Column: More call drops ahead

Written by Rishi Raj | Updated: Jun 3 2011, 08:16am hrs
Going by the financial and operational performance of the countrys top three mobile operators (Bharti Airtel, Vodafone Essar and Reliance Communications), the ones that have announced their results so far, it is quite established now that not only are the days of double-digit growth and profits pass but it will take quite some time for the industry to regain its robustness. Not that this revelation is new. The trend of declining numbers and traffic was evident from 2009 itself. However, the executives of these companies had blamed disruptive tariffs for the same. The impression given was that with the end of tariff wars, the industry would return to its original robustness. With a full year having gone by without any tariff war and the operators still far from posting spectacular performances, any projections that the mobile firms are out of the woods would be misplaced.

True, the Indian mobile phone market remains promising and growth would come by, as close to 40% market still remains unpenetrated, but the real problem is that it will take quite some time for the uncovered markets to start generating revenues for the operators. The scenario would have been fine if the revenue generating customers continued to talk more, but thats clearly not happening and thats why operators are either posting flat or declining minutes of usage on their networks. This was bound to happen because saturation would have set in sooner or later. To overcome this, the industry needs to shift gears and move on to data services, which has just begun with the onset of 3G services. But these are very early days for 3G and, considering the amount the companies have spent on acquiring the spectrum, it is going to take a long time before they break-even.

Like any other industry, the Indian mobile phone market also does not present a monolithic picture. So, within the macro scenario, one finds operators presenting varying report cards. The lesson here is that the stronger companies continue to perform better than the weaker ones. So we have Bharti Airtel still maintaining its lead in all the parameters, though the year saw its net profit declining 33%. The January-March quarter, generally considered the best quarter for mobile firms, also saw its net down by 31%. Traffic clearly is not flowing back into the networks as the minutes of usage was flat sequentially and average revenue per user (ARPU) down. The company may attribute all these to its re-branding costs, losses in African operations, etc, but the fact remains that some extraneous factors would always be there. For instance, in the current fiscal, the prospects of paying some R4,000 crore for excess spectrum looms large over the company. The question is that some three years ago Bharti was in a position to absorb all these and yet be able to post double-digit growth, which clearly is no more the case. The major positive for Bharti is that despite its close to $9 billion acquisition of Zain Africa and 3G spectrum loan, the companys debt-to-equity ratio is still in the comfort zone and it generates free cash flows.

Coming to Vodafone, which is the countrys third largest mobile services firm by subscribers, the year can be seen as positive as it is for the first time that it posted profits in Indiathough it was a paltry R110 crore for the full year. The other positive for it is that though it lags behind RCom in total subscriber base, in terms of ARPU and revenue market share, which are better barometers of performance, it ranks next to Bharti. Add to these its emergence as the biggest gainer through mobile number portability and its clear that the company is on a sound wicket. There are worries as well. Its ongoing spat with 33% joint venture partner, the Essar group, which wants to exit but is locked in a valuation dispute, and the tax dispute with the I-T department over payment of capital gains tax over its $11-billion acquisition of Hutchs stake in 2007, are a case in point. On balance, however, it can be said that these would be taken care of by the parent firm so the Indian operations would continue to consolidate with time.

This brings us to RCom and its here that the signs are most worrying. Though the company is the countrys second largest operator in terms of subscriber base, its financial and operational performance is worrisome over the last one year. On top of this, three officials of its group have been chargesheeted in the 2G spectrum scam case and are currently behind bars. RComs fourth quarter results saw a whopping 86% decline in net profits at R168 crore. For the full fiscal its net was down 68% at R1,505.82 crore. The companys net debt stands at a high of R32,048.5 crore. Its ARPU and revenue market share is the lowest among the top four mobile operators. That branding is weak is clear from the fact that after the state-owned BSNL, it was the biggest loser in MNP. The company realises its problems and, therefore, last year in June its board authorised the management to look for a strategic buyer for 26% stake. However, nothing has materialised so far. At the fourth quarter earnings the company did say it is devising steps to deleverage its balance sheet but did not share how. The biggest positive for the company is its asset base so, if it is able to deleverage its balance sheet and increase its revenue market share by lopping off the huge non-paying subscribers off its network, theres no reason why it cant rebounce.

In short, though the mobile operators do not give guidance, the next one year will see more pain than any major gain.