On the one hand, Vodafone India and Idea Cellular declared the completion of the planned merger last week. Vodafone Idea have dethroned Airtel as the largest service provider in the country. On the other hand, Reliance Jio tweeted that it has been joining people since it hit the market in 2016. Reliance Jio’s growing market presence has accelerated Vodafone India and Idea Cellular to merge. Jio has already crossed 150 million subscriber base. However, Vodafone Idea is in a far more unstable place than anyone has assumed.
As per the company report, both the company’s combined earnings before interest, tax, depreciation and amortization (EBITDA) was Rs. 24,400 Cr in 2016. According to Vodafone India, the profit of the company has been reduced to Rs.10,700 Cr by the end of June 2018.
Now, after the merger, Vodafone Idea is leading the market with the number of subscribers and revenue generation. However, in terms of the profitability, the EBITDA of the merged company is 20% lower than the wireless business of Bharti Airtel albeit the revenue is 33% higher.
Some of the analysts have found out that the annual profit of the merged entity has been only Rs. 7,270 Cr by the end of the second quarter of 2018. The net debt of the Vodafone Idea is almost 15 times more than its profit. While the companies announced their merger in March 2017, the ratio between net debt to EBITDA was around 4.4 times of the profit.
The debt amount has remained almost the same. However, the companies faced the problem owing to a large amount of cash burn because of aggressive pricing in the telecom market. If the merged entity Vodafone Idea wants to get hold of the market, it must protect its market share. However, as per the recent reports, Vodafone Group has sold a share of its holding to Idea Cellular promoters. Therefore, the analysts assume that Vodafone Idea is the most vulnerable telco in India currently.
The merger of Vodafone and Idea also marks the end of consolidation in the Indian telecom industry. There are now just three main private players (Airtel, Reliance Jio and Vodafone Idea) and one state players (BSNL or MTNL) in the country. However, this doesn’t mean that the pricing power is back with the telcos. While at one end the telcos are forced to spend a huge amount to upgrade and modernize the network, they are hardly in a position to increase tariff because of a hypercompetitive environment. Because of predatory pricing, it seems unlikely that the industry will be able to increase tariff any time soon.
The Challenge is only going to increase as Jio has announced plans to launch fixed broadband services and plans for the enterprise segment. The battleground is only going to become bigger as the three players slug it out for marketshare (and revenue!) in the country.