Case 028Forecasting and modellingHard

Case study, then a debrief with the portfolio manager: Telvarra Telecom raises tariffs 15% and expects to lose 3% of subscribers. Model the effect on revenue and EBITDA, and defend it.

The situation

Telvarra Telecom, an Indian mobile operator, has 180 million subscribers paying an average revenue per user (ARPU) of Rs 210 a month, so annual service revenue is Rs 45,360 crore. Its EBITDA margin is 35%, Rs 15,876 crore.

Telvarra announces a 15% tariff rise across its prepaid plans. The two larger rivals raised tariffs by a similar amount a month earlier. Management guides to losing 3% of subscribers, mostly customers who keep a second SIM. The company says incremental revenue carries about a 50% EBITDA margin after revenue-linked levies, dealer commissions and content costs.

Your task

What happens to revenue and EBITDA, and how would you defend the 3% churn and the 50% flow-through when the portfolio manager pushes?

Quick check

Before the maths: which rises more in percentage terms, revenue or EBITDA?

Worked solution

Try it on paper, then open one step at a time.

30-second answerThe answer to give first

Revenue rises about 11.5%, Rs 5,239 crore a year, and EBITDA rises about 16.5%, Rs 2,620 crore. ARPU goes from Rs 210 to Rs 241.5 and subscribers from 180 million to 174.6 million. The extra revenue carries a 50% margin against a 35% base, so the margin lifts to about 36.6%. The deal survives churn up to about 13%, so the risk to defend is rivals not holding their prices.

Step 1How do you set up the revenue change?

A coaching centre raising its fee by 15% loses a few students but collects more from everyone who stays. Split Telvarra's change the same way, into what the stayers pay extra and what the leavers took with them. The price effect on 174.6 million remaining subscribers is Rs 6,600 crore a year; the lost 5.4 million subscribers took Rs 1,361 crore; the net is Rs 5,239 crore, 11.5%. Always convert monthly ARPU to an annual figure before you compare it with the income statement: 180 million times Rs 210 times 12 is Rs 45,360 crore.

The relationship

\Delta\text{Rev} = \underbrace{174.6 \times 31.5 \times 12}_{\text{stayers pay more}} - \underbrace{5.4 \times 210 \times 12}_{\text{leavers}} = 6,600 - 1,361 = 5,239

174.6, 5.4	million subscribers who stay and who leave
31.5	the Rs a month rise in ARPU, 15% of Rs 210
12	months, to annualise
result	Rs crore a year, after dividing rupees by one crore

What it says in wordsThe revenue change is the extra paid by the subscribers who stay less the revenue lost with the ones who leave.

Step 2Why does EBITDA rise faster than revenue?

The network, spectrum and towers cost the same whether a customer pays Rs 210 or Rs 241.5. Revenue from a price rise needs almost no new cost, so it drops through at a far higher margin than the business earns on average. After revenue-linked levies and commissions, 50 paise of each extra rupee reaches EBITDA against 35 paise on the base, so EBITDA rises Rs 2,620 crore, 16.5%, and the margin moves from 35% to 36.6%. This is operating leverageThe way a business with mostly fixed costs turns a small change in revenue into a larger percentage change in profit. running in the good direction.

Telvarra loses 3% of subscribers and gains 15% on ARPU, which lifts revenue 11.5% and EBITDA 16.5%, because the extra revenue carries a 50% margin against a 35% base.

Step 3What will the portfolio manager push on, and how do you answer?

First, churn. The tariff rise still raises revenue until churn reaches 13.0%, more than four times the guided 3%, so the conclusion is robust to churn being wrong by a lot. The real risk is a rival cutting prices to take share, which would turn churn from 3% into double digits; the fact that both rivals moved first is your main evidence. Second, the lost customers are mostly second SIMs with ARPU below Rs 210, so the Rs 1,361 crore of lost revenue is if anything too high.

Telvarra's revenue and EBITDA gains shrink as churn rises and turn negative only beyond 13.0% churn; at the guided 3% revenue rises 11.5% and EBITDA 16.5%.

Third, the 50% flow-through. Treat it as the swing assumption and give the range. If 80% of the extra revenue reached EBITDA, the gain would be Rs 4,191 crore, 26%, so the number you choose moves the answer more than churn does. Ask what sits between the tariff and EBITDA: levies that scale with revenue, commissions on each recharge, bundled content. Finally, timing: prepaid customers move to the new tariffs only as their current plans expire, so the full effect arrives over one to two quarters, not on day one.

Where candidates lose it

The common loss is forgetting to annualise, or mixing monthly ARPU with an annual EBITDA, and producing a revenue change twelve times too small. Say the unit out loud at every step.

The second is defending the 3% churn as if it were the key assumption. The breakeven is near 13%, so churn barely matters; the PM will respect you more for saying the flow-through margin and rival behaviour decide the answer.

What the interviewer asks next

One rival does not follow the rise and churn is 8%. What is the EBITDA change now?
How would you forecast ARPU if 40% of subscribers are on long-validity plans that renew after 84 days?
Would you rather own the operator that moves first on price or the one that follows, and why?

Company names and figures are illustrative.