The alarm bells have gone off. Once the poster boy of India's economic reforms, the telecom sector is witnessing disturbing trends. Operator revenues are stagnating, profitability is declining, investments are slowing and costs rising.
Consider this. Vodafone's Profit after Tax margins have declined from 17 per cent in 2007 to just 0.01 per cent in 2011. Bharti Airtel's Return on Capital Employed has decreased from 29 per cent in 2007 to 19 per cent, and Idea Cellular's operating expense as a percentage of revenue has increased from 12 per cent to 31 per cent during the four-year period.
Add to this the fact that operators' average revenue per user has declined from Rs 262 in 2007 to Rs 100, minutes of usage (MoU) per user have fallen from 465 to 369 and net subscriber addition has fallen from 14-15 million a month to just over 8 million, and you have all the signs for a disaster in the near future.
“The slowdown in the sector should be an area of great concern as the growth journey of the sector is only partially complete. More than half of the people in the country have not yet subscribed to mobile services and they mostly reside in rural areas. While large-scale additional investments are the need of the hour, the sector is witnessing a reverse trend,” says Siddarth Vishwanath, Executive Director, PwC India.
According to the consulting firm, the capital expenditure of Bharti Airtel, Idea Cellular and Reliance Communications has declined from Rs 29,600 crore in 2008 to Rs 9,500 crore in 2010.
All of this is giving mobile companies sleepless nights. “The financial trends are very worrying. This is compounded by the regulatory uncertainty over crucial issues like spectrum pricing, licence renewal, and merger and acquisition rules,” says Rajat Mukarji, Chief Corporate Affairs Officer, Idea Cellular
Too crowded for comfort
It's not too difficult to see what triggered this slowdown. According to the Cellular Operators' Association of India (COAI), the industry body representing GSM operators, the entry of new players in 2008 is one of the factors that put pressure on the industry. “Intense competition, with 10-12 operators in a service area, has led to a free-fall in tariffs. However, this has not been matched by an increase in minutes of usage per connection per month. Thus, negative influence on revenues due to falling tariffs is not being compensated by increase in MoUs,” says Rajan Mathews, Director General, COAI.
The industry association reckons that a lot of the misery has been caused due to the heavy taxes and levies imposed by the Government on the sector. Mobile operators in India pay 19-28 per cent of their annual revenues to the Government in the form of licence fees, spectrum charges and service tax. In addition, the industry has had to bear the cost of implementing Mobile Number Portability — estimated to be around Rs 500 crore, and an equal amount is expected to be invested to satisfy the Government's security concerns. “I see it as a schizophrenic tendency on the part of the Government because, on one hand, they want us to improve tele-density, roll out broadband in rural areas and fulfil social rollout obligation, and on the other, we have to bear heavy costs,” says Mathews. The Government earned Rs 1.36 lakh crore from the telecom sector in 2010, compared to Rs 9,100 crore in 2004. According to PwC, mobile companies on average pay 23.5 per cent of their annual revenues to the Government, even as the most-efficient operator's profit after tax was lower at 20.2 per cent of the annual revenues.
Funds are drying up
Increasing costs have forced operators to resort to debt to finance network rollouts in rural areas, and paying for 3G/broadband spectrum. This has significantly raised their debt ratios. For instance, the net debt to EBITDA ratios of Idea Cellular and Reliance Communications have increased manifold from 1.3 and 2.6 in 2009 to 2.9 and 5.3 respectively at the end of 2010.
“This high indebtedness is likely to lead to slower expansion of 2G networks in rural areas as well as slower upgrades in urban areas, and delayed rollout of 3G,” says PwC's Vishwanath.
The immediate impact of the slowdown has been on foreign investors, who are cagey these days about putting big bucks into Indian telecom — a sharp contrast from pre-2007 when investors were queuing up. FDI in the telecom sector was $1.7 billion in fiscal 2011, down by 35 per cent compared with $2.6 billion in fiscal 2010. Of late, Indian banks are also going slow on lending to telcos. Gross credit exposure of Indian banking industry to telecom has fallen from Rs 1,00,425 crore in March to Rs 94,319 crore in June this year.
The other major impact has been on consumers, who are now being asked to pay more. Many mobile players including Tata DoCoMo, Bharti Airtel and Vodafone have increased tariffs over the past two months, indicating a reversal in trend. “Continuously declining margins, high 3G and BWA auction prices, constrained spectrum and rural rollout aspirations leave us with little choice but to make some price corrections,” an Airtel spokesperson had said soon after increasing prices for some of its prepaid packages. If industry fundamentals stay poor, further tariff hikes could be on the cards. While this will help operators protect margins to some extent, the party for telecom consumers seems to be over for now.
The biggest impact, however, has been on the new players, whose business case has been adversely affected due to hyper competition. Even three years after acquiring licences, they have only 5 per cent market share and 2 per cent of the overall revenues. Further, they have only around one-third of the ARPUs that the incumbent players have.
Roadmap for growth
But not all is lost and operators are betting on a combination of Government policy impetus and potential market growth to revive their fortunes.
“The silver lining is that there are 500 million more people without a mobile connection, which means there is a lot of scope for growth. Broadband is another avenue of revenue growth. But along with this we need clear policies from the Government to stimulate the sector,” says Mukarji.
Though the Government is working on the New Telecom Policy 2011, the industry feels its real concerns are not being addressed.
To start with, the industry wants cuts in taxes and levies to help lower its costs. Second, it wants a correction in the market structure through a liberal merger and acquisition norm. And, finally, it calls for freeing more spectrum at reasonable prices.
“The Government, on its part, has to decide whether it wants the telecom sector to bounce back to its thriving old glory or whether it wants to continue to milk it dead for more revenues,” says Mathews.