Competitive tariffs, coupled with slower subscriber addition, is expected to reduce the second quarter 2009-10 earnings of telecom companies, say reports from five brokerage houses. “The profitability will be depressing across the telecom sector. Operating revenues and the EBITDA margins would be hit as competition increases with new players entering the fray,” said a Mumbai-based analyst.
This is largely in line with the subdued growth in the first quarter of the financial year 2009-10, when industry wireless revenues grew by only 0.5% QoQ. A significant chunk of new subscribers include existing users taking multiple connections. This means the downward pressure on minutes of usage and average revenue per user (ARPUs) is expected to continue.
Analysts say the telecom sector revenue, on a quarterly basis, is likely to grow at 4.5% and the EBIDTA growth is at 4%. “This will happen largely on the back of higher network expansion costs and a secular decline in tariffs (revenues per minute) due to increasing competition in the sector,” said Angel Broking in its recent report.
New entrants such as Tata Docomo, MTS, Aircel and Idea Cellular (in new circles) are driven by marginal profits, which, in turn, is leading to an aggressive tariff war in the sector. New subscribers from tier-2 and tier-3 cities are also contributing to lower ARPU. “Tata Docomo?s per second billing has put further pressure on the plummeting tariffs. The tariff war will get increasingly fierce with slower quarterly subscriber addition, which is a negative indication to the telecom sector. Telecom companies’ stocks have also witnessed around 20% correction,” pointed out Varun Goel, assistant VP, fund management, KC Securities.
Reliance Communication?s new tariff plan (all calls except ILD at 50 paise per min) signals the tariff war will continue. A report by Deutsche Bank says the surge of investment in the sector at the mid-cycle stage of sector growth raises the spectre of capital misallocation. “We estimate RComm?s ARPU will fall by 20% and Bharti Airtel?s by 24% if it were to match the offer,” the report adds. Accelerating competition, especially from Tata Docomo and Aircel, is likely to drive pressure on tariffs. “We expect a blended RPM (revenue per minute) decline of 2-3% QoQ, resulting in revenue growth of 1-4% QoQ. Quarterly PAT comparison is skewed because of significant forex gains in the first quarter of FY10 due to rupee appreciation, whereas forex fluctuations were virtually absent in the second quarter of FY10,” said Motilal Oswal in its recent report. “Tariffs have fallen significantly as the telecom market is now shared by almost 12 operators. Docomo?s pay per second has proved disruptive for the sector. By December-January, new operators Unitech Wireless and Etisalat DB will launch services, which will mean further drop in ARPU,? said Romal Shetty, KPMG.