This may not come as a shock to anyone as the telecom sector is on a slippery path to post a 5% dip in revenues during the current fiscal of FY18 with the continuation of Jio’s disruptive packages and now (almost) free 4G feature phone.
This is the prediction of equity research house UBS which says the launch of Jio's free offers and continuation of aggressive packages caused significant disruption with QoQ revenue declines of 8-9% in Q3- Q4FY17, and we estimate sector revenues likely to have declined 5% Q-o-Q in Q1 FY18. As we incorporate recent quarterly trends, we now estimate sector revenues to decline 5% in FY18 before recovering to 9% YoY growth in FY19 – these are slightly below our prior expectations”, UBS said in a sector note.
That said, it said Jio's recent pricing actions have surprised positively – it raised prices for its smart phone plans by 25-30% and the much anticipated feature phone launch was also less aggressive than market expectations.
“We therefore believe sector revenues should start to recover from Q3-Q4FY18 onwards”, says the forecast giving some hope of recovery.
Top 3 operators have each reported flattish sequential mobile revenues following 5-7% Q-o-Q revenue decline for last two quarters suggesting revenues for top-3 are showing signs of bottoming out since Jio has started charging. Jio's effective price hike of 25-30% also bodes well for sector recovery as we believe incumbents are likely to raise prices too – indeed our channel checks suggest Vodafone is not aggressively pushing its 56-day/56GB plan in the past two weeks. Jio's unveiled feature phone tariffs of Rs153/month are also comparable to industry ARPU of Rs120-130, and higher than industry feature phone ARPU of less than Rs 100, UBS stated.
The brokerage house views are “while both Airtel and Idea stocks have recovered YTD, we note that they are still underperformers vs other telcos on a 2-3 year basis. The FY18e EV/EBITDA of 8.2x for Airtel compares with 9-10x EBITDA for most other #1 telcos in the region” .
We therefore believe market still remains sceptical of a medium-term revenue recovery for the sector, it said.