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MOSL: TELECOM-Vodafone India-Weak earnings but signs of bottoming-Focus on markets where it holds top-3 position

​TELECOM: Vodafone India: Weak earnings but signs of bottoming; Focus on markets where it holds top-3 position and has above 15% share

• Wireless revenue declines 8% QoQ in 4QFY17: Vodafone India’s wireless revenue declined 8% QoQ (-15% YoY) to INR88.4b. ARPU fell 10% QoQ (-20% YoY) to INR142, with voice ARPU down by 9% QoQ to INR108 and data ARPU (for data subs) by 9% QoQ to INR107. Voice revenue fell 7% QoQ to INR67b (higher than Bharti/Idea’s 5%/3% decline), led by a 16% drop in voice RPM, partly offset by an 11% jump in voice traffic due to an increase in incoming traffic from RJio. MOU was up 9% QoQ to 336. Data revenue declined 11% QoQ to INR21.2b (v/s Bharti/Idea’s 11%/16% QoQ decline), led by a steep 27% ARMB drop, which partly helped stimulate data volume growth of 23% QoQ from the unlimited price plans.
  
• 2HFY17 EBITDA drops 24%, FCF negative for first time: 2HFY17 revenue declined by 10% HoH to INR203.7b and EBITDA by 24% HoH to INR50b. Management highlighted that higher network cost from 4G site deployment at the time of contracting revenues hurt EBITDA. EBITDA margin shrunk 480bp HoH to 24.6%. Vodafone generated negative FCF for the first time at INR3b v/s positive FCF of INR33b in 1HFY17. It incurred capex of INR50b in 2HFY17, leading to FY17 capex of INR83b v/s Bharti/Idea’s FY17 capex of INR100b/INR78b. Net debt was INR578.7b as of FY17, with net debt to EBITDA of 5x.
  
• Focus on markets where it remains in top-3 position: Vodafone has started 4G services in 18 circles, as against 9 circles prior to the spectrum auction in October 16. These circles cover ~92% of service revenue and 96% of data revenue. With 105,000 broadband sites and 73 data carriers, the strategy is to focus only on markets where it holds the top-3 position and has over 15% share, leaving rest of the five circles with 11% revenue market share. Vodafone expects the merger with Idea to conclude in FY18.