Cracks Appear in Vodafone’s India Operations

Vodafone India’s results suggest some company specific factors at play while also serving to highlight some cautionary aspects pertaining to the Indian wireless industry. Several metrics appear subdued relative to peers, be it mobile subscriber adds, data subscriber adds, EBITDA margins voice usage, all of which reflects in softening ARPUs and slowing revenue growth.

Vodafone has specifically called out slowing data revenue growth citing slower data subscribers growth with data revenue growth sliding to 16% Y/Y in Sep-16, down from 22% in the prior Jun-16 quarter. (35% Y/Y growth in Mar-16). Vodafone attributed the slowdown due to the offer of Free promotional offers from Reliance Jio, which caused the flattening of unique data user growth Q/Q. The seemingly unassailable India wireless data story is likely to fall short of multi year expectations.

Blended ARPU declined significantly to Rs171 in Sep-16 quarter (after staying in a tight range for the past three quarters), down 11.5% from two years back in Sep-14. Increasing competitive intensity took its toll on Vodafone India’s volume metrics such as customer adds (just 1.338 million subs added in the Sep-16 quarter), voice minutes added (voice minutes grew 3.7% Y/Y and were down 2.0% Q/Q) and MOUs.

Mobile Broadband Data Services under Attack from Jio
Vodafone’s active data sub-base fell to 69.6 million (from 69.7 million in Jun-16). Airtel’s data penetration (data sub-base as % of total sub-base) is increasing but the increase is tangibly tapering off Y/Y.

The easier adoption of the Top 25-30% of the subscriber base has happened but now India telcos are likely finding it harder to penetrate the subsequent sub tiers, not to mention the much lower data ARPU associated with the next strata of subs. Only Airtel is executing its data strategy well ahead of Idea / Vodafone India. But it may not be able to defy for long the signals speaking to slowing data dynamics in the industry.

Is there Data Revenue Growth ?
After the Launch of Jio, Operators have been pushing for Data Volume Growth by every possible means. If mobile data is a sufficiently elastic good, then they can push volumes through adjusting price downwards. Today, the Big 3 operators are bundling a lot more data (25-35% more volumes) at the same price point. But this does not necessarily help the cause of revenue growth (if volume usage increase largely offset the price declines). For this reason, the focus stays on data revenue, data revenue growth to judge the health of the mobile data industry in the long term.

With Vodafone having procured 2500Mhz Spectrum for 4G, we do not think the company will be able to turnaround immediately unless they go for spectrum trading and active infrastructure sharing with one of the Big 3 Operators or re-open talks with Idea Cellular for merger.