Once the poster boy of India’s economic reforms, the telecom sector is now squeezed between high costs and stagnating revenues.
Telecom operators’ revenues have grown at a meagre 1.9 per cent in the last six years if adjusted for 10.8 per cent retail inflation during the period.
Stagnating revenues coupled with high costs are putting a pressure on margins of operators. If the situation persists, quality of services will be adversely impacted and may lead to liquidation of operations by some players, believe analysts.
The industry’s gross revenues were Rs 1,51,234 crore during FY13, a decline of 1.2 per cent over the previous fiscal after adjusting for inflation (see table). Indian mobile subscriber base (897 million at June-end) is over 13 per cent of the world mobile subscriptions but only 2.3 per cent of global telecom revenues.
“In terms of revenue, India lags behind miserably,” said Himanshu Kapania, Managing Director, Idea Cellular and Chairman of industry body Cellular Operators’ Association of India (COAI).
Key factors
This sharp unsustainable difference in the share of global customers and revenue is primarily due to two reasons: hyper-competition and low tariffs. India has the world’s lowest call rates at 35 paise per minute and has six to eight operators in each circle. In contrast, China has only two large operators – China Unicom and China Telecom.
And despite inflation, telecom tariffs have dropped by over 30 per cent in the last four years, Kapania pointed out.
To add to the operators’ woes, telecom equipment, which is imported, is becoming costlier due to rupee depreciation. “With Indian operators using international equipment at nearly constant dollar prices, the strain of managing mobile business in a falling price environment is now clearly showing up in the sector’s outlook,” Kapania said.
Besides, the cost of capital and financing has gone up in the last few years. Service tax too is up from 10 per cent to 12 per cent.
“Operators are stuck in an environment where costs are going up while revenues are not. This is leading to pressure on margins,” Sivarama Krishnan, Executive Director (risk advisory services), Pricewaterhouse Coopers India, told Business Line .
Ideally, EBITDA (earnings before interest, tax, depreciation and amortisation), which is also an indicator of profitability, should be upwards of 35 per cent for telecom operators.
However, in 2012, Indian operators’ EBITDA margin fell to 15 per cent while the emerging Asia average for the sector stood at 36.1 per cent. The corresponding figure for Pakistan was 43 per cent, Japan (47 per cent) and China (36 per cent). This raises questions about the long-term sustainability of the sector.
Pressure on margins
“If the pressure on margins continues, the first consequence will be poor quality of service as operators will not be able to invest into the business. Second, it will force consolidation or operation liquidation. That will reduce competition and when that happens, tariffs will start going up,” Krishnan added.
Mritunjay Kapur, Managing Director of Protiviti Consulting, said it will be difficult for the sector to sustain future investments with present unenviable low margins. Besides, spectrum availability for operators is limited and the price per MHz of spectrum remains high. “The Government should look at the financial viability of the sector and set the base price for the next auction after taking an overall view of the sector,” he added.