Tariff hikes, surprisingly, go missing in Vodafone Idea’s Q1 results

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Vodafone Idea Ltd has been a company in decline for some time now. But the company’s June quarter results show that things have gone bad to ugly. Hefty tariff hikes in December had helped Bharti Airtel Ltd and Reliance Jio Infocomm Ltd report revenue growth of 15-18% in the past two quarters. In Vodafone’s case, it’s almost as if the tariff hikes never happened. Its revenues have fallen 4% in the past two quarters.

Average revenue per user (Arpu) rose just 4.6%, far lower than the 16.3% jump in Airtel’s Arpu in the past two quarters. “The modest sub-5% increase in Arpu is baffling. This either reflects a deteriorating quality of the 4G subscriber base or down-trading within this segment – a worrying sign, either way,” analysts at Kotak Institutional Equities said in a note to clients.

Vodafone’s subscriber base has fallen by 8% since end-December, losing market share to Reliance Jio and Airtel in the process. The bulk of the decline in the subscriber base is outside the 4G segment. As such, its Arpu should have increased at a much faster pace, with the higher-value 4G subs now making up a higher proportion of the total base. But the fact that the Apru doesn’t even reflect the tariff hikes taken in December is clearly a worrying sign.

“With Vodafone selectively investing in 4G networks, retaining premium customers is proving to be tough,” Rajiv Sharma, head of research at SBICAP Securities Ltd said.

Vodafone’s cash position has weakened further. In end-June it reported a cash balance of Rs3500 crore, and it has since made payments worth Rs3900 crore to the government and to debt mutual funds, where some debt payment was due. Note also that the company’s net debt increased by Rs3000 crore despite capex of just Rs600 crore. As such, cash burn of around Rs2500 crore continues on a quarterly basis, even before considering capex.

When more debt repayments become due, the company will be in a tight spot to meet its obligations, the way it is positioned financially. In Q1, it managed to prop up Ebitda through aggressive cost cuts. But of what value is cost-cutting when revenues are declining at a rapid pace.

Investors had thought that the hefty tariff hikes in December would give Vodafone Idea a short-term prop, and indeed, the March quarter results had provided some hope. But Q1 results have shown that the company’s troubles run far deeper. “Essentially, from a sector standpoint, Vodafone Idea’s results only reaffirm our core thesis – massive price hikes or a two-player market!” analysts at Kotak said.

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