Krishna Baidya’s Random Musings

Debt ratings agency, Fitch says that it expects the recent tariff war by new telecom entrants in India and the likely retaliation by incumbent operators, will have a significant impact on industry revenues and profitability.

The reduced tariffs will lower the ARPUs and operating margins for all industry players. In a recent report, Fitch stated that EBITDA margins of existing operators will fall on lower ARPUs in the near term. The exaggerated tariff reduction and competitive intensity will likely reduce ARPUs by 10%-15%, which is lower than expected.

The Indian telecom industry is witnessing price wars with the entry of the new telecom operators, which were allotted universal access service licenses (UASLs) in February 2008 by the Department of Telecommunication (DoT).

The new entrants (Aircel, Sistema Shyam Teleservices (SSTL) and Tata Docomo (GSM)) have launched aggressive tariff plans in an effort to garner subscriber market share. These new entrants have launched per second billing, either selectively or throughout their networks, while Tata CDMA has launched tariffs on a per call basis, irrespective of duration (Re 1 and Re 3 per call on local and STD, respectively). Following this trend, Reliance communication (Rcom) has reduced the tariff to 50 paise per minute for local, STD, roaming and SMS, for both off-net and on-net calls. BSNL has also launched per second billing plan in Karnataka, Andhra Pradesh and Orissa.

Fitch expects other incumbent operators to eventually match the reduced tariff plans, considering the adoption of mobile number portability in the near future.

Nevertheless, Fitch expects the Stable Outlook of the sector to continue, given the net monthly subscriber additions. However, the impending 3G and BWA auctions remain an event risk.

Fitch expects subscriber growth to be at a CAGR of 25%-30% over the next three years up to FY12, as compared to a CAGR of 44% in the last three years (FY07- FY09). The incumbent operators with strong balance sheets and strong portfolio of high-end customers in metro areas are expected to maintain their credit profile. However, Fitch expects new entrants to face increasing difficulties in garnering any meaningful market share, with already low tariffs leading to lower ARPUs, a lack of adequate spectrum quality and restrictions on spectrum sharing.

The telecom industry has yet to see service launch of other UASL holders like Etisalat DB Telecom India, Datacom, Telenor – Unitech wireless, Loop Telecom and S-tel. Fitch believes that the reduced industry profitability will likely expedite industry consolidation in the medium to long term.

Source: Fitch Ratings