Credit Suisse, one of the top brokerage and consulting firms in the world, has maintained ‘underperform’ rating for both Bharti Airtel and Idea Cellular. It has also set a target price of Rs 330 per share for Airtel and Rs 74 per share for Idea Cellular. At the end of today’s market, Bharti Airtel was trading at Rs 427 whereas Idea Cellular closed at 91.10. Credit Suisse expects a sharp fall in the share prices of these companies since they have been facing disruptive competition from Reliance Jio. With its free voice and SMS, and dirt-cheap data plans, Jio has eaten into the market share of most other telecom companies including Airtel and Idea Cellular.
As per calculations made by Credit Suisse, both Airtel and Idea would continue to experience a decline in their EBITDA (Earnings before interest, tax, depreciation and amortization). Credit Suisse has also predicted that there will be divergence in revenue and EBITDA. During today’s morning trade hours, Airtel was trading at Rs 426.95 around 10.15 am (IST), whereas Idea Cellular was trading at Rs 87.55. The benchmark BSE Sensex was at 31,587 at that time.
Looking at the current trends in the telecom industry, it can be seen that most telecom companies are experiencing poor financial health. Most telecom operators have witnessed a significant fall in their revenue and profitability. Overall, the telecom industry is staring at a massive debt of Rs 4.5 lakh crore. If we talk about Bharti Airtel, India’s largest telecom operator, we see that the company has been experiencing a major erosion of its voice and data business. Bharti Airtel’s net profit has dropped a massive 75 percent for the quarter ended June 30, 2017. This is the worst performance for the company in the last four and a half years. The erosion in Bharti Airtel’s revenue and profits is largely due to the aggressive pricing strategy deployed by Reliance Jio.
If we look at the year-ago period, we see that Bharti Airtel’s profit was Rs 1,462 crore for quarter ended June 30, 2016. This has dropped to just Rs 367 crore for the quarter ended June 30, 2017. The situation is even worse for Idea Cellular, which has posted a net loss of Rs 815.9 crore for the quarter ending June 30, 2017. In the year-ago period, the company had registered a net profit of Rs 220.4 crore. For the Jan-Mar 2017 quarter, the company had posted a loss of Rs 325.6 crore. There are hopes that the merger with Vodafone would help secure the company’s future.
Currently, the telecom sector is abuzz with the launch of 4G feature phones by Jio, which is being offered at an effective price of Rs zero. The 4G feature phone is expected to create the second wave of disruption in the telecom industry. Competing telecom companies such as Bharti Airtel and Idea Cellular will continue to suffer as a result. It would be interesting to see how these telecom companies fight Jio’s aggressive price war and whether or not they will be able to survive.