Competitive pricing is likely to result in muted top line growth for telecom operators over the next four to six quarters. With per-second billing being launched by telcos, analysts foresee a further decline in average revenue per minute (ARPM), which has been a constant challenge for the industry. Ana-

lysts estimate that the revenues of telcos are likely to be stagnant and the earnings before income tax depreciation and am-

ortisation (Ebitda) margins would fall further by 5 to 10 per cent.

According to a Fitch Ratings report, incumbent operators with stronger balance sheets and comfortable liquidity profiles would be stable, while the outlook for new entrants and public sector telecom operators is negative. “The revision in the outlook from 2009 is primarily due to stiff competition and a faster-than-expected decline in tariffs, which has had an impact on revenue and profitability. However, the credit profiles of all operators are subject to the event risk of 3G and broadband wireless access (BWA) auctions,” the report says.

3G auctions and the implementation of mobile number portability (MNP) will be key themes in 2010.

Entry of new players in the telecom space saw the introduction of aggressive tariff plans from September 2009, forcing incumbents to introduce per-second billing plan. Analysts expect competitive pressure to continue in 2010, impacting revenue growth and putting pressure on Ebitda margins.

Director of telecom of KPMG Romal Shetty said 2010 would be one of the more difficult years for telecom operators and a positive year for customers. He said that there would be further correction in tariffs that are likely to come down further.

“Ebitda margins will go down by 5 to 10 per cent. Revenues for operators may remain stagnant. In the short term, it will be a difficult market but there is huge growth potential in the long term. Tariffs of high-end services such as international roaming, value- added services and data services are likely to come down further,” he said.

He said this year, some consolidation in this sector is likely. However, the mergers and acquisitions would be purely based on spectrum acquisition. “Due to the delay in the auction of 3G spectrum, some consolidation is likely to happen. We could see telecom biggies looking at smaller players for mergers. Thirteen telecom operators is a large number. Ideally, it should be six to eight operators,” Shetty said.

The increase in voice minutes is not proportionate to the decline in tariffs, putting margins under pressure. Shetty said that to combat falling Ebitda margins, operators would soon look at a change in the revenue contribution from voice and data segments. He said that once data revenues increase to 20 to 25 per cent, the revenues would start showing positive overall growth.

Principal analyst of Gartner Kamlesh Bhatia said, “Hyper competition on tariffs would have a pressure on both top line, as well as bottom line for operators. We see this is a difficult year for the telcos because tariffs have already reached the bottom, but there could be some corrections. Declining tariffs are eroding the margins of telcos and operators are going to have a competitive year ahead.”

Executive vice-president of Telenor group and head of Asia region Sigve Brekke said that going forward, if low tariffs are to continue, margins for operators would be under pressure. “It has always been a challenge for operators as the average revenue per user (ARPU) have been witnessing a steady decline. Operators offer low tariffs and are successful in increasing the minutes of usage, as such the pressure on margins could be rectified. However, the industry is likely to see such fluctuations in the future before the sector witnesses any consolidation,” Brekke said.

Price-led competition intensified in the third quarter 2009-10, with major operators cutting tariffs aggressively during the quarter (switching to per- second billing from the previous per-minute system). Consequently, ARPM declined at a faster pace of 5 per cent 6 per cent quarter-on-quarter in 2009. Voice ARPM declined from Rs 0.75-0.85 in the first quarter of financial year 2008 to Rs 0.45-0.55 in second quarter of financial year 2010. Fitch expects ARPM to continue to decline in 2010 due to the addition of mainly lower-end incremental subscribers and expected further pricing pressures due to the entry of new greenfield operators. However, the rate of decline will be lower than in 2009 due to growing data revenues.

Fitch states that capital expenditure, as a percentage of revenue remained high in financial year 2009-10 for private telcos (an average of 55 per cent), on the back of increased network coverage in smaller cities.

Capital expenditure for financial year 2010 is expected to be lower, however for financial year 2011, it will be higher for the 3G licence auction winners, assuming the 3G licence fees and its subsequent rollout in financial year 2011 is implemented. The free cash flow (FCF) of major private telcos has remained negative since inception due to higher capital expenditure and financing costs, and this trend is likely to continue, except for Bharti Airtel, which is expected to generate mildly positive FCF in financial year 2010 and financial year 2011, excluding the 3G licensing outlays.

According to a Macquarie report, the ongoing tariff war is likely to cap any meaningful re-rating of Indian telecom stocks in the next six to nine months. “Recent tariff actions are likely to result in muted top line growth for next four to six quarters for the Indian wireless operators. In addition to the slowdown in top line, intense competition leaves little cost cushion — hurting the margins of these players,” the report said.

However, mobile number portability is considered only a modest risk, and revenue from 3G services is not likely to be significant in 2010.

This is due to the fact that the Indian wireless market is already predominantly pre-paid and has a high annual churn rate of 40 to 48 per cent. Increased retention costs would mainly relate to the post-paid segment, which only accounts for around 5 per cent of overall subscribers in India.

Stock performance

The expected decline in ARPU on intensified price war between the telecom giants led to a downfall in the telecom stocks in the past quarter. Stocks of Tata Communication, Tata Teleservices Maharastra (TTML), Reliance Comm­unications (RCom) and Bharti Airtel dropped 15.84 per cent, 11.52 per cent, 7.28 per cent and 6.16 per cent.

In contrast, Idea Cellular returned 12.96 per cent. Idea Cellular has recently reported third quarter revenue growth of 5.9 per cent on a quarter-on-quarter basis. The benchmark BSE TECk index jumped 5.53 per cent during the same period. The price war helped major telecom service providers such as Bharti Airtel and RCom to increase their subscriber base but failed to hold falling ARPU. Analysts say that one should go by the short term prospects in the telecom sector. There may be huge paradigm shifts in the next 18 to 24 months. Investors can wait for a year to get a clear picture.

“The third quarter revenues and margins for whole telecom sector were down on price war. At present, there are 12 major players in the sector and we believe this number would drastically go down to just three or four over the next two years on account of acquisitions, mergers and consolidations. Many telecom firms would fail to continue with the price war and hence will shut down or be acquired by big players” said Jagannadham Thunguntla, head of research at SMC Capitals.

Year-to-date, all the telecom stocks, remained in negative territory. TTML dropped 11.03 per cent followed by Bharti Airtel, Tata Comm­unications and RCom, which slid 8.70 per cent, 8.17 per cent and 4.54 per cent, respectively.

Thunguntla said telecom stocks, at present, can be seen as defensive stocks, at the time, when our market is falling. We believe the stocks may outperform if the market continues to fall. However, we are bearish on the counter if market moves up.

“Telecom operators are sitting on huge cash flows. It may be difficult to say who will acquire whom. It is not necessary that only a big operator can acquire a small one, there could be a number of combinations,” said an expert with a leading mutual fund house, who did not wished to be named.

(With inputs by Amit Mudgill)

bhaskarhazarika

@mydigitalfc.com