Vodafone Idea and Bharti Airtel, the second- and third-largest operators in India respectively, may have assumed the worst was over after posting double-digit year-on-year increases in ARPU following a protracted price war with newcomer (and now market leader) Reliance Jio, and the sector showing some early signs of a recovery.
This was before India’s Supreme Court ruling on adjusted gross revenue (AGR). The decision in late October affirmed the Department of Telecommunications’ position that AGR should cover all revenue, including non-telecoms related activities.
Vodafone Idea had endured a freefall in subscribers since it was formed in August 2018: dropping from 422 million to 311 million at end-September (see chart below, click to enlarge). But the rate of decline slowed dramatically in the latest quarter, falling by just 9 million subscribers sequentially. Blended ARPU increased 21.6 per cent from end-September 2018 to INR107 ($1.49).
The high court ruling abruptly ended any hopes of a rebound.
After booking an INR257 billion provision for the adverse regulatory decision, Vodafone Idea reported an INR509 billion quarterly loss in its fiscal Q2 (calendar Q3). It was its fourth consecutive quarterly net loss. It also cut back on its 4G rollout plans, slashing its fiscal 2020 capex guidance by nearly a quarter to INR130 billion.
Airtel’s operations were also improving, with revenue increasing 5.7 per cent to INR154 billion in the July to September period, driven by 7.4 per cent year-on-year growth in mobile turnover to INR108 billion. ARPU increased 28.4 per cent to INR128.
Following the ruling and an unprecedented two-week delay in releasing earnings for the quarter, Airtel posted a loss of INR230 billion for its fiscal Q2 after setting aside INR284.5 billion for what it estimates it will owe in unpaid licence fees and spectrum usage charges.
Those results contrasted sharply with market leader Jio which experienced strong growth in profit and revenue as well as continued subscriber gains.
The court decision also had ramifications far beyond India.
In an earnings call Nick Read, CEO of UK-based Vodafone Group, blamed the performance of its India joint venture and the regulatory decision for the group’s continued losses in its fiscal H1 2020. After fully writing-down the book value of its India operations, he said the company had no obligation to fund further losses and promised to stop putting group funds into the country.
Meanwhile, Singtel, with a 35 per cent stake in Bharti Airtel, suffered its first quarterly loss ever after being hit by a one-time charge of SGD1.93 billion ($1.4 billion) for its share of a provision made by Airtel for an adverse regulatory ruling. The Singaporean operator recorded a net loss of SGD668 million in the July to September quarter after booking the exceptional loss.
Call for action
Both Vodafone Idea and Airtel said they are holding discussions with the government and hope it will reconsider.
In a statement, Vodafone Idea said the acute financial stress in the telecoms sector had been acknowledged by all stakeholders, and a high-level committee headed by the cabinet secretary is looking into providing appropriate relief.
Heeding those calls, the government granted mobile operators a two-year moratorium on spectrum-related payments, which is estimated to be worth as much as INR420 billion.
Operators will certainly be looking for additional concessions from the government, as analysts believe the cash flow relief measure won’t be sufficient to improve their bottom-lines.
Research from GSMA Intelligence ranked India in top-20 worldwide with the highest tax payments as a percentage of revenue. About 11 per cent of operators’ total revenue goes toward taxes and other levies, the second-highest in Asia after Sri Lanka.
Despite the tax burden and pleas from operators, communications minister Ravi Shankar Prasad told local media the government is not considering waving penalties and interest on outstanding licence payments based on AGR or extending the timelines for operators to pay spectrum dues.
The operators recently announced plans to raise prices on 1 December, with Jio also saying it will consider increasing tariffs in the next few weeks in “a manner that does not adversely impact data consumption or growth in digital adoption and sustains investments”.
Piyush Nahar, an equity analyst at Jefferies, said in a research note that while tariff increases were a positive move, other government measures are still important for the incumbents, especially Vodafone Idea.
The Telecom Regulatory Authority of India reportedly is considering initiating a public consultation to look at the revision of tariffs, with talk of setting a price floor for voice and data, which Nahar said would be the first case of the government setting a minimum price.
He said the benefits would depend on the price set and over the medium term could lead to pricing becoming a regulatory decision, as the government would question price hikes at some point to protect consumers.
India’s mobile market has transformed completely since Jio’s entry in September 2016, with just three major players and two tiny state-run entities (BSNL and MTNL). Vodafone Idea is burdened with $14 billion in debt and, without a reduction in the levies it owes the government, the playing field could soon be reduced to just two, giving customers less choice.
The government needs to act quickly but must be cautious of any intervention which could undermine operators’ business strategies and market driven competition, and would need to be backed by strong evidence showing market mechanisms have failed.
The editorial views expressed in this article are solely those of the author and will not necessarily reflect the views of the GSMA, its Members or Associate Members.Subscribe to our daily newsletter Back