The financial performance of telecom service providers over the past two years has not been giving the right signals to investors. Operator revenues have been stagnating, profitability has been declining, investments have slowed down and costs are rising. Once considered the face of the country?s economic reforms, the telecom sector witnessed the lowest investor activity in 2011-12 in the past three-four years.
This can be attributed to the regulatory uncertainty over issues like spectrum pricing, licence renewal, and mergers and acquisitions as well as high competition, which has resulted in very low mobile tariffs. Investors, who have already been impacted by the global financial slowdown, have adopted a wait-and-watch approach.
tele.net takes a look at some of the important profitability indicators and factors responsible for the high costs for telecom companies…
?EBITDA: While net profits have been declining, the earnings before interest, taxes, depreciation and amortisation (EBITDA) of most of the listed operators have been positive in the past five years. Bharti Airtel and Idea Cellular witnessed 15.77 per cent and 17.54 per cent annual growth in EBITDA between 2007-08 and 2011-12 respectively. Vodafone India?s EBITDA also increased by 23 per cent from Rs 86 billion in 2010-11 to Rs 98 billion in 2011-12. This growth has been driven by an increase in revenues and economies of scale, though limited by high customer acquisition and interconnection costs.
?EBITDA margins: Aggressive bidding for 3G and 4G spectrum, and low mobile tariffs have impacted operator margins. According to a recent report by PricewaterhouseCoopers (PwC), Indian telecom operators? average EBITDA margins are now the lowest in the emerging Asian markets, at 28.9 per cent as compared to a regional average of 40 per cent. However, these margins are comparable to the global average.
In 2011-12, Bharti Airtel reported the highest EBITDA margin among operators at 33.18 per cent, though it was marginally lower than the previous year?s 33.58 per cent. However, operators like Idea Cellular and Vodafone India witnessed an increase in EBITDA margins in 2011-12. Vodafone?s EBITDA margin increased by 0.8 percentage points over the previous year to 26.3 per cent, driven by cost efficiencies and scale benefits.
?Profit after tax (PAT): Between 2007-08 and 2011-12, several operators witnessed a significant drop in PAT, with some reporting negative margins. Mahanagar Telephone Nigam Limited?s PAT, which was 12 per cent in 2007-08, stood at a negative 101 per cent in 2011-12.
?ARPUs: Between 2007-08 and 2011-12, the average industry ARPUs declined from Rs 159 per month to Rs 97 per month. This declining trend is expected to be arrested as the number of data users increases, which is already visible in the operators? financial results. For instance, non-voice services contribute 15 per cent to Vodafone India?s revenues. The operator?s data users annually increased by more than 80 per cent during 2011-12 to 35.4 million. Bharti Airtel witnessed a marginal increase in monthly ARPUs in the last two quarters of 2011-12. These increased from Rs 183 in the quarter ended September 2011 to Rs 189 in the quarter ended March 2012.
?Debt cost: The industry?s total debt is close to Rs 2,000 billion. This comprises Rs 936 billion of domestic loans and Rs 185 billion of external debt. The proposed 2G spectrum auctions in November 2012 could add to this burden and the total debt is expected to more than double to Rs 4,850 billion in just one year.
?Debt-EBITDA ratio: Until 2009-10, Indian telecom operators, especially the incumbents, were leveraged lower than their global peers. The debt-EBITDA ratio of several Indian operators was around 1.6x in 2009-10 as compared to the global average of about 2.1x. Operators? debt service burden will increase further going forward, driven by the upcoming 2G spectrum auctions and network expansion. Usually, a debt-EBITDA ratio of above 3x is considered unhealthy. As per a recent analysis by PwC on the impact of the Telecom Regulatory Authority of India?s recommendations on spectrum pricing and allocation, the operators? debt-EBITDA ratio is expected to increase to 7.4x by 2016.
These trends show that the capex and debt cost will increase significantly. For instance, Bharti Airtel?s capex, which stood at $2.65 billion in 2011-12, could increase to over $3 billion in 2012-13. Of this, $1 billion is expected to be spent on African operations and the rest on the Indian business.
As the debt levels are already very high, operators will need to explore other options to raise funds. An alternative would be to capitalise their assets, primarily the tower infrastructure. Several operators have already begun exploring this option. Bharti Airtel is reportedly looking to list its infrastructure arm, Bharti Infratel, on the bourses. The company has shortlisted various banks including Standard Chartered Bank and J.P. Morgan to manage the share floatation for its telecom masts unit to raise over $750 million.
Reliance Communications (RCOM) is also looking to capitalise its stake in Reliance Infratel. The company, which recently cancelled the initial public offering for Flag Telecom citing unfavourable market conditions, has been in talks with private equity investors to offload a part of its stake in the tower venture. Saddled with a debt of about Rs 350 billion as of mid-2012, and additional loans expected for the upcoming auctions, the company will need more funds.
Therefore, the slowdown in the sector is a key concern as the Indian telecom industry?s growth story remains incomplete. More than 50 per cent of the country?s population is yet to subscribe to mobile services and the data revolution has only begun to gain momentum. Currently, there are about 650 million active mobile users while about 500 million are yet to be connected.
While large-scale additional investments are the need of the hour, the sector is witnessing an opposite trend. This calls for investor-friendly policies and mechanisms that will help the sector address the issues and challenges it faces.
