Mumbai: Telecom stocks slumped Tuesday on concerns that an ongoing price war and a proposal by the regulator to impose per-second billing will cut earnings sharply. Analysts have downgraded the sector, cut earnings estimates and indicated that these moves constitute an entry barrier to new firms waiting to enter wireless services.
Fearing a drastic reduction in revenues and profits, investors rushed to exit this sector. The country’s second largest telco Reliance Communications Ltd (RCom) lost the most, declining 10.64%, or Rs31.95, to close at Rs268.25. Rival Bharti Airtel Ltd lost 10.22% to close at Rs359.40. This brings the losses suffered by these two operators to at least 15.6% in the past two days even as smaller firms such as Idea Cellular Ltd and Tata Teleservices Ltd lost around 10% each. The Sensex, India’s bellwether equity index, rose 0.55% to close at 16,958.54 points.
On Monday, RCom entered a price war with a nationwide 50 paise per minute tariff plan. Analysts estimate this will result in its average revenue per minute, a key industry metric, declining to 40 paise per minute, or around 30% less than the first-quarter average of the industry.
In an unrelated development, the Telecom Regulatory Authority of India (Trai) during an industry convention in Geneva on Tuesday said users should be charged based on the actual number of seconds. Currently, most operators charge customers for at least a minute even if they use less than that.
In an August report, HSBC Securities and Capital Markets (India) Pvt. Ltd called per-second billing the most “disruptive” plan, projecting the sector’s revenue to fall by 10-15% if the plan is adopted by all operators.
Brokerages are unanimous in downgrading the sector. For instance, Anand Rathi Financial Services Ltd cut its sector rating to “sell” from “neutral” while Kotak Securities Ltd’s institutional equities arm retained its “reduce/sell” rating on all telecom stocks while cutting earnings per share (EPS) by 5-50% and target prices by 10-20%.
JPMorgan India Pvt. Ltd has cut its estimates for RCom’s EPS by 6 percentage points and said it expected similar cuts for other firms as well. Anand Rathi estimates a 22% cut to its fiscal 2011 earnings estimate for Bharti.
“We expect the competitive intensity to exacerbate over the next 12-24 months leading to consistent downgrades in consensus estimate,” wrote Kotak’s Kawaljeet Saluja and Rohit Chordia. “We struggle to compute the damage and decline in earnings for the wireless companies.”
“With aggressive pricing and increased competition, we believe investors could start de-rating the Indian telecom sector,” wrote Vinay Jaising, Mayank Maheshwari and Surabhi Chandna of Morgan Stanley India Co. Pvt. Ltd in a 6 October note. “This tariff will be a hindrance for new operators to launch services, and possibly stagnate industry revenue growth for the next 12 months,” they said, referring to RCom’s new tariff.
Indeed, per-second billing is still some time away as the regulator typically takes months to implement such decisions, but the immediate concern is the reaction of other firms to RCom’s plans.
Tata Teleservices introduced a per-second billing plan and added its highest ever 3.4 million subscribers in August and, as of now, Vodafone Essar Ltd is considering this billing with trial runs in some circles.
Already, India has the lowest phone tariffs in the world, but many firms have resorted to aggressive pricing strategies to retain or gain market share, putting pressure on earnings. For instance, Bharti’s advantage plan lets users make calls on the Airtel network for 50 paise per minute, while Vodafone Essar has region-specific plans that allow users in a state to call others in neighbouring states at 50 paise per minute.
“The tariffs have been commoditized,” said Bhavesh Gandhi, analyst with India Infoline Ltd. “Even though Ebitda (earnings before interest, tax, depreciation and amortization, or operating profit) margins for RCom, Bharti and Idea have hovered in the 28-40% range, there will be a gradual attrition in the margins.”
Rahul Singh, Gaurav Malhotra and Anand Ramachandran of Citigroup Global Markets Inc. see collateral damage to the tower business as tariff cuts “will force rethinking and pace of ramp-up of new entrants and hence their long-term viability as tenants”.
There is a consensus among analysts that smaller firms and those waiting to enter the sector will suffer more. According to India Infoline’s Gandhi’s estimate, it may take up to five years for new entrants to break even.
Graphics: Yogesh Kumar / Mint
“The strategic reason for RCom’s move is clear—to make it uneconomical for new telcos to operate in the Indian market,” wrote Manoj Singla, Nishit Jasani and Tim Storey of JPMorgan. Their report added that this move might benefit the company in the medium term.
Although India’s wireless subscriber base has increased 50% from 2008 to 2009, the increase in revenues was only 10.7% because of multiple SIM usage by pre-paid subscribers and incentives to distributors to push new SIM cards or numbers rather than recharge products.
There are around 494 million users and the pie is getting more fragmented as firms such as UniNor led by Norway-based telecom firm Telenor ASA, MTS (telecom brand operated by Sistema Shyam Teleservices Ltd), Etisalat DB Telecom Pvt. Ltd and Aircel Ltd enter the market or expand their services.
“Faster-than-expected tariff decline is likely to further squeeze smaller operators and new entrants (Aircel, Tata, Telenor),” said the Anand Rathi note. The options for these players are limited, note analysts, since they typically have weaker distribution power and network coverage and less brand recognition.
Mint reached out to a couple of new entrants to find what their strategy is likely to be. Etisalat didn’t respond to an email query, while an Aircel spokesperson talked about betting on “customization” and “value-added service”.
email@example.com Ashwin Ramarathinam and Reuters contributed to thisstory.