Idea needs to ramp up data userbase to compete, say analysts

Idea Cellular needs to improve its broadband subscriber base by grabbing more 4G customers, and increase investments if it does not want to lag way behind Bharti Airtel and Reliance Jio Infocomm and lose customers to these rivals, say analysts.

"Tight control on costs can only take Idea so far; ultimately the company would need to catch up with larger peers on investments, especially in non-core markets, to be able to stage a revenue recovery," JP Morgan said in a report. Cost controls were a major reason for Idea expanding operating margins in the fiscal fourth quarter to 23.6% from 18.8% in the previous three months, and reporting lower-than-expected losses.

"Idea would need to do a better job of ramping up its broadband sub base", since it added just 5 million subscribers in March quarter compared with Bharti Airtel's 14 million plus, the brokerage said.

For the fiscal year ended March, Idea spent about Rs7,000 crore in capex, compared with Airtel’s Rs24,000 crore. Jio spent Rs14,000 crore in the January-March quarter alone.

Expecting the tariff war to continue, CLSA cut its forecast on Idea’s revenue and earnings before interest, tax, depreciation and amortisation (EBIDTA) by 12-30% for FY19-21.

Vodafone India and the Aditya Birla Group-owned Idea are in the process of merging their operations, which is expected to close by June end. CLSA’s forecast is for the merged entity.

Analysts at JP Morgan said the company, which posted its sixth consecutive quarterly loss, will have to get more subscribers move to 4G from 2G. This is especially important for the telco with an average revenue per user (ARPU) of Rs 105, since ARPU, according to Airtel, typically more than doubles when a subscriber moves from 2G to 4G.

Among its rivals, Airtel reported ARPU of Rs116 and Jio’s Rs137.1 in the past quarter.

On cue to target more 4G customers, the telco Tuesday said it will roll out Voice over LTE (VoLTE) services in six of its major markets — Maharashtra & Goa, Gujarat, Kerala, Tamil Nadu, Andhra Pradesh & Telangana and Madhya Pradesh & Chhattisgarh — starting May 2. However, it will still lag way behind Bharti Airtel and Vodafone India, which have made an earlier start. These three however trail Jio whose entire offering is based on a VoLTE network.

"It is absolutely essential for Idea to get its fair share of subscribers to upgrade (to 4G) for improving headline ARPUs if overall industry pricing does not improve," JP Morgan wrote in its report.

Although there has been increase in consumption pattern, the drop in data ARPU from Rs95 to Rs83 and that of voice ARPU from Rs 86 to Rs 78 when compared sequentially points out that “positive elasticity does not make sense when this is accompanied by sharp pricing cuts”, said JP Morgan.

But the merger will create a robust franchise and cost position for the new entity, say analysts.

"Jio is likely to maintain an aggressive stance to gain subscribers over the next 12 months as it endeavours to benefit from the marketplace uncertainty arising from the Idea-Vodafone India merger. While we expect revenue trends to remain weak in the near term, the merged companyshould gain from operational expenditures synergies to aid margins," Deutsche Bank said in its report.

The merger, which will create the largest telco in India, is awaiting final approvals and is expected to be completed by the end of May. The merger, along with cash from sale of their towers to American Tower Corp for Rs 7,850 crore, should result in combined net debt of Rs 107,700 crore for the merged entity by June, analysts at JM Financial estimate.

For the January-March quarter, Idea’s net loss widened to Rs 930.6 crore from Rs325.6 crore a year earlier, but narrowed from Rs 1,285.6 crore in the previous quarter. It is hit by the continuing price war and cut in interconnect usage and international termination rates.

The results beat estimates mainly because the quarter saw a reversal of network operational expenditure and variable pay provisions, adjustment in spectrum fees and income tax refunds, analysts said. "Without these one- offs and reversals, 4Q net loss would have been similar to our estimated Rs 1,470 crore," JM Financial said.