Tariff war cuts short telecom growth dream

Tariff war cuts short telecom growth dream

New Delhi: It may be early days yet, but numbers gleaned from the second-quarter results of India’s telecom companies suggest the industry could be headed for a plateau as a tariff war erodes their revenue and earnings, offsetting the effect of subscriber additions.

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While the second quarter has traditionally been marked by muted earnings, this time around the pace of earnings growth is showing clear signals of tapering.

The primary reason for this, according to analysts, is the price competition that is expected to continue for some time till consolidation starts in the sector. Operators, however, don’t see the ultra-low call rates extending beyond two-three quarters.

At the India Economic Summit this month in New Delhi, Bharti Airtel Ltd chief executive officer and joint managing director Manoj Kohli said the tariff war wasn’t sustainable beyond the short term.

The tariff war was initiated by Tata Teleservices Ltd for its new global system for mobile communications, or GSM, network-based mobile service branded Tata DoCoMo, which launched its one paisa per second call charge scheme in July.

The move was quickly followed by Aircel Ltd, MTS, Vodafone Essar Ltd and also Reliance Communications Ltd, or RCom, and the state-owned Bharat Sanchar Nigam Ltd.

With mobile number portability, or MNP, “around the corner, subscribers can migrate to a better proposition of a better tariff plan and network without changing their number", said Lloyd Mathias, chief marketing officer, Tata Teleservices (TTSL). “The sooner we up the ante on that proposition, the better; and the best time for that is now—a couple of months away from implementation of MNP," he added.

Bharti Airtel threw its hat into the ring a few hours after saying that it would not match the lowest common denominator in the market on 29 October, when it announced its results for the second quarter of the fiscal year.

For the first time in its history, Bharti Airtel reported a sequential decline in its wireless revenue, while total network minutes growth was only 2% compared with the previous quarter and lower than 3.3% posted by smaller rival Idea Cellular Ltd.

Big three

Airtel, the country’s largest mobile phone service provider, while recording an increase in its net profit by 13% to Rs2,321.6 crore for the September quarter, from Rs2,050 crore for the same period a year ago, saw its profits fall 9.5% on a sequential basis. Total revenue grew 9% to Rs9,850 crore ($2.1 billion) over the same period last year, but fell almost 1% from the first quarter.

Similarly Mumbai-based RCom, Airtel’s closest rival, announced that net profit fell by 54.8% to Rs740 crore for the quarter ended September, from Rs1,531 crore a year earlier. Revenue for the September quarter rose 1% to Rs5,703 crore from a year earlier.

Revenue at Vodafone Group Plc’s India arm, Vodafone Essar, the country’s third largest mobile phone firm by subscribers, dropped 7% sequentially to £704 million (Rs5,435 crore) for the September quarter. The company posted a £43 million loss in the first six months of the fiscal against a profit of £7 million for the corresponding period last year. The telco does not provide a quarterly break-up of profits from its Indian operations.

According to data compiled by the Telecom Regulatory Authority of India, or Trai, the industry’s gross revenue (excluding fixed-line phones) for the quarter ended September was Rs38,755 crore. This was lower than the sector’s revenue in the quarter ended December 2008, when it recorded Rs39,408 crore, even though it had 125 million fewer customers then.

Despite a record addition of just under 45 million new customers, the highest in a quarter, in the January-March period, the sector’s revenue increased only marginally to Rs40,445 crore compared with the corresponding quarter last year.

Since then, it has been on a downward spiral—falling to Rs39,108 crore and Rs38,755 crore in the quarters ended June and September, respectively, according to Trai data.

‘Backs to the wall’

“With the stronger incumbents entering the tariff game and bringing their per second cost to one paisa, the new operators will have their backs to the wall. There is very little room to move once you come down to half a paisa a minute, considering the minimum cost for an off-net call is 20 paisa per minute," an analyst with a Mumbai-based brokerage said. He didn’t want to be named because he is not authorized to speak to the media.

“They will bleed for a while, but will be able to sustain for a couple of years," he added.

According to Kunal Bajaj, managing director with strategy consulting firm BDA Connect (India) Pvt. Ltd, the incumbent operators did not need to get into a tariff war. They could have stayed passive spectators, watching the newer operators pile up losses.

“It would have been better had they lasted the tough period and then with a strong balance sheet and numbers led the consolidation in the market," he said.

With operators such as Aircel and Tata Teleservices in expansion mode and at least three new operators getting ready to launch, including Etisalat and Unitech Ltd-Telenor SA joint venture Uninor, the incumbent operators seem to have nothing left to do but match the “lowest common denominator" in the market.

Sistema Shyam Teleservices Ltd-promoted MTS recently took the tariff war to a new low by announcing its half a paisa per second plan for local calls on other networks and a quarter paisa for calls within its network.

Earlier, Anil Ambani-promoted RCom extended its Simply Reliance Initiative, where tariffs are one paisa per second for short duration calls (up to 3 minutes) and Re1 for calls of long duration (extending beyond 3 minutes). RCom also continues its 50 paisa per minute tariff along with these, announced on 5 October.

Revenue destruction

A recent report on the telecom sector’s revenue market share by Rajiv Sharma, telecom analyst with Mumbai-based HSBC Securities and Capital Markets (India) Pvt. Ltd, said that while wireless revenue for the sector was flat sequentially, companies such as Tata Teleservices had seen their market share go up by 40 basis points whereas Airtel and Vodafone saw their revenue market shares decline by 50 basis points and 30 basis points, respectively.

One basis point is one-hundredth of a percentage point.

“In Q2FY10 (second quarter of 2009-10), 11 telecom circles saw q-o-q (quarter-on-quarter) revenue deceleration, leading to flat sector revenues," the report said. “We attribute the lower growth to the poor monsoon, seasonality, increasing competitive intensity and declining revenue realization, largely driven by the per second offering by Tata Teleservices," it added.

Sharma also said his firm would remain cautious on the sector, given the rapidly declining revenue per minute and a move by the entire sector to a per-second billing format, which will be revenue-destructive.

The sector is expected to get highly capital-intensive in terms of technology, given the impending 3G spectrum auction, and the need for expansion to enable companies to stay competitive, said Harit Shah, an analyst with Angel Broking Ltd.

In a 4 November research report on Indian equities, a Macquarie Group analyst took a negative investment view on the sector and recommended that investors “avoid Indian telecoms as dynamic game of price positioning (is) expected to be played out in the next two-three quarters".

Graphics by Sandeep Bhatnagar / Mint