Existing mobile operators shying away from fresh investment
November 6, 2009
The ongoing tariff war in mobile services is proving to be unhealthy for operators. The tariff war has discouraged fresh investments from operators, except new players, due to longer payback periods. Many incumbent mobile service providers (MSPs) have not only put on hold their expansion plans but have also reduced capacity expansion (capex) provisions.
Idea Cellular, for the second time in the current fiscal year, revised its capex, excluding 3G, to Rs4,500 crore from Rs5,500 crore on account of lower minutes of usage (MOU) growth and to increase the productivity of its existing cell-sites. Bharti Airtel, India's largest telecom services provider, is planning to spend about $2 billion as capex this fiscal year, of which it has already spent $700 million in the first half to end-September.
Reliance Communications Ltd (RCom), the Anil Dhirubhai Ambani group (ADAG) company, has also kept its capex plan of Rs10,000 crore intact. According to a research note from a foreign bank, RCom’s ability to capture subscriber growth from rural and semi-urban centres will be constrained by its tower base, currently 50,000 which is low compared with other players. Thus, the bank said it do not believe RCom is best placed to cut capex and generate growth.
"We do not think RCom is well placed to weather the increasing competitive intensity, given its stretched balance sheet, thin tower base and sub-optimal 1800 MHz spectrum in 15 new GSM markets," the bank said in the note.
The ‘pay-per-call’ and ‘pay-per-second’ initiative by Tata Teleservices has forced almost all players, including Bharti Airtel, Vodafone Essar, Reliance Communications (RCom) and Idea Cellular, to join the tariff war. The aggressive launch and lower tariff plans from new entrants are not only snatching customers but are also hurting the top and bottom line of incumbent MSPs. During the recent quarter, all MSPs have reported a sharp fall in average revenue per user (ARPU) and MOU.
The aggressive pricing strategy by some operators has adversely impacted the valuations of the entire sector as it will have a negative impact on the profitability of incumbent operators. "We believe that the flow of negative news could continue over the next few months, resulting in continued weakness in the stock. However, such irrational pricing would hasten the consolidation process in the sector and players with strong balance sheet, scale and brand would emerge as winners," said Sharekhan Ltd in a report.
The Telecom Regulatory Authority of India (TRAI) is also planning to make the one-second pulse a mandatory tariff option for all operators to bring in transparency into the tariff plans. Although this is beneficial for subscribers, such a ruling may hurt ARPUs of incumbent operators. Moreover, an increase in MOU cannot offset the ARPU decline and would therefore impact margins of telecom operators.
Mobile number portability, coming into force from 1 January 2010, will further increase competition. With an aggressive price war and declining MOU elasticity, the ARPU and margins of all MSPs will come under pressure in the near term.
The tariff war has also discouraged fresh investment by incumbent MSPs as the payback stretch has gone beyond six years. With lower and discouraging paybacks, the capex plans of operators are likely to get delayed as such low tariffs do not justify creating fresh capacity in the industry. This also indicates that such low tariffs would not sustain after the new entrants utilise their free capacities.
"With aggressive tariff cuts resulting in sharp fall in revenue per minute (RPM) to our estimate of Re0.47 in FY11 and (earnings before interest, taxes, depreciation and amortisation) EBIDTA per minute of Re0.12 per minute, the paybacks turn unattractive and hence discourage operators from spending on capex," said Emkay Global Financial Services Ltd, in a research note.
"With EBIDTA per minute falling as low as Re0.12 per minute and capex in the range of Re0.8-Re0.9 per minute (for efficient players like Bharti) the incremental return on capex significantly reduces to about 20% in FY10E and less than 15% in FY11E verses in excess of 30% till FY09. We believe that this is also the reason for cut in capex guidance by other incumbent operators like Idea and RCom," Emkay added.
According to TRAI, the total telecom subscribers the country increased to 509 million by September 2009 from 494.10 million in August, registering a growth of 3%. The milestone mark, targeted for December 2010 by the government came 15 months ahead of schedule in September.
International market research and data company, Research and Markets, in a report estimated India’s total wireless subscribers to reach 876.60 million in 2013 with Bharti Airtel's market share increasing to 27.40%. “ARPU levels in India will continue to fall across operators over the next several years. Our model predicts that the industry average monthly ARPU will decline to Rs240 in 2013 from Rs302 in 2008,” the report added.
According to analysts, India with a population of over 1.30 billion still offers huge potential for MSPs as the domestic market is characterised by high, multiple SIM usage. An estimated 20% of all-India subscribers are currently using multiple SIMs, the proportion being higher in urban areas. This phenomenon has now proliferated with the availability of 'genuine' dual-SIM mobile handsets, which facilitate the simultaneous use of dual-SIMs on the device.
Anand Rathi Financial Services Ltd, in a research report said, “We recently slashed our estimates for wireless telcos on back of weak second quarter results, and recent tariff cuts. We maintain our ‘Sell’ ratings on the sector, given a fluid competitive environment like daily tariff cuts, ongoing Tata-DoCoMo expansion, mobile number portability, 3G and Telenor launch."
Four new MSPs, including the joint ventures of Norway's Telenor and United Arab Emirates's (UAE) Etisalat are set to start their operations in India. Sistema Shyam Teleservices Ltd, a joint venture between the Shyam Group and Russia's Sistema, which operates under the MTS brand, has already intensified the tariff war. MTS is offering call rates as low as half paisa per minute to users in Karnataka. Last month, MTS launched its services in Delhi and the National Capital Region with a scheme of one million minutes of free talk time with a limit of 150 minutes usage every day. MTS is now eying Mumbai, the country's most lucrative circle in terms of customers and ARPU.
Weak growth outlook and significant tariff pressure is leading to cautious investment outlook across operators. With the somewhat stagnant capex provisions and pressure from new entrants, the mobile services industry appears to be heading towards consolidation faster than expected. -Yogesh Sapkale[email protected]