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Vodafone-Idea and Airtel vs. Jio: Shifting Business Plans and Strengthening 4G Footprint

Professor of Financial Economics and Part-time Value Investor, Transfin.
Nov 29, 2018 7:22 AM 4 min read

With the swashbuckling rise of Jio, orchestrated through aggressive price cutting, it is fairly evident that the likes of Airtel, Vodafone and Idea have seen their ARPUs (Average Revenue Per User) and margins take meaningful hits. The latter two i.e. Vodafone and Idea, in fact were somewhat coerced into merging to take on the threat posed by Jio. However, with the industry consolidation now behind us, at least for the time being, Airtel and Vodafone-Idea ought to lift back their ARPUs and margins while maintaining infrastructure investments which the industry as such warrants. This has prompted some key shifts in business strategy. 


[Listen in from the beginning to learn more on the Airtel and Vodafone-Idea Strategic pivot to compete against Jio]


Airtel and Vodafone-Idea hiked minimum recharge tariff in a move to lift ARPUs and perhaps shift towards higher-ARPU customers while leaving out the lower-ARPU base for Reliance Jio. 


With minimum recharge plans starting at INR 35, the idea appears to reduce marginal or low-value customers and rather orchestrate heightened focus on subscriber retention via improved customer service. It is estimated that between Airtel and Vodafone-Idea there are 250 million subscribers who recharge for under INR 35 per month. In that context, impact of customer churn notwithstanding, the ARPU lift could be quite material in driving top line and EBITDA growth.


Ironically, Airtel and Vodafone-Idea ARPUs are significantly below that of Jio. Perhaps it endorses the potential ARPU growth runway, boding well for Airtel and Vodafone-Idea.


In the quarter ending September, Airtel’s India ARPU was at INR 100 while Vodafone-Idea’s ARPU came in at INR 88. These are quite sharply below Jio which reported an ARPU of a robust INR 131.7 for the same period. While this might seem somewhat counter-intuitive, it clearly highlights the meaningful growth potential in mobile ARPU’s for Airtel and Vodafone-Idea both of whom are trailing quite meaningfully to Jio.  


ARPU and margin growth aside, spectrum related capex coupled with high leverage could continue to be a free cash flow drag for Vodafone-Idea.


Loss making Vodafone-Idea appears to be most precariously placed in this free-cash flow regard. With debt to EBITDA nearing 14x and INR 123 billion deferred spectrum relate payment in the offing one can expect the company to remain pressured from a free cash flow standpoint. While, ARPU growth and exploiting cost-synergies from the recent Vodafone-Idea mergers yet to be seen, streamlining and focusing on high-value customers appears to be an intuitive starting point for a long-term strategic shift especially when the company appears to be riddled with financial challenges. As a side-note, albeit related, Vodafone-Idea recently transferred its fibre network assets to separate unit with the possibility of selling it to address capex needs.


Focus on higher-ARPU customers is also just one of the several moving pieces for Airtel as it looks to raise INR 12,000-INR 15,000 crores in fresh shares to strengthen its balance sheet. 


Airtel has articulated an increased focus on cutting general and administrative expenses while focusing on enhancing their services to high-value customers. However, similar to Vodafone-Idea but perhaps to a lesser extent, Airtel also expects to be pressured on the free-cash flow front. In that context, as per several press reports, Airtel appears to be raising INR 12,000-15,000 crores through fresh shares to tackle interest payments, debt-pay down and capital expenditures all of which ought to happen in conjunction with a gradual shift upmarket towards a higher-ARPU customer bracket.  


Strengthening 4G footprint to cater to wider range of high-value customers while also preparing for 5G spectrum auctions in 2019 are key focus areas.


Airtel and Vodafone-Idea have already made plans to use the 900MHz spectrum for 4G/LTE deployment. The move towards lifting ARPU ought to be supported by a robust 4G network as the contribution from 3G devices to overall revenues continues to see sharp declines. One would expect lofty spectrum investments by all the carriers to win the 4G battle. In that context it is not surprising to see Nilanjan Roy, Global Chief Financial Office at Bharti Airtel say the following:


In order to execute brilliantly in the market, we have a simple five-pronged strategy. First is to win the 4G game decisively. This is crucial as India transforms to 4G. Starting this quarter, we have further heightened the disclosures to represent the 4G only customer additions…


While several moving pieces are at play in this dynamic telecom landscape, strengthening spectrum assets  to improve coverage and capacity are perhaps central to thrive in an market which continues to see sharp uptick in data consumption among users. With 5G spectrum auctions expected in late 2019, positioning competitively ahead of it from a financial as well as a strategic standpoint is perhaps the order of the day.


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