Among the telecom companies that have survived the relentless onslaught of Reliance Jio Infocomm Ltd, Idea Cellular Ltd is the most precariously placed. Its pre-tax loss rose to 32% of revenue in the December quarter, and its Ebitda of Rs1,223 crore was barely enough to take care of financing costs (Rs1,149 crore).
Ebitda stands for earnings before interest, tax, depreciation and amortization.
So it wasn’t entirely surprising when Idea Cellular’s management suggested on a call with analysts that it wants nothing to do with the latest downward tariff revisions. “We do not want to be a price warrior,” Himanshu Kapania, managing director of Idea, said on the call.
Explaining its latest tariff revisions, Jio said last week that if competitors matched its tariffs, it would give its customers 20% more value. Some incumbents had tried to match the company’s tariffs in the December quarter.
A moot question is what happens if incumbents keep trying to match Jio’s tariffs. Almost as if he were addressing the question, Kapania said on the call, “We will keep a reasonable distance…we will be competitive, but we will not be a discount warrior.”
Idea may have raised the white flag, but it’s another matter if this will help. The big boys, Jio and Bharti Airtel Ltd, need to call a truce.
Meanwhile, relatively smaller companies such as Idea are caught between the proverbial devil and the deep sea.
If they cut tariffs, it will lead to Arpu (average revenue per user) erosion and impact profitability further. If they don’t match prevailing tariffs, there can be subscriber and revenue loss, which will again result in profit erosion.
In short, it’s clearly premature to call the December quarter as a bottom. Apart from the impact of Jio’s latest price revisions, incumbents will also be hit by a reduction in international termination rates.
Idea’s only hope is that things reverse quickly on the tariff front. “We believe this is a minor aberration and should correct itself in a short period of time,” Kapania said on the call.
But it’s far more important what Jio thinks. “Investors believe Jio can out-invest its competition, expand the lead on data capacity and leverage its position to drive revenue-share,” analysts at Deutsche Bank said in a 24 January note to clients.
Thus far, absorbing high levels of cash burn has been part of Jio’s strategy, and there seems to be no end in sight to this strategy.
In fact, some analysts are wondering what exactly is driving Jio’s pricing strategy, considering that it is now the market leader in the mobile broadband category. Every pricing change in bundled voice and data plans impacts it the most. Whatever Jio’s motivation, the fact remains that highly leveraged companies such as Idea will be the worst hit by the tariff war.
The company’s merger agreement with Vodafone India Ltd includes a clause that each company can only bring a reasonable pre-agreed level of debt (or a maximum leverage ratio, to be precise) into the merged company.
With profits eroding at a fast clip, leverage ratios have gone haywire, and it remains to be seen how the two companies tackle this dilemma.
Against this backdrop, it’s little wonder Idea is desperate for peace and wants the price war to end.livemint