The second quarter earnings of companies in the telecom sector mirrored the impact of the intensive tariff war. Both Bharti Airtel and Reliance Communications reported profits below expectations. Bharti Airtel reported a decline of 7.8% in net profit at Rs 2,321 crore, against Rs 2,517 crore on a quarter-on-quarter (QoQ) basis and up 13% from Rs 2,046 crore on a year-on-year (y-o-y) basis, as per US GAAP. Total revenues slipped 0.97% to Rs 9,845 crore versus Rs 9,941.6 crore QoQ.
The second-largest domestic telecom company, RComm, followed suit with a 51.7% drop in net profit to Rs 740 crore from Rs 1,531 crore y-o-y. Besides the tariff war, the telcos witnessed an impact of network expansion costs, derivative losses and low-paying users. The mobile industry in India, the world’s fastest-growing market, started witnessing increased competition during the quarter as players started cutting rates to attract subscribers before four new operators — Unitech Wireless, Etisalat DB, Datacom and S-Tel — roll out their operations this year.
“There is hardly any room for recovery as the pricing in the telecom sector is getting commoditised with slowing revenue growth and margins coming under pressure. In the coming year, we expect a revenue drop of about 10-15% in the industry if the price war continues,” said an analyst with a broking firm.
“We estimate average revenue per user (ARPU) decline for this year to the tune of around 18-20%. With pressure on ARPU and price being the only differentiating factor, the players in the industry would witness significant cash burn, which might lead to consolidation in the industry,” said Manoj Mohta, head research, CRISIL Research. RComm’s ARPU per month declined to Rs 161 from Rs 210 last quarter. Similarly, Bharti witnessed its ARPU decline by 9% to Rs 252 in the second quarter.
“Soon after Docomo’s phased rollout of per second billing plan, the incumbents felt its heat. However, they reacted timely and sharply towards competition. In such a condition, shareholders of the listed telecom companies see sector consolidation to be expediting,” said an analyst, on the condition of anonymity.
As per analysts, it took a new entrant an investment of $3.2 billion and a span of three-five years to break even in the earlier tariff scenario. However, due to the increased competition, the new entrants will break even in not less than five-six years with a capex of around $4-5 billion. “While Bharti Airtel has reacted to the competition by moving on to per second billing, RComm has reduced its tariffs to a flat 50 paise. ARPU losses for these companies were below expectations. Moving on to per second billing, revenues of Re 1 or 50 paise will decline to almost 40-45 paise per minute.”
“Owing to competition, profit growth of telecom companies will be under pressure for another two to four quarters. Stocks will underperform in the small term. Breaking even for the new entrants and turning profitable at these tariffs will take longer than expected,” said Gaurav Dua, head research, Sharekhan.
