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Telecom: Cellular woes - Views on News from Equitymaster
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  • Jun 15, 2004

    Telecom: Cellular woes

    The Indian telecom sector is at a crossroad. What we mean by this is that while the sector is witnessing an explosive growth rate and is likely to maintain it going forward, it is also increasingly facing falling profitability due to regulatory pressures and fragmentation. Increasingly the choice among the various cellular operators is becoming clear and the obvious road that must be taken is that of consolidation.

    In this backdrop, let us review a recently released report from the Cellular Operators Association of India, or the COAI (association of mobile service providers using the GSM standard) on the performance of the sector in FY04 and the impediments to its growth. According to the COAI, while the growth in subscriber base for FY04 was robust and stood at over 100%, the Average Revenue Per User (ARPU) has fallen significantly (17%) in the same period. While falling ARPUs have helped the sector to boost its subscriber base, this has also meant diminishing margins for the various operators. The table below indicates the change in ARPUs for the various operators over the last one year.

    ARPU (Rs) April- June03 Jan- Mar04 2003-04
    Aircel 606 344 395
    Bharti 498 444 455
    BPL 517 375 397
    Escotel 423 352 363
    Hexacom 395 429 460
    Hutch 618 498 534
    IDEA 490 434 435
    Reliance 458 420 411
    Spice 485 321 367
    All India 523 432 451

    We believe that the entry of private basic service providers (using CDMA technology) in the mobility segment has resulted in the falling ARPUs. Basic service providers like Reliance and Tata Teleservices, in order to garner market share and make up for lost time, resorted to price based competition. This has forced cellular service providers using the GSM technology to bring down tariffs in order to maintain and grow market share. Due to the inherently strong demand for mobile services in the country, the entry of new competitors was absorbed in the market.

    We believe that over the long-term quality of service will be a key differentiator and price based competition will not be the norm, especially in the urban telecom segment. In the rural segment despite affordability being the key factor, the high cost of setting up infrastructure is not likely to allow the players to compete on the price front. Hence we believe that the fall in tariffs from here on will be very limited.

    While competition may have been one of the key challenges to the cellular service providers, other regulatory factors have been equally responsible for the woes of the sector. The COAI has indicated that the telecom sector, especially the cellular services segment, continues to pay very high duties and levies. The association has also indicated that due to the high rates of duties and levies and falling ARPUs, cellular service providers are not in a position to fund expansion and enter in to the relatively lesser-serviced rural areas. Currently, the sector is paying duties and levies under various heads including annual license fees, spectrum charges and access deficit charge. In addition to the above, significant levies are also imposed on the industry on account of sales tax, service tax and import duties on handsets and other telecom hardware. As a matter of fact, the report states that the burden on the sector on account of access deficit charge, spectrum charges and license fees is to the tune of 25%.

    This is a worrying aspect since most of the cellular operators are not profitable and this means that their break-even levels will be pushed further. Now, as some of the operators are likely to tap the capital markets in order to fund further expansion of their services, investors need to understand the ground realities being faced by these service providers. While the sector as a whole is witnessing rapid growth, investors need to understand that not all operators are in a position to benefit from the same. For most of the operators, growth may not be profitable and this is indicated by the recent spate of consolidation in the sector (Bharti buying out the cellular operations of Shyam Telecom and Idea buying out the cellular operations of the Escorts Group).

    The overall sector may paint a rosy picture, however, for individual players the story may be drastically different as they continue to grapple with falling ARPUs, regulatory pressures and defaulting customers. The ride for the telecom players may be topsy-turvy from here on. This is because the sector is still in a process of evolution and this increases the uncertainty aspect and, consequently, the risk profile of players that form part of the same.



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    Aug 17, 2017 03:37 PM