Profitability woes seem to be a thing of the past for the telecom industry. As predicted by CRISIL a year ago, better revenues, a return of pricing power, easing competitive intensity and an uptake in data usage are some factors that spell good times ahead for operators’ balance sheets. We believe this trend should sustain over the next two years.
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 industry’s 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.
Let’s now take a look at the factors driving this improvement.
Better ARPU drives up revenues: CRISIL believes India’s 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 operators—the small ones, mostly—exited 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,