Telecom update: Calling for consolidation

The Telecom sector is in the midst of an intense pricing war. The aggressive billing plans are now talking of per-second schemes with the advent of Tata DoCoMo, a joint venture between India's Tata Teleservices and Japan's NTT DoCoMo. Meanwhile, the battlefield action has now shifted to SMS pricing… with Rcom unveiling its go-getting 1p/sms scheme.

What does this cut-throat competition mean to the market?

With the abundance of rather irrational supply-side freebies, the Subscriber base is expected to rise steadily but only at the cost of a falling Average Revenues per User (ARPU) – the litmus test measure for the industry. The incremental growth will come from the largely untapped rural market where prepaid subscription is still dominant. No wonder, four big players, including Norway's Telenor and United Arab Emirates' Etisalat, are making a foray in the next few months.

Revenues

Bharti and Reliance Communications, leading market players, have announced a drop in profitability for the last quarter. The sector’s lower revenue growth YoY and pressure on margin/earnings following the severe penetration pricing is likely to continue for the next 3-4 quarters at least.  The proposed 3G auction spells more burden for the players’ financial statements.

Consolidation

Over the next two years, subject to conducive regulation, we expect a semblance of consolidation in the sector as the number of players/circle could drop from the current 8-10 to a more sustainable 4-5. Moreover, the incumbent minutes of usage could improve as demand elasticity is likely to be exploited to the maximum by virtue of established network-backed tariff cuts. With fewer players orchestrating the industry’s moves, profitability and operational efficiency would get a big boost.

3G and Number Portability

The hype notwithstanding, the Number portability impact (despite the mere Rs 19 porting charge) is destined to be short-lived. Till date, the industry makes do with annual pre-paid churn rates of 40% or higher. In such a scenario, 3G may not bring meaningful revenues in initial years. We predict a substantial lead time for companies to recover license money...Though the 3G auction will pave the way for high-speed internet and mobile downloads, the bidding at 3G auctions are likely to be restrained, given the current market turmoil.

Tower IPOs

The Tower listing, Reliance Infratel in particular, (tenancy pegged at 3x by Mar' 12), is undoubtedly a potential trigger paving way for other players like Indus Towers (the largest tower player with over 100,000 towers). Having said that, this prospect has been long anticipated by the market and hence the vigour is clearly amiss.

Valuations

The sector re-rating may well begin when visibility improves following industry consolidation and/or on revenue per minute stabilization. The telecom sector today remains elusive at best. This does not augur well for any bottom buys but the promise of consolidation and streamlined revenues point towards an environment conducive to investment.

Going by the action on the field, a staple line from the telecom parlance seems apt: “All lines on this route are busy. Please call later”