rs 11.4 billion. Also, it added 9.5 million 4G subscribers in the December quarter, taking the total 4G base to 75.3 million.
The company is reeling from the entry of Reliance Jio in 2016. A lot of players were compelled to shut shop after Jio’s entry, while Vodafone and Idea decided to merge to survive the battle.
SEPARATE THE WHEAT FROM THE CHAFF
Even though the company has managed to improve EBITDA margins, they are still far less than its peers in the sector. Airtel India’s wireless margins are at least twice those of Vodafone Idea.
As long as Reliance Jio continues to keep tariffs at low levels, the cash burn will continue. In an analyst call recently, Reliance Jio Infocom has confirmed that it has no intention of increasing tariffs, even as its subscriber base has crossed 280 million with a subscriber market share of 24% and a revenue market share of 26%. In comparison, Vodafone Idea stood at 421 million in November 2018 while Airtel had around 342 million subscribers.
Another major concern is that Vodafone Idea would struggle to compete with the kind of investments being made by Reliance Jio Infocomm Ltd and Bharti Airtel on strengthening their networks. In capex terms, Reliance Jio and Airtel have invested 6.58 times and 2.37 times higher respectively as compared to Vodafone-Idea.
During the quarter ending December 2018, Reliance Jio’s capex stood at Rs 14,000 crore compared to just Rs 1,169 crore for Vodafone-Idea. It will be tough to raise the figure considering that net liabilities are at Rs 1.15 trillion, around 25 times annualised EBITDA, according to an analysis by Livemint.
With consistent pricing pressures and weak financials, Vodafone-Idea will certainly find it a daunting task to compete with Reliance Jio and Airtel in the coming years. Its best bet would be to continue to push out lower ARPU customers and improve margins, even as it makes sustained investments in improving its 4G network. Quality would be its best bet at this juncture, and size is only a notional strength.