Pain in the telecom sector is not over yet and the current year will see an up to 10 per cent fall in revenue.
Pain in the telecom sector is not over yet and the current year will see an up to 10 per cent fall in revenue and eventually, the top three telcos will control up to 85 per cent of revenue market share after the ongoing consolidation, says a report. “We expect a consolidation in the telecom sector, with the top three telcos (Vodafone-Idea, Airtel and Jio) eventually controlling 75-85 per cent of revenue,” ratings agency Standard & Poor’s said in a note today. Stating that the the aggressive market play is “costly” for competitors, it said telcos are burning cash amid a “brutal competition for market share”.
“The ongoing raging telecom battle has all the ingredients of a ‘Hunger Games’ movie. The combination of rivalry, power plays, and elimination of the weak, has investors, financiers, analysts, and the government on the edge of their seats,” its credit analyst Ashutosh Sharma said. The telecom sector has always been very competitive with telcos vying for market share, but the entry of Reliance Jio mid last year has only aggravated the stress on the companies, he said. “Jio’s aggressive tactics are a strain on the revenue, profitability, and cash flows of all the contestants in this game,” Sharma said.
The note said it will take between 12-24 months for the dust to settle, which means that margins and cash positions of operators will be challenged further before they get better. On the revenue growth front, it said the declines will be at the lower end of the 5-10 per cent range for the top three players, while it will be more sharper for Reliance Communications-Aircel, and the telecom arms of the Tata Group. Stating that Jio’s costly discounting practices cannot last forever, Sharma said, “we expect Jio to rationalise its competitive strategy at some point over the next 12-18 months and start focusing on achieving sustainable revenue and margins.”
It can be noted that Jio’s entry has wrecked financials of all the telcos as they are forced to lower prices on offerings. Considering the heavy debt of the sector which is close to Rs 5 trillion, the Reserve Bank has asked banks to set aside more as provisions for standard assets.