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Telecom: 1QFY19 Review - Pressure on incumbents continues

Q1FY19 saw mixed performance from India wireless operators, with Bharti Airtel (Bharti) beating slightly on topline on an adjusted basis, but Idea Cellular (Idea) exhibiting a weak performance. Revenues continued to decline YoY (Bharti India wireless revenues fell 18% and Idea’s by 28%) on continued pricing pressure from bundled plans. High capex continued to eat into margins and put further pressure on the already levered balance sheets. Market share loss for Idea and Vodafone accelerated in Q1 – visible in churn rates and low data subscriber (subs) additions (adds). Overall, relatively better performance from Bharti suggests that capex catch is helping the company defend market share well. We maintain our preference for Bharti over Idea. Vodafone’s management commentary was completely focused on merger delivery and capex was directed only towards leadership circles.

Operating metrics mixed: Operating metrics in the sector were mixed, with weak ARPU performance by Bharti and Idea, but strong reported ARPU from RJIO (flat QoQ). However, churn accelerated for Idea, which now has a run-rate of 5.2% per month versus Bharti, which has seen churn run-rate improve qoq and is at 2%. Idea and Voda has shifted focus from subs addition to quality subs. We remain sceptical of this strategy, as it would allow the other two incumbents to continue to push into Idea’s and Voda’s subs base.

Data subs adds momentum - good for Bharti but weak for Idea & Vodafone: Bharti showed strong growth in data subs, as the company added 8m subs qoq compared with nearly nil addition by Idea. Vodafone and Idea continued to lose incremental data subs market share, and we believe these are potentially high ARPU subs, which might be relative more inelastic once pricing turns. Bharti and Idea high speed data subs base stood at 94m and 46m in Q1FY19, respectively.

Strong earnings momentum to continue in Sterlite Technologies (SOTL); Tata Communications (TCOM) continues to disappoint: SOTL reported in line operating performance with continued traction in product business order book. Management commentary remained optimistic with increasing demand for fibre across domestic and international markets. Management expects 2HFY19 to be stronger than 1HFY19, supported by strong growth from exports business and the services business. TCOM posted a soft quarter, with miss on revenues and EBITDA. Further, data performance was soft on the revenue front, although the company managed to maintain margins.

Capex continues, but Idea/Vodafone wait for merger: Bharti maintained its capex guidance of Rs250bn, but the company front loaded the India wireless capex in 1Q (Rs69bn in 1Q). However, Idea reported a low capex of Rs10bn for the Q1FY19. Management indicated that it was awaiting the merger approval to draw on synergies and would accelerate again. We think that balance sheet capacity for Idea/Vodafone remains constrained and continued delay in capex will continue to pressure data subscriber market share.