Motilal Oswal Financial Services Ltd hosted the top three listed telecom companies at its annual global investor conference. The key takeaway is that the industry has started taking corrective measures to contain channel commissions. The broker released a note last week that says, “GSM incumbents have reduced the channel commissions paid for subscriber acquisitions from August 2012, which should drive reduction in cost of customer acquisition." This appears, prima facie, a positive as far as margins go.

Margins of telecom companies have been under pressure because of hyper-competition, both in terms of pricing as well as dealer commissions, which had seen selling and distribution costs rising sharply in the past few quarters. But as Motilal’s telecom analyst Shobhit Khare points out in his note to clients, growing traffic and revenue would prove challenging while implementing such cost-control measures. And eventually, margin improvement could prove to be difficult on a sluggish revenue growth trajectory, given the high proportion of fixed costs for the industry.

h the top three GSM players—Bharti Airtel Ltd, Vodafone India Ltd and Idea Cellular Ltd—reporting an increase of 3.16 million subscribers compared with 4.42 million in June. The corrective action in terms of dealer commissions in August could slow growth further.

Having said that, some amount of correction was due, especially considering that new players such as Uninor have been considerably weakened since the Supreme Court ruling cancelling their licences. Some new players have even exited the business completely—Etislalat said last week that it will not participate in the second-generation (2G) spectrum auction slated for November. The moot question here is if incumbents such as Bharti and Idea will remain disciplined. A little over a year ago, the industry had raised tariffs, but this lasted only a brief while. Needless to say, telecom companies are treading a fine line on pricing and customer acquisition strategies.

According to a recent note by Emkay Global Financial Services Ltd, “Reliance Industries Ltd’s possible entry in voice segment (through its possible participation in the auction or an acquisition) is likely to be negative for the incumbents. RIL’s entry would not lead to further price disruption, but could limit the upside in tariffs in the near to medium term." Any sustainable increase in pricing and margins, therefore, will be some time away. Given this backdrop, it’s not surprising telecom stocks have underperformed the market this year.