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Business News/ Money / High 3G capital costs add to telecom companies’ woes
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High 3G capital costs add to telecom companies’ woes

High 3G capital costs add to telecom companies’ woes

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Analysts had expected that there would be serious bidding by at least five companies in the metro and “A" circles. Although the number of bids has been fewer than expected, bidding intensity has been relatively strong, as is seen from the bid prices. According to analysts Rumit Dugar and Manoj Singla at Religare Institutional Research, pan-India 3G spectrum is expected to cost in excess of $1.5 billion (Rs6,675 crore). “As such, we remain concerned about the high acquisition price of 3G and expect limited revenue upside in the near term," they added.

According to another analyst, telecom operators will have to invest $400-500 million annually for the next two-three years in setting up the 3G telecom network. With such high capital costs, winners of 3G spectrum are likely to see dilution in their earnings in the next two-three years.

Graphic: Naveen Kumar Saini/Mint

And it’s not that 3G is the only overhang on telecom stocks. Profit growth in the existing operations has been under check because of intense competition. For the past few quarters, average revenue per user has been declining at a fast pace because of “free minutes" offered to customers.

The Religare research note added that “intense competition is leading to higher churn and greater distributor incentives, which, in turn, is driving up subscriber acquisition costs". So although the industry’s subscriber addition numbers continue to be impressive month after month, the underlying reality is that the cost of acquiring and retaining subscribers has increased, which will lead to erosion in profitability. Since all this will show in the results of telecom companies in the coming quarters, their shares may continue to be under pressure.

Write to us at marktomarket@livemint.com

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Published: 18 Apr 2010, 10:26 PM IST
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