The signals of this turnaround have been loud and clear. In the past, operators were in a tizzy to acquire subscriber volumes and outdo each other in terms of tariffs. This affected the industrys average realised revenue per minute (ARPM) which fell 7-8% from 2009-10 to 2011-12. However, ARPM rates began to stabilise in 2012-13 and even saw an upswing in the last three quarters owing to a variety of factors.
As a result of these factors, described in greater detail below, critical benchmarks such as revenues growth, operating profits and margins are all set to surge. While revenues of mobile operators will grow at 15-16% over the medium term, operating margins of large CRISIL-rated players* will improve 400-450 basis points (bps; 100 bps equal one percentage point); and operating profits will increase 20% per annum over the next two years from near-10% seen in the last five years.
Lets now take a look at the factors driving this improvement.
Better ARPU drives up revenues: CRISIL believes Indias telecom industry is moving towards qualitative growth in revenue and profitability in contrast to from 2009-10 to 2011-12, which were marked by a rapid expansion in subscriber base and declining ARPMs.
The revenue growth will be primarily driven by growth in ARPU or average revenue per user (see table). Telcos have started laying emphasis on the quality of subscribers through stricter enrolment norms, reducing subscriber acquisition cost, and targeting only the revenue-generating ones. Not surprisingly, ARPUs surged around 8% last fiscal after steep declines in 2010-11 and 2011-12, and could grow 10% between this fiscal and the next on the back of higher tariffs, lower discounts and rising usage of data and value-added services (VAS).
Significantly lower competitive intensity: In 2008, the average number of telecom players in each of the 22 circles in India was about 11. After the Supreme Court cancelled 122 licences in February 2012, many operatorsthe small ones, mostlyexited circles where they were incurring continuous losses, which brought down the average number of players in each circle to seven. As a result of this, the top three operators have gained about 300 bps of revenue market share over the last two years.
Pricing power sustaining and supporting ARPM growth: With competitive intensity waning, large players now have elbow room to raise tariffs. Their ARPMs surged in the first quarter of this fiscal, driven by a drastic reduction in discounts on special tariff vouchers and increase in headline tariffs. CRISIL estimates show there is still a 50% gap between headline tariffs and ARPM (see chart) due to discounted call rates offered to many subscribers. With competitive intensity easing, telcos are in a better position to reduce these discounts and crunch the gap.
Continuously rising data usage: The increase in ARPU will also be driven by rising usage of data and VAS. Their contribution to overall mobile revenues is set to increase as smartphones proliferate, user population in the 15-30 age bracket increases, and penetration of 3G/2G data services improves. Data usage has more than doubled in the first nine months of this fiscal, year-on-year. The proportion of data users has also increased and, unlike voice services, growth in data uptake has not come at the cost of lower realisation per megabyte (MB) because data ARPU has grown at a healthy pace, indicating steady pricing. Also, the large players are better positioned to drive growth through data as they have recently won sufficient spectrum in the 900 MHz and 1800 MHz frequency band in their key circles of operation.
Penetration of 3G services continues to wallow at 3-4% three years after launch, but with the price points of 3G and 2G now converging, data usage through 3G is set to increase. CRISIL, therefore, expects revenues from data and VAS to touch around 20% of mobile revenues in the medium term from 16% in the last fiscal and 11% in 2010-11.
These factors, CRISIL believes, signal increasingly better times for Indias large telecom players.
* Large CRISIL-rated companies comprise Bharti Airtel, Vodafone India, Idea Cellular, Tata Teleservices and Tata Teleservices (Maharashtra). They account for nearly 60% of the subscriber base, 75% of revenues and two-thirds of the debt in the sector
The author is senior director, CRISIL Ratings