According to ICRA, the telecom industry is currently at an inflection point and data will drive future growth in the sector. It also says that high spectrum pricing is going to weigh on the operators? already stretched financial profile.
As per ICRA, after reporting strong growth in terms of both subscriber additions and revenue generation for over a decade, the Indian mobile services industry has been witnessing slow growth for the last two years.
The active user base, which is 76 per cent of the total number of subscribers as of July 2012, translates into ?active teledensity? of 57 per cent, indicating increasing saturation in the industry. Given the fact that urban areas have a higher teledensity compared to rural areas, a significant portion of the incremental subscriber additions would have to be accounted for by rural subscribers.
However, owing to the slow penetration of mobile services in rural areas, the overall incremental subscriber growth is likely to slow down.
ICRA emphasises that the highly competitive environment in the sector has been a long-standing issue since 2008. The telecom industry currently has at least seven operators in each circle and up to 12 operators in some circles competing for market share. This makes India one of the world?s most crowded mobile markets. Globally, the number of operators in most countries ranges from two to five. The presence of a higher number of players has led to frequent price wars.
The impact of such pricing strategies is reflected in the continuous decline of the industry?s key operating metrices, namely, average revenue per user (ARPU) and average rate per minute (RPM). As of March, 2012, the average ARPU in India stands at around $ 2 as against the estimated $ 63 for NTT DOCOMO, Japan $ 33 for Vodafone, United Kingdom, and $ 12 for China Mobile, China. A similar pattern is seen in the case of RPM.
Besides, as a result of the intense competition and the resultant low tariffs, the Indian mobile industry has one of the lowest tariffs in the world. This difference can also be attributed to the high proportion of prepaid subscribers in India.
According to ICRA, as a result of the cancellation of telecom licences by the Supreme Court in February 2012, the number of operators in the industry is expected to decrease, which in turn should lead to some abatement in competition. This, along with the anticipated regulatory payouts, could prompt the operators to raise tariffs.
Sabyasachi Majumdar, senior vice-president, ICRA Limited, says, ?With revenues from voice services stagnating, future growth is likely to be driven by wireless data services. Operators have already invested significantly in acquiring spectrum for 3G and broadband wireless access services and are now expanding their footprint across the country, albeit cautiously. To date, revenues from data services remain significantly low in India vis-?-vis other countries largely because of the relatively high pricing; lack of handset affordability; and limited content availability. Extrapolating from the experience in some of the other mobile markets, in India too, data is likely to be a long-term play and take some time to mature.?
Besides data, operators have been looking at other services to bolster their topline. Some business segments that have emerged as important revenue drivers for the industry are: enterprise communications, broadband services, direct-to-home (DTH) and data centres. While each segment has its own set of competitors, the operators have an advantage, given their established subscriber base, network deployment and technological knowhow.
According to ICRA, the key issues facing telecom operators in the country include:
Regulatory Environment: A Key Challenge
The cancellation of 2G licences by the Supreme Court have led to significant regulatory uncertainty in the industry. The Department of Telecommunications (DoT) and the Telecom Regulatory Authority of India (TRAI) have made several policy changes and recommendations in critical areas as delinking of licence from spectrum, allocation of spectrum via auctions, and spectrum liberalisation. However, greater clarity is still awaited in some key areas such as levying a one-time spectrum charge, re-farming of spectrum, and legality of 3G roaming agreements. Recently, a major development has been the finalisation of the 2G auction reserve price and the modalities for the auction to be held in November 2012. Majumdar elaborates, ?This auction will have long-term implications for the sector in terms of deployment of technology, cost of acquiring future spectrum, competitive intensity, spectrum holding, and pricing flexibility of the operators. The auction-determined prices would form the basis for price to be paid by the operators for spectrum in future. Hence, the high spectrum cost will impact the cost metrices of the operators, who are already burdened by highly leveraged balance sheets. Spectrum re-farming is likely to impact the incumbents more than the new operators, given that the incumbents hold a relatively higher proportion of sub-1 GHz.?
Tower Industry ? muted Growth Outlook
The telecom tower industry, after reporting robust growth till 2010, is now witnessing a slowdown with operators curtailing their network rollout plans. The cancellation of telecom licences in February 2012 has been another setback for the tower industry, as this is likely to lead to loss of tenancies and build-up of receivables. Moreover, the tower industry is awaiting clarity on reduction in the limit on foreign direct investment in the sector and the inclusion of tower companies within the purview of licensing. Currently, some operators are even exploring the possibility of divesting their equity stake in tower companies in order to meet funding requirements.
Financial Profile of operators: Stress Showing
The financial profile of most of the operators has deteriorated considerably since March 2010, mainly because of the significant debt-funding of their capital expenditure; acquisition of 3G and broadband wireless access spectrum; and overseas acquisition. The financial risks arising out of such deterioration are aggravated by the fact that a significant portion of the debt is foreign currency denominated, while the revenues are largely denominated in rupees. Majumdar says, ?Going forward, the operators are likely to require sizeable funding to meet the commitments related to regulatory developments. The operators would have to make decisions on the amount of spectrum (circle-wise) that they would want to renew/re-farm, and their existing capital structure would have an important bearing on these decisions. Given the challenging environment prevailing, obtaining institutional funds would not be easy for the operators.?
