|Tuesday, 04 September 2012 00:00|
Telcos need to book 10 subscribers to get 1 to stay, raising sales expenses hugely and putting the industry in deep trouble
In the June quarter, market leader Bharti Airtel cited regulatory changes as the reason for its poor performance—the regulator didn’t allow it to only sell combo packs bundling voice (on which telco margins are wafer-thin) and SMS (on which margins are high). In the September quarter the excuse, for the entire industry, my colleague Rishi Raj points out (http://goo.gl/TtDfT), is likely to be the changes in the way the regulator wants them to sell value-added services that make up 12% of revenues, roughly the same share as the PBT margin (profit before tax).
When an industry starts measuring the impact of a one paisa tariff hike or fall, you know you’re in serious trouble. Kotak Institutional Equities Research’s Rohit Chordia—at $12.4 billion, his call on what telcos valued 3G spectrum at was the closest to the actual $14.6 billion, but he got it wrong on the BWA bids in 2010—has an interesting analysis in this context. Chordia does it for Bharti Airtel, but it applies to other telcos as well, some more than others for reasons we’ll go into after a moment. A one paisa fall in the revenue per minute assumptions for Bharti Airtel, for instance, sees its Ebitda margin fall from 31.2% for FY13 to 30.5% and the fair value of its shares by as much as 4%. A 5% fall in minutes—of the type that can be expected when telcos hike tariffs in response to the high base prices fixed for the forthcoming 2G auctions—can be even more disastrous and see Ebitda margins fall from 31.2% in the base case to 30.1%, leading to a 7% fall in the fair value of shares.
We could get into similar metrics for each telco but that gets complicated, so it’s best to focus on some key numbers. First, and most obvious, there has been a dramatic fall in the number of new subscribers and, therefore, in the size of the addressable market. The government would do well to focus on this since this is what will determine the kind of bids it will get in the forthcoming 2G auction. With 919 million subscribers in FY12 as compared to 811 million in FY11, that’s roughly 100 million less subscribers for a new telco to try and get—and even if you get them, they will be got after substantial discounting. So while 227 million new subscribers got added on in FY11, this was only 108 million in FY12.
Each subscriber is paying less and less each year—this is a combination of both tariffs falling for existing subscribers as well as the newer ones having a lower spending capacity—average revenue per user (ARPU) for the industry fell from R205 in FY09 to R97 in FY12. Just to put this in perspective, a 10% fall in monthly ARPUs means the industry needs to increase subscribers by 10% just to keep revenues constant. Between FY09 and FY12, the number of subscribers rose by 2.3 times while ARPUs fell 53%, giving the sector a total gain of just 11% in revenues despite the 130% hike in subscribers—while the subscribers grew faster, the value erosion due to falling ARPUs is best seen in the share price of all telecom stocks.
But, and this is the killer, what is really getting the industry is the hyper competition we’ve been seeing for some years, and the heightening of this since the Raja years and the introduction of number portability. On the face of it, customers are getting a good deal, but when even a one paisa fall plays such havoc, the industry is clearly headed towards self-destruction. This is best seen from what’s called the churn, or the proportion of customers who leave their telco to join another each month. Since not all telcos report churn, let’s assume Bharti Airtel is the industry standard. Its monthly churn has gone up from 3.2% (that’s 38.4% customers per year deserting the telco) in FY09 to a whopping 8.8% in FY12—this is what happens when customers have 4-5 SIM cards each, where they use one and replace it with another telco’s SIM and then again once they’ve exhausted the free talk time and again … RCom reports a much lower churn, but then it just knocked off 20 million subscribers from its numbers for July. And Vodafone doesn’t report a churn if a subscriber leaves within 30 days.
As a result, what was to essentially be an annuity business once it stabilised—X number of customers at RY per month will give you RZ of business every year—has been reduced to a box business, where the emphasis is on getting out those many boxes, or SIM cards, each month. Calculating the impact of the churn is a complex task, but a rough approximation is possible with even a calculator. Take the monthly churn and multiply that by 12 to get the annual churn and apply this to the year’s total subscriber base. For FY12, that gives you a loss of 971 million customers. Compare that with the 108 million new ones added (these are the numbers telcos report to Trai) and what that means is that industry is adding 10 new subscribers to get just 1 to stay. Even though one customer stays, telcos have no option but to target 10, so that has raised selling expenses hugely—in the case of Bharti Airtel, this is up from 13.6% of revenues in FY09 to 17.8% in FY12.
Both the telcos and the government need to think seriously about the mess we’re in.
|Last Updated ( Saturday, 08 September 2012 14:51 )|