|Cyclone RJio's aftermath|
|Thursday, 26 January 2017 09:07|
With huge value-destruction, expect more M&As soon
Even those expecting a shake-up in the industry after RJio’s entry would have been taken by surprise by the intensity of the shock, partly because no one expected such aggressive pricing and such an extended period of freebies. The initial response by incumbents, of trying to match and even bettering RJio’s offers, made the market sanguine about their ability to withstand competition—after falling 6.4% the day Mukesh Ambani announced RJio’s launch on September 1, Airtel was back at the pre-RJio price of R331 by December 8. As the days went by, and the impact became clearer, however, shares of incumbents started falling again and on Wednesday, after a disastrous Q3 performance, Airtel’s shares were 6% down compared to what they were the day before Mukesh Ambani announced RJio’s launch.
While Airtel’s revenues have fallen 7% sequentially and ebitda 12.5% in the December quarter, its PAT fell 42%; voice realisations fell 9%—as a result, even the 5% increase in voice volumes didn’t help fix either the top-line or the bottom-line. Worse, while growing data revenues have been the saving grace in each quarter, this time around, data volumes fell 3.5% despite data realisations falling 10% due to the massive discounting and a near-13% fall in data subscribers—this is the first time in eight quarters that revenues from data services have fallen, and by as much as 14%. Though Bharti Airtel’s revenue-market-share remains high at over 30%, given that RJio has crossed 75 million subscribers in under five months, the competition is expected to get worse over the next few quarters. Not surprisingly, Kotak Institutional Equities expects Airtel’s EPS to fall from R11.9 in FY17 to R8 in FY18, net profits from R4,750 crore to R3,180 crore—as a result, it expects Airtel’s RoE to fall from 7% to 4.6%.
For the industry as a whole, the impact could be worse—Kotak is looking at Q3 ebitda of R200-250 billion (ex-RJio) for an industry which has aggregate debt of over R3 trillion; if you include RJio, the debt will be R4 trillion. Given the situation is unsustainable, only companies with big balance-sheets can hope to survive. While this is why there is so much speculation on Vodafone and Idea merging, it is not clear what the government’s plan is for loss-making behemoths like MTNL and BSNL—privatisation doesn’t seem an option, but the PSUs don’t have the deep pockets required to survive either. What remains unclear, throughout this, is whether Trai will declare RJio’s prices predatory though, as FE has pointed out earlier, RJio’s market share in the 4G data segment is large enough to warrant such action—besides, in areas like steel where imports are biting or in retail where discounts by PE-funded e-tailers like Flipkart have destroyed the market, the government has stepped in to prevent value erosion. With telcos too cash-strapped to bid for fresh spectrum and their licence/spectrum fees also likely to fall along with revenues in FY18, the government may also have to some hard thinking sooner rather than later.