Vodafone Idea may become fringe player if revenue growth stalls: Analysts

Kolkata: Vodafone Idea’s weak first-quarter earnings could rapidly relegate India’s top telecom operator by subscribers to a regional player if it fails to grow revenue in the coming quarters, analysts said.

It also appears to rule out an early revival for the debt-laden telecom sector, they said.

The company’s “4.3% on-quarter overall revenue decline, and an even higher 6% wireless service revenue decline (in the April-June period) will take away the illusion of stability and hopes of a quick revival in the sector,” said Kotak Institutional Equities.

“At a big picture level, the odds of a set of investors liking the odds of a two-large players scenario (read: Airtel and Reliance Jio) emerging increases with Voda Idea’s fiscal first-quarter print,” the brokerage said.

ET has seen a copy of the note.

The upside from a minimum recharge play, which supported revenue stability for Voda Idea in the January-March quarter of the previous financial year, has not been sustained for even a quarter, analysts said.

Customers also moved to lower-value tariff plans in the top-middle segments, a phenomenon known as down-trading, causing the on-quarter revenue slide, they said.

Over the past two quarters, Voda Idea and Bharti Airtel have put in place minimum recharge plans that weed out non-revenue generating customers and boost average revenue per user (ARPU), a key performance metric in the sector.

If the upside has not been sustained for Voda Idea, it is believed to be bad news for the sector as a whole. Its impact on Bharti Airtel will be known when the industry number two reports first quarter earnings on August 1.

Both the incumbent telecom operators have been forced into losses after fierce price wars following Reliance Jio’s entry some three years ago, which pushed ARPUs to record lows.

Voda Idea marginally narrowed June-quarter losses to Rs 4,873.9 crore, helped by a change in accounting standards and lower operating cost, but revenue at Rs 11,269.9 crore, dropped below Jio’s (Rs 11,679 crore) for the first time, hit by customer losses of over 14 million and modest (3 lakh) broadband user additions.

Voda Idea’s inability to grow revenue could prove to be its biggest challenge, analysts said, since the impact of costsynergies can be limited, beyond which, revenue growth is a must to sustain the business amid brutal competition.

Going forward, “Voda Idea’s inability to generate revenue growth could ultimately turn it into a small, regional player from a national one, compelling it to reduce its footprint to some priority markets only,” Naveen Kulkarni, telecoms research head at Reliance Securities, told ET.

Adoption of the Ind AS 116 accounting standard — which allows companies to recognise leases as assets ((towers in this case) in the balance sheet from April 1, 2019 —sequentially boosted Voda Idea’s quarterly operating income (read: Ebitda), but a like-to-like comparison presents a different picture.

On a like-to-like basis (excluding Ind AS 116 lease accounting impact), “VIL’s June quarter Ebitda stood at Rs 1,240 crore, down 22% sequentially from the Rs 1,585.3 crore in the previous quarter,” Kotak said.

Voda Idea’s revenue weakness, it said, has flowed down to the operating income level, and the company would have been in the red at the Ebitda level if not for a cost savings of Rs 1,480 crore.

Bank of America-Merrill Lynch said Voda Idea’s “disappointing revenue decline” coupled with the loss of 14.1 million subscribers has led to “Jio de-throning the company” on both subscriber and revenue counts.

Though Jio’s June quarter subscriber base, at 331 million, is more than Voda Idea’s reported 320 million, latest subscriber data collated by the telecom regulator has pegged Voda Idea’s user base at 387.55 million as of May-end, making it the clear market leader by subscribers.