May 2018

Telecom Services

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Presentation Flow

• Subscribers
• Operating Metrics
• Revenues

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•

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Profitability
• Investments
• Credit profile
• Conclusion

2
Industry picture looks grim in medium term

• Revenue growth to remain sluggish in fiscal 2019 and 2020; revival expected post 2020 as competitive intensity eases post
consolidation

 Wireless adjusted gross revenue to decline by 8-10% on-year in fiscal 2019 owing to deterioration in realization/ARPU

 Launch of the cheapest postpaid plan (by RJio) in the industry will pressure the incumbents to revise their existing postpaid tariffs resulting in

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further dip in ARPU

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 Data to constitute over 90% of the wireless revenues by fiscal 2024, significantly up from 35% in fiscal 2018 and expected ~42% in fiscal 2019

• EBITDA margins to fall by 150-200 bps on-year in fiscal 2019, led by dip in ARPU and increased network opex

• Operating metrics to stay subdued in short term but surge in volumes to drive growth

 Drastic cut in data tariffs spiked data usage since last one year (primarily on 4G network). The data usage/sub is expected to grow ~40% in fiscal
2019 led by migration of 2G/3G data subscribers having low data usage to 4G services and new offers introduced by the players

 Data ARMB to decline ~25% on-year in fiscal 2019 albeit new plan launch by players to remain key monitorable

 Data traffic expected to grow by ~35% on-year in fiscal 2019. Growth to be lower on high base.

• Net debt to EBITDA & interest coverage ratios to remain weak in fiscal 2019

3
More than three-fourth of wireless data subscribers to be 4G by fiscal 2019
Rural subscribers addition to outpace urban given high urban tele-density Half of wireless subscribers to become data subscribers in three years
(mn) 1327 (Mn)
1170 1183 1198 1200 74% 80%
1200 CAGR: ~2%
1034 70%
1000
1000
868 60%
800
800 50%
661 38%
37%
661 600 34% 40%
600 662

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672
589 985 30%

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400 525 400
17% 131
667 287 ~360 20%
498 521 524 200
200 445 10%
343 0 270
143 152 ~100
0 0 0%

FY19E

FY20P

FY21P

FY22P

FY23P

FY24P
FY13

FY14

FY15

FY16

FY17

FY18
FY19E

FY20P

FY21P

FY22P

FY23P

FY24P
FY13

FY14

FY15

FY16

FY17

FY18

Rural Urban 2G & 3G data subscribers 4G data subscribers Data subscriber proportion (RHS)
Source: TRAI, CRISIL Research
Source: TRAI, CRISIL Research

Porting from smaller players drove net addition in subscriber base

• The urban tele-density declined by ~550 bps to 161.17% while rural tele-density
rose by ~220 bps to 58.7% in fiscal 2018 100 (mn)

• Exit of smaller players impacted subscriber addition as ~10% subscribers of 50

2 30 58 48 60 78
smaller players moved out of the industry (primarily from urban areas) 0

• Better proposition (such as speed, tariffs, network availability) to ease -50 -19

migration from 2G/3G to 4G. E.g. Project Jump by Bharti Airtel -100
-106
• Increasingly launch of VoLTE services by the incumbents to increase 4G uptake
-150
H1FY18 H2FY18 FY18
-125

• Availability of affordable 4G feature/smartphone to provide impetus to growth Bharti Airtel+Idea Cellular+ Vodafone India Reliance Jio Others
Source: TRAI, CRISIL Research
4
Price war led to sharp uptake in data usage
Drastic cut in data tariffs spiked data usage; growth to slow down
Data traffic to increase five-fold by fiscal 2024
on high base
(GB)
~1 ~26 ~38 ~51 125-130 12
2.5x ~11
10
~9
53%
8
~7
87%

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95% 98% 100% 6
4.9

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4
47%
11% 5% 2 1.3
2%
1% 0%
FY19E 0% 0.2

FY20P

FY21P

FY22P

FY23P

FY24P
FY14

FY15

FY16

FY17

FY18

FY19E

FY20P

FY21P

FY22P

FY23P

FY24P
FY14

FY15

FY16

FY17

FY18
2G 3G 4G
Note: The numbers above the bars represents total data traffic in trillion MBs Source: CRISIL Research
Source: CRISIL Research
With tariff cuts, average data usage on 4G started growing in
Q2FY18
• The average data usage/sub for Bharti Airtel, Idea Cellular and Vodafone India
rose 4.1x, 4.4x, and 4.3x on-year, respectively, in fiscal 2018
(GB) Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18
• The data usage/sub is expected to grow ~40% and ~25% in fiscal 2019 and
2020, respectively, led by migration of 2G/3G data subscribers having low
Average data
data usage to 4G services and new offers introduced by the players 9.3 7.9 7.3 7.5 7.6
usage/sub/month (4G)
• Robust 4G device ecosystem, increasing availability of content on OTT
platforms will drive data usage-leading to surge in data traffic
Source: TRAI, CRISIL Research

5
Data ARMB to decline; Volumes to drive growth
Reduction in data tariffs to plummet data realisation Data Volume to drive growth in net ARPU
(Paisa/MB) (Rs )
30 27.48 140
123
25.61 CAGR: (-)11%
25 120 CAGR: ~7%
22.88 106
95 95-100
100
20 83
76 74
80

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15

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60
10 7.62
40
5 1.56
1.15-1.2 1.1-1.2 20

0 0
FY19E

FY20P

FY21P

FY22P

FY23P

FY24P
FY14

FY15

FY16

FY17

FY18

FY19E

FY20P

FY21P

FY22P

FY23P

FY24P
FY12

FY16

FY17

FY18
Source: CRISIL Research Source: CRISIL Research

• The continued aggressive pricing strategy adopted by new entrant (on account of benefit received from IUC cut) led to deterioration in data realizations

• Launch of the cheapest postpaid plan (by RJio) in the industry will pressure the incumbents to revise their existing postpaid tariffs resulting in further dip in
net ARPU

• Increase in data usage/subscriber to revive net ARPU marginally post fiscal 2020

• Data to show sustained growth although voice to continue declining owing to bundling of voice with data

6
Revenue likely to recover in fiscal 2020 as consolidation concludes
Continued decline in revenues owing to ongoing price war Incumbent’s AGR plummeted on deterioration in realisation
(Rs bn)
2500 20% 25% 23% 22% 22%
20%
15% 20%
13% 12% 12% 12% 15% 16% 15% 15%
14%
2000 8% 15% 11%
10% 8% 14%

1953
1933
5% 10% 10% 12% 11%
1825

1809
3%
5% 1%
1650

1500 5%
5%

1530
1505

-1% 0%
1475

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1408
0% 0% -1%
1311

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1173
1167

1000 -5%

1080
-5%
1037

-5%
(-)8-10% -10%
-10%
500 -15%
-15%
-17% -20%
0 -20% -25% -27%
-27%
FY18E

FY19P

FY20P

FY21P

FY22P

FY23P

FY24P
FY13

FY14

FY15

FY16

FY17

-30% -28%
FY12 FY13 FY14 FY15 FY16 FY17 FY18E
Gross revenues (GR) Adjusted Gross Revenue (AGR) Growth rate (AGR) (RHS) Bharti Airtel Vodafone India Idea Cellular
Note: Wireless revenues refer to Adjusted gross revenues which do not include interconnect usage charges to avoid double counting Source: TRAI, CRISIL Research
Source: TRAI, Company reports, CRISIL Research

• While drop in IUC charges should have resulted into lower decline in AGR, sharp increase in minutes of use due to free calling plans led to a higher IUC payout
in fiscal 2018. Total minutes handled by players increasing on an average over 25% in H2 of fiscal 2018 as compared to H1 of fiscal 2018

• Post decline of ~16% in GR in fiscal 2018 of the top 3 players (Bharti Airtel, Idea Cellular, Vodafone India), the drop is expected to continue at ~14-16% on-year
in fiscal 2019 as incumbents focus on retaining subscriber market share by matching the cut-down in pricing by the new entrant

• Industry’s AGR likely to stabilise by fiscal 2020, recovery expected in fiscal 2021 as competitive intensity eases post consolidation. Growth will primarily be led
by increase in data volume and marginal improvement in data realisations

7
 Dip in ARPU to pressure margins in fiscal 2019
Increase in network investments to limit impact of decline in access charges

31.0% 31.3% 27.8% 26.2% 28.0%

33.1% 33.6%

17.4% 17.3% 17.2%

17.6% 17.1% 16.6% 16.3%
3.1% 3.8% 3.8%
4.3% 4.2% 4.2% 4.2%

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28.5% 30.2%

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23.6% 22.3% 23.6% 25.7% 30.6%

9.8% 10.1% 10.2% 10.3% 9.8% 10.7% 10.8%

13.6% 13.3% 11.8% 12.2% 13.5% 11.8% 9.7%

FY19E

FY20P
FY14

FY15

FY16

FY17

FY18
Access charges Licence fees and spectrum charges Network opex Employee costs Selling, general, admin and other expenses EBITDA Margin

Note: Includes the financials of Bharti Airtel, Idea Cellular, Vodafone India, Reliance Jio; The margins are irrespective of any synergy gains resulting from the announced M&As
Source: Company reports, CRISIL Research

• Access charges (as a % of revenue) increased in fiscal 2018 despite IUC cut on account of surge in minutes of use

• Industry EBITDA margin to decline 150-200 bps in fiscal 2019. However, the consolidated margin of top three players is expected to decline by 250-300 bps on-
year in fiscal 2019

• Recent launch of postpaid plan by Jio to pressure incumbents’ ARPU as they will be forced to cut down tariff- resulting in dip in EBITDA margin
• Increase in network operation cost as incumbents increase their 4G infrastructure and network coverage
• Margin likely to expand post fiscal 2019 as industry move out of IUC regime and competition eases

8
Capex to ease out with widening of infrastructure & network coverage
Investments to remain high this fiscal as incumbents bolster their 4G infrastructure
(Rs bn)
1400

1200

1000

800

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600 1229

400 807
689
510
200
257 42 203 241 265
123 19 29 33 5 8 58 132 171 117 132 110 120 55 75
0
FY15
FY13

FY14

FY16

FY17

FY18

FY19E

FY20P
Active Capex Transmission Capex Other Network Capex
Source: Company reports, CRISIL Research

• Widening 4G coverage, while adding capacity to handle future data traffic to keep investments high in fiscal 2019
• Deployment of new technologies like MIMO will also garner significant investment
• Regulatory capex to ease led by increase in deferred payment period from 10 to 16 years; any new spectrum auction, however will be a key
monitorable

9
Credit metrics likely to deteriorate further in fiscal 2019
Net debt to EBITDA

(times)
10 8.0-8.5
8 6.4
6 4.0
4 2.5 3.1
2.3
1.3
2

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0

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FY13

FY14

FY15

FY16

FY17

FY18

FY19E
Note: Include financials of Bharti Airtel, Idea Cellular, Vodafone India
Source: Company reports, CRISIL Research

Interest coverage ratio

(times)
10 8.1
7.2
8 6.4
5.4
6 4.1
4 2.3 1.5-2.0
2
0
FY13

FY19E
FY14

FY15

FY16

FY17

FY18
Note: Include financials of Bharti Airtel, Idea Cellular, Vodafone India
Source: Company reports, CRISIL Research

10
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