The telecom sector, or whatever is left of it after the massive disruption created by Reliance Jio’s entry, saw the top few players defending their territories and living to fight another day. The smaller and regional players, however, just gave up.

Indeed, fiscal FY-18 saw an unprecedented churn in the mobile services space, so much so that a seven to eight player industry is now reduced to effectively just three now.

The hyper competition in tariffs, the regulator’s intervention in reducing interconnect charges and down-trading by customers to attractive lower-rate data packs, all played their part in squeezing the financials of major telecom operators.

Revenue was down 10-20 per cent in FY-18 compared with the previous year for the likes of Bharti Airtel and Idea Cellular. Key parameters such as the average revenue per user (ARPU) and realisations were at their lowest levels in at least the last five to seven years. Idea reported losses, while Bharti’s profits were down over 71 per cent. Vodafone, Idea and Airtel have witnessed their ARPUs decrease to ₹105-116, down a good 25-30 per cent over the last one year. Even Reliance Jio’s ARPU was down sequentially in the March quarter, but was higher than that of peers, at ₹137.

So, is the telecom sector in a state from which recovery seems impossible? Not quite.

Within the gloomy scenario, there are several encouraging and important factors, which if played out over the next year or so, may usher in happy tidings for the likes of Vodafone, Idea and Airtel.

Lower competitive intensity, with just three or four players left, steadily decreasing churn in the customers of these networks and increasing levels of ‘active’ subscribers for the top mobile operators could bring back pricing power to the service providers over the next couple of years.

Apart from these, the increasing proportion of higher ARPU 4G customers coming on board for the top operators, and the massive rise in data usage (up three to six-fold in the last one year for all the operators) are other lucrative avenues that could be monetised better.

Apart from mobile services, Airtel and Vodafone also derive significant revenue from other business such as enterprise connectivity, which is an added positive.

From a cost angle, Airtel and Idea have kept a tight leash on employee expenses and those related to sales and marketing, which helped them hold margins to a reasonable extent.

We get into each of these factors in greater detail to get a sense of how a slow and painful, but definite recovery is possible for incumbent operators.

Fewer operators, larger share

From 12 players in 2016, to seven in 2017, the mobile services arena now has only three main providers, with BSNL coming in as a weak fourth operator.

Several regional and national players — Aircel, Tata Teleservices, Reliance Communications (RCom) and Telenor — have either merged with larger operators or filed for bankruptcy.

Tata Teleservices (mobile operations) and Telenor India will merge with Airtel, and RCom (mobile operations) with Reliance Jio; Idea and Vodafone are set to integrate and become a single entity. Aircel has filed for bankruptcy.

Effectively, only three dominant players — Airtel, Idea-Vodafone and Reliance Jio — remain in the race, with state-owned BSNL coming in at a distant fourth.

This consolidation has revenue implications for the incumbent operators.

Till about a year back, Airtel, Idea and Vodafone enjoyed about 75 per cent of the total revenue market share among themselves. The other private operators and BSNL accounted for the rest.

State-owned BSNL (together with MTNL) has about 10 per cent revenue market share.

With the industry morphing into a three-player arena, the top three operators would now command a greater share of the overall mobile services pie.

Therefore, these operators would now enjoy nearly 90 per cent revenue market share after the consolidation is complete, giving them a much larger scale. After the mergers mentioned earlier are completed, Airtel and Idea-Vodafone are expected to become more resilient in the face of Reliance Jio’s tariff onslaught.

Given the consolidation of the industry in favour of just three operators, it would only be a matter of time before pricing power returns for the mobile service providers.

Lower subscriber churn

Next, the churn in subscribers of the top three to four operators has been declining over the past four quarters.

Subscribers are moving out of the networks of Airtel, Idea and Vodafone at a much slower pace — 2-4 per cent in the recent quarter — down significantly from 4-7 per cent levels as of March last year.

Thus, customers of the incumbent operators seem to be settling in with their networks and aren’t exiting as quickly. One of the main reasons for this is that tariffs across operators have started to converge to a reasonable extent.

All the top three operators now offer hybrid packs that club voice (mostly free) and data services. With Jio’s free usage phase over and the company charging users from FY-18, and competition matching or coming close to its tariffs, the differentiation in rates gets diminished considerably. Though further rate cuts cannot be ruled out, the hyper competitive nature of tariffs may well be behind the top operators.

Increase in active base

One key parameter that indicates how much customers stick to their operators is the VLR (visitor location register) data. The VLR gives the list of subscribers who use their mobile services regularly; those who are in a position to send/receive calls and messages.

As of February 2018, the proportion of ‘active’ subscribers for Bharti and Idea was quite healthy. For both these operators, the proportion of active subscribers from VLR data was in excess of 100 per cent. The figure is 86 per cent for Reliance Jio and the proportion is close to 95 per cent for Vodafone. When Idea and Vodafone merge, the joint entity is likely to have a VLR proportion of close to 100 per cent.

A ratio in excess of 100 per cent indicates that there are several roaming subscribers on the network as well. The proportion of active subscribers, as seen from the VLR data, has improved for the top three operators in the last one year.

Clearly, after the initial heavy churn, subscribers have been retained by the incumbent operators.

Taken together, a lower churn and a large active customer base mean that that the phase of hyper competition in terms of chasing subscribers at all costs may be slowing down.

Encouraging 4G additions

Reliance Jio had a clear advantage over peers from day one of its launch — it had 4G subscribers on board. This move ensured that it was able to tap data customers in the initial stages itself. Despite offering data services at low rates, its average revenue per user (ARPU) was higher than the likes of Airtel, Vodafone and Idea.

A typical 4G customer provides twice the ARPU of a normal 2G subscriber for mobile operators.

But after the initial setback, Airtel, Idea and Vodafone have come back strongly and managed to claw back into the reckoning with robust 4G subscriber additions.

Airtel, for example, has witnessed a 79 per cent increase in its 3G/4G subscriber base in the recent March quarter. About 28.3 per cent of its total customer base now comprises 3G/4G subscribers compared to 21 per cent in March 2017.

Data consumption is skyrocketing. The data usage in the March quarter has been in the range of 6-9.7 GB per user for the likes of Airtel, Idea and Jio. Consumption of data is up three to four-fold in the last one year for all the top three-four mobile service providers.

With subscribers hooked on to networks, monetising additional data usage could bring back revenue and profit growth for the operators.

Additionally, Bharti Airtel and Idea Cellular saw two successive quarters of robust subscriber additions in the second half of FY18, after facing the heat in the first half. While Bharti managed to add 22 million subscribers in the second half of last fiscal, Idea increased its customer base by over 12 million in the same period.

The backdrop of easing headwinds may allow the top three-four mobile service providers take rate hikes without hurting their customer bases.

The rural opportunity

One aspect that is not often highlighted in the seemingly all-pervasive presence of mobile services throughout the country, is the low level of tele-density in rural India.

As of February 2018, urban penetration of wireless services was nearly 159 per cent, while rural tele-density was just 57 per cent, according to data from the telecom regulator, TRAI. India’s total subscriber base is around 1157 million.

Clearly, there is a huge untapped opportunity for operators to tap into, especially as the urban zone reaches saturation levels in terms of penetration.

In this regard, Airtel, Idea and Vodafone have substantially larger reach in rural areas than Reliance Jio. Airtel has a 29.4 per cent rural subscriber market share, while Vodafone and Idea have 22.9 per cent and 21.1 per cent shares respectively.

Jios’s share of rural subscribers is around 8.2 per cent.

Between Airtel and Idea-Vodafone, the operators have nearly 75 per cent rural market share, indicating a strong and entrenched presence despite the hyper competition over the past 18 months.

As of now, Jio’s success appears to be largely restricted to urban areas. But the company is launching feature phones and offering bundled packages that are largely targeted at rural customers.

It remains to be seen how Jio’s moves play out in villages and non-urban areas. Those areas are dominated by voice services and, here, the incumbent operators appear to have the scale and reach to withstand competition from Jio.

Non-mobile divisions fire

While much of investors’ focus has been on the mobile services division of Indian operators, it is important to note that the older operators such as Airtel and Vodafone also derive significant revenues from other segments.

Airtel’s DTH and enterprise connectivity (B2B) businesses contribute nearly 25 per cent of its overall revenues. The DTH segments accounts for 6 per cent of revenues and has 14.2 million customers. The B2B division contributes 18 per cent of the overall revenues.

The company is among the top DTH operators in the country; revenues from the segment have grown at over 10 per cent in FY-18. Its B2B business too is growing at a healthy pace.

Vodafone India derives nearly 19 per cent of its revenues from delivering enterprise solutions to corporates, up from about 12 per cent a year ago.

Thus, these large operators have significant non-mobile operations, where EBITDA margins are in excess of 35 per cent. They have fairly diversified revenue streams with reasonable growth trajectory.

Of course, Reliance Jio could also enter these segments at some stage either this fiscal or the next, but the incumbents have the advantage of established customer relationship and connectivity, and a head-start.

Tower sales

The incumbent operators are also looking to reduce stakes or fully sell their tower arms to raise cash for their core operations.

Vodafone and Idea decided to sell their tower businesses (other than those held by Indus Towers) to ATC Telecom Infrastructure (American Towers; a specialist company) for ₹7,850 crore in November 2017. Vodafone received ₹3,850 crore from the transaction, while Idea would get ₹4,000 crore by the first half of 2018.

Apart from this transaction, Indus Towers (owned by Bharti Airtel, Vodafone and Idea Cellular) is set to merge with Bharti Infratel. The joint entity would have 1,63,000 towers.

Airtel is also steadily reducing stakes in its tower arm. After the Indus Towers-Bharti Infratel merger, Airtel is expected to gradually pare or exit stakes in the arm to raise funds.

Separately, Bharti Airtel is also looking to list its African mobile operations on the London Stock Exchange. The company hopes to sell 25 per cent stake for $1.5 billion in an IPO planned for FY19.

The cost focus

While revenue took a big hit for the older players, they did their best in terms of containing costs significantly in FY-18.

Selling and marketing expenses, which are at around 15-16 per cent of sales for the likes of Airtel and Idea, have been trimmed by about 10 per cent in FY-18 compared to FY-17.

As there are only three major players around, advertising and marketing may not be as aggressive as it was earlier. Given the consolidation in distribution, selling, general and administrative (SG&A) expenses are likely to be trimmed or kept on a tight leash by incumbent operators.

Employee expenses are also under control and costs under this head have been cut by 10-12 per cent in FY18 compared to the previous year. Network operating costs have also come down.

As a result, despite experiencing significant erosion, margins aren’t poor. Idea has an EBITDA margin of 21.4 per cent, while Bharti Airtel has a healthy 36 per cent.

The focus on costs should help them maintain margins at these levels.

Bharti Airtel still has a fairly robust balance sheet. It has over ₹95,000 crore of debt as of March 2018. But its interest coverage ratio is still a healthy 4.4 times. Debt equity is reasonably comfortable at 1.37 times. Although Idea’s financials are not as robust, its merger with Vodafone in the first half of this fiscal should bring in the much-needed synergies on costs and revenues.

Over the next couple of years, the incumbent operators can be expected to come back strongly in terms of subscriber additions and stable revenue market shares.

The debt level for Jio too is fairly heavy, at over ₹58,000 crore as of March 2018. Its interest coverage ratio is less than half of Airtel’s, at 1.54 times in FY18. The company could report profits largely as a result of the cut in interconnect charges from 14 paisa per minute to 6 paisa from October 2017. At some stage, operators would be forced to take a call on increasing their tariffs — a factor that may take a year or two to play out — if they are to service debt and shore up their balance-sheets.