Indian mobile phone users who have long enjoyed the lowest tariffs in the world maybe in for some disappointment soon, with operators like Bharti Airtel, Reliance Communications and Vodafone India likely to raise tariffs, say analysts. The move follows a consolidation in the Indian telecom sector after the recent cancellation of 122 licenses.
The Supreme Court on February 2 cancelled 122 telecom licences of eight firms, including Idea Cellular, Uninor, Tata Teleservices, Etisalat DB, S-Tel, Videocon Mobile Services, Loop Telecom and SSTL which were issued in 2008 over irregularities in the allocation of these licences.
?The new licensees (some of whom like Uninor were serious competitors) being either financially weakened or taken out altogether, would reduce competitive intensity,? equity research firm Credit Suisse said in a report released on February 23. ?Some larger competitors, such as Idea and Tata Docomo, might have to pay heavy amounts in the expected spectrum auctions, and hence could be forced to raise tariffs from current levels giving leeway for larger incumbents to raise tariffs.?
Both S-Tel and Etisalat have decided to close down their India operations. ?Loop and Videocon are also unlikely to participate in the spectrum re-auctions,? said another report by Barclays Research released on February 3. ?We do expect Idea, Uninor and SSTL to bid in the next spectrum auction, but doing so is likely to increase their cost structure.?
The Credit Suisse report pointed out that current tariffs are at the lowest possible.
The benefit of any tariff increases will fully flow down to the bottom line of telecom operators who are now not just cash-strapped with stretched balance sheets but also struggling with falling profits. All the incumbents have revised promotional tariffs in July, increasing them by 20%.
?We believe the exuberance over rate improvement is premature,? said Himanshu Kapania, managing director at Idea Cellular, announcing the company’s third quarter results. ?Voice rates will remain flat or show only a marginal growth.? He, however, had then ruled out another round of tariff hikes in the near future. ?Competitive intensity has not reduced as there are still far too many players. It would be difficult to revise tariffs further,? he said.
A report by Edelweiss Equity Research expects a reduction in freebies and promotional offers from Idea and Uninor which are the most aggressive on the ground in terms of subscriber additions. This would lead to possible surge in revenue that an operator earns from a subscriber on every minute basis known as revenue per minute or RPM. ?We also expect subscriber acquisition costs to shrink due to a reduction in distributor margins as the chase for marginal customers reduces. With the cancellation of licences, the excess supply of spectrum would lead to cheaper prices.?
Analysts are optimistic that the removal of excess competition and tariff pressures should improve RPM. ?If we assume that prices increase by 10-15%, this could translate to an RPM of 48-52 paise in FY13 and FY14. But the likely impact may not be that significant as the company may have to incur additional capex for incremental customers, traffic and spectrum,? said Nomura Equity Research report released on February 3. Average RPM for the industry in the third quarter of financial year 2012 was 41 paise.
According to reports, Bharti Enterprises chairman Sunil Mittal said at the Mobile World Congress 2012 that tariff hikes for voice calls are vital for the industry’s survival. ?At 40 paise average realised rates per minute, if these were to go up to 45 or 50 paise, consumers will not complain about it. They will only say give us better services,? he said.
Auction of 2G spectrum will make new entrants struggle more to raise funds or refinance debt and could risk losing focus on strategy in the near term. ?Even if the new entrants rebid to acquire spectrum, their financial position would be weaker, in our opinion, thus giving bargaining power to operators like Bharti/Vodafone to raise tariffs. We expect incumbents like Bharti and Idea (in their strong circles) to continue to gain revenue market share at the expense of new operators,? said a report by Goldman Sachs on February 6.
HSBC Securities report highlighted that funding for new entrants has been tough. ?For the last two years, there has been no release of funds by the Indian banking sector to the telecom space. The recent licence cancellation has put stress on the banking sector and, until the new policy is in place, we expect funding conditions to remain difficult.?
Barclays Research estimates that there would be limited 2G bidders. ?Given tough credit environment and our understanding of the Indian mobile business, we believe there could be limited bidders of the new 2G licences.? ?In our view, bidders could be limited to companies who have sold stakes to foreign operators like Uninor and Sistema, incumbents looking to create pan-India networks like Idea and Tata Teleservices in a few circles and potential new entrants like Reliance Industries.?