Competitive pressures hurting Indian telecom companies

Competitive pressures hurting Indian telecom companies

New Delhi: Bharti Airtel and its smaller Indian telecom rivals are set to report that quarterly earnings were hit by a vicious price war that has sent call tariffs tumbling in the world’s fastest-growing mobile services market.

The outlook remains bleak with more competition expected to keep pressure on wafer-thin call charges, while heavy bidding for 3G radio waves are set to balloon their costs in the near term.

Analysts expect each winner to spend up to $3 billion for acquiring the 3G and wireless broadband spectrum, and building next-generation networks would cost billions of dollars more.

“The entire sector is under pressure after the price war and things will remain so for the rest of 2010," said R.K. Gupta, managing director at Taurus Mutual Fund, which manages about $520 million in assets.

For Bharti, which dominates India’s mobile market with about 128 million subscribers, the integration of its $9 billion acquisition of Kuwaiti Zain’s African assets will be crucial for its earnings in the coming quarters.

Bharti sees itself becoming the world’s No. 5 wireless firm after closing the deal, which comes after two failed attempts to finalise tie-ups with South Africa’s MTN.

The acquisition, signed in March, must be approved by regulators, and governments in at least two of the African markets have weighed in against the deal.

India, the second-largest wireless market in terms of subscribers, has signed up 16 million connections a month on average in the past one year, but call charges have fallen to as low as 1/100th of a US cent amid stiff competition among firms to add users faster than rivals.

A majority of the new users come from rural areas, who spend less than their urban counterparts, and people use more than one connection to benefit from freebies offered by newer mobile firms.

Second-ranked Reliance Communications, which was more aggressive in cutting call prices, is expected to see its quarterly profit plunge more than 40%.

After years of strong profit growth, Bharti and Reliance are facing the heat from Indian ventures of international players such as Vodafone, NTT DoCoMo and the newest foreign entrant Telenor, with incumbents being forced to match low call charges offered by a smaller rival.

“While I don’t see much downside for call prices from these levels, one has to wait for the response to value-added services after 3G comes," Gupta said, referring to premium data services, which offer better margin than voice.

Stock market laggards

In the March quarter, Bharti added 8.8 million mobile users, but lagged Vodafone’s 9.5 million. Reliance and fifth-ranked Tata Teleservices, which had started the price war last year, signed up 8.6 million each.

Reliance Communications and Bharti were the two worst-performing stocks in the main Bombay index in 2009. This year, Bharti shares are down 9.5% and Reliance Communications has fallen 2.4%, while the broader market is up 1.7%.

“I would avoid the sector for at least one year," Sandip Sabharwal, CEO of portfolio management services at Prabhudas Lilladher, said from Mumbai. “Things are not looking good in the near term with the rising competition and the tariff wars."

Investors will watch for any announcement on a possible initial public offer of Bharti’s telecoms tower unit, or in a tower joint-venture firm it owns along with Vodafone and Idea Cellular. Bharti has said it will look into these possibilities after the March quarter results.

Reliance has got the regulator’s clearance for an IPO of its telecoms tower unit, which banking sources say could raise as much as $1 billion. The company is yet to set a date for the IPO.

Following are the March quarter results forecasts for Bharti, Reliance and sixth-ranked Idea, based on a Reuters poll of 12 brokers.