New Delhi: Telcos could see a reversal in fortunes over the next two-three quarters, after at least two years of being buffetted by intense price-based competition and a controversy over the allotment of licences and airwaves that threatened, at one stage, to burn every company in the business.
The turnaround, said analysts and telecom executives, will come on the back of the roll out of third-generation (3G) high-speed mobile services (with “sensible plans”), the end of price-based competition, and increased usage of data by customers. Over the next two-three quarters, they added, this will first become evident in average revenue per user (Arpu), a popular metric in the telecom business, and, eventually, in profitability.
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In the past eight quarters, the profitability of Bharti Airtel Ltd has fallen from 22.4% in the third quarter of 2008 to 8.3% (according to International Financial Reporting Standards) in the third quarter of 2010-11; that of Idea Cellular Ltd from 8% to 5.5%; and of Reliance Communications Ltd (R-Com) from 21.4% to 9.6%. In the same period, the Arpu of Bharti, Idea, and R-Com fell from Rs 324 to Rs 198, Rs 266 to Rs 168, and Rs 251 to Rs 111, respectively.
“Many of the operators seem to have realized that the tariffs were already as low as they could be and that’s why the irrational behaviour seems to have come down,” said Samaresh Parida, director, strategy, Vodafone Essar Ltd. “There is a change in the mix coming about with data usage increasing significantly.”
“As awareness about 3G services and their impact on lifestyles increases...and with greater subscriber penetration...with time, we see this trend only getting stronger,” said Deepak Gulati, executive president, mobility business, Tata Teleservices Ltd.
“The irrational behaviour in terms of pricing seems to have died down,” a Mumbai-based analyst with a multinational brokerage firm said, asking not to be identified.
And data-rich 3G telecom services are contributing to the reversal of the trend. Telcos in India may have a few million subscribers for 3G services out of a total of 791.38 million at the end of February, but even this small proportion is already beginning to make an impact on Arpu. Earlier this month, Bharti announced that it had crossed the two million mark in 3G subscribers across the country.
Then, the telecom market may have crossed an important tipping point in terms of data usage by even non-3G subscribers.
“3G usage is acting as a catalyst and we are seeing that even 2G (second-generation telecom services) users are increasing their data usage leading to a significant increase in the data usage over the past four-five months. This was almost dormant all this time though at this time it’s still too early to quantify,” said Parida.
“The pricing on data so far suggests that telcos have no intention of playing a value-destructive game in 3G,” Rajiv Sharma, an analyst with HSBC Securities and Capital Markets (India) Pvt. Ltd, wrote in a 12 April report.
“There are no signs of irrational pricing on 3G and plans are in line with global pricing norms; this is positive. Voice calling rates on the 3G network are the same as that in 2G, which supports our argument,” he wrote. “We believe that telcos are unlikely to use 3G platform for discounting voice, as such a move will extend the payback period of operators by several years.”
One clear indication of the revival is a metric called revenue per minute (RPM) that analysts use to rate telcos. RPM for most telcos has remained flat for the past two quarters, after touching a low in 2009 at the peak of the tariff war.
“We believe things are looking up for the sector. Positive signals include the fact that there have been no major cuts in tariffs since 2010 and revenue per minute has stabilized over the past two quarters,” Sharma wrote in the report.
Sharma’s sentiment is borne out by events in the wake of the introduction of mobile number portability (MNP), which allows customers to switch telcos without changing numbers. In the past, such a significant change in the landscape would have meant a tariff war, said a senior executive with a telco who asked that neither he nor his firm be identified due to the silent period being observed by his firm. The person’s reference is to R-Com’s entry in 2003 and that of new telcos in 2009.
“The launch of MNP in the market has been counter-intuitive. Many predicted that when MNP is launched, there would be a huge increase in free minutes available in the market, but this hasn’t happened as the consumer is going for quality of service,” said Vodafone’s Parida.
Most analysts have been quick to react to the changing fortunes of the business. Most brokerages, including BNP Paribas Securities (Asia) Ltd, HSBC Securities and Capital Markets, Credit Suisse Group AG, JP Morgan Securities Ltd and CLSA Asia-Pacific Markets have re-rated the sector or at least some of the telcos in the past two months.
Still, there are analysts advising caution. This is partly because there is still a significant drag on Arpu from rural subscribers being added every month.
“In addition, the declining proportion of low-Arpu rural subscribers as a proportion of existing mature telecom subscribers will provide additional support to an increase in Arpu over a two- to three-year period. Beyond three years, we believe the availability of high-speed wireless networks, encouraging consumption of on-demand rich media, will drive the next leg of growth of Arpu and the telecom industry as a whole,” Sameer Naringrekar, an analyst with BNP Paribas Asia, wrote in an October report on the sector.
And it’s partly because the results will come with a lag.
“It could take up between two-three quarters for the effect of this to show. 3G services are in the process of being rolled out across the nation, and tariffs have stayed flat only for the last two quarters only,” said a third Mumbai-based analyst with a multinational investment bank who asked not to be identified.
Graphic by Ahmed Raza Khan/Mint