Price war to infect post-paid and international roaming charges

S Tel and Uninor garner substantial subscriber addition in January

Bhaskar Hazarika & Sanjeev Sharma

New Delhi: The price war sparked by new entrants like S Tel and Uninor in prepaid rates, that has helped them garner a substantial number of subscribers, may now be looming on the postpaid rates, corporate connections, wireless data, international roaming and SMS.

According to analysts, competitive pricing is likely to spread. The director for telecom at KPMG, Romal Shetty, said that the short term would be difficult for the operators but positive growth was possible in the long term.

"We will next see a fall in tariffs of other services such as international roaming, data services and postpaid," Shetty said. In January mobile operators added 19.9 million subscribers. Vodafone added 2.74 million, Bharti Airtel 2.85 million and Tata Teleservices 2.98 mil- lion.

On the other hand, S Tel added 3,64,000 in three circles and Uninor 1.33 million in eight circles.

According to a Macquire equities re- search report, "A further ramp-up and rollout of services by greenfield entrants will likely lead to a further cut in prepaid rates. The report says that as greenfield op- erators Uninor and S Tel ramp up their GSM services, competition will intensify, hurting the revenue market share and profitability of older GSM operators.

Industry net additions, says the report, reached 13.9 million, helped by a ramp-up by the newcomers, with Uninor capturing 33 per cent of the net additions in its eight circles and S Tel cornering 20 per cent in January.

Uninor's executive vice- president of corporate af- fairs, Rajiv Bawa, said that in a market this competitive, there was bound to be price competition in all telecom products. "But our view also is that a differentiation based only on pricing is always shortlived. It will last only as long as the next lower offer. A long- term dif- ferentiation has to be based on much more  better cus- tomisation of the product for distinct consumer needs and an overall focus on quality of service," he said.

"For Uninor, it is much more than how many paise are raised every second," he added.

Commenting on the pressure of margins on oper- ators, Bawa said, "Some op- erators look at subscriber additions at any cost. Others look at a low-margin, high- volume play. Then some others seek to deliver the lowest costs, but to a certain kind of customer. Irrespec- tive of the approach, howev- er, it is clear that the tele- com sector requires a long- term commitment and long- term business ambition.And the model must make for a sound business case."

The CDMA operators lobby, Association of Unified Service Providers of India's secretary-general, S C Khanna, said the market was under pricing pres- sures. "However, we do not see further cuts, but there will be competitive offers and packages for cus- tomers," he said.

The chief corporate officer of Idea Cellular, Rajat Mukarji, said, "We are in a hyper competitive market. But this is not sustainable in the long term for new opera- tors, as they do not have the coverage others have. Serv- ices such as wireless data are niche segments not mass subscriber services. It is difficult to forecast if the competitive pricing will enter these segments."

The CEO of S Tel, Shamik Das, was not avail- able for comment. Bharti Airtel and Vodafone did not respond to the calls made by Financial Chronicle.

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Telcos EBITDA margins to fall further by 5 to 10 per cent: Analyst

Outlook grim as tariff war rages, 3G delayed

Bhaskar Hazarika


Competitive pricing is likely to result in muted top line growth for telecom operators over the next four to six quarters. With per-second billing being launched by telcos, analysts foresee a further decline in average revenue per minute (ARPM), which has been a constant challenge for the industry. Analysts estimate that the revenues of telcos are likely to be stagnant and the earnings before income tax depreciation and amortisation (Ebitda) margins would fall further by 5 to 10 per cent.

According to a Fitch Ratings report, incumbent operators with stronger balance sheets and comfortable liquidity profiles would be stable, while the outlook for new entrants and public sector telecom operators is negative. “The revision in the outlook from 2009 is primarily due to stiff competition and a faster-than-expected decline in tariffs, which has had an impact on revenue and profitability. However, the credit profiles of all operators are subject to the event risk of 3G and broadband wireless access (BWA) auctions,” the report says.

3G auctions and the implementation of mobile number portability (MNP) will be key themes in 2010.

Entry of new players in the telecom space saw the introduction of aggressive tariff plans from September 2009, forcing incumbents to introduce per-second billing plan. Analysts expect competitive pressure to continue in 2010, impacting revenue growth and putting pressure on Ebitda margins.

Director of telecom of KPMG Romal Shetty said 2010 would be one of the more difficult years for telecom operators and a positive year for customers. He said that there would be further correction in tariffs that are likely to come down further.

“Ebitda margins will go down by 5 to 10 per cent. Revenues for operators may remain stagnant. In the short term, it will be a difficult market but there is huge growth potential in the long term. Tariffs of high-end services such as international roaming, value- added services and data services are likely to come down further,” he said.

He said this year, some consolidation in this sector is likely. However, the mergers and acquisitions would be purely based on spectrum acquisition. “Due to the delay in the auction of 3G spectrum, some consolidation is likely to happen. We could see telecom biggies looking at smaller players for mergers. Thirteen telecom operators is a large number. Ideally, it should be six to eight operators,” Shetty said.

The increase in voice minutes is not proportionate to the decline in tariffs, putting margins under pressure. Shetty said that to combat falling Ebitda margins, operators would soon look at a change in the revenue contribution from voice and data segments. He said that once data revenues increase to 20 to 25 per cent, the revenues would start showing positive overall growth.

Principal analyst of Gartner Kamlesh Bhatia said, “Hyper competition on tariffs would have a pressure on both top line, as well as bottom line for operators. We see this is a difficult year for the telcos because tariffs have already reached the bottom, but there could be some corrections. Declining tariffs are eroding the margins of telcos and operators are going to have a competitive year ahead.”

Executive vice-president of Telenor group and head of Asia region Sigve Brekke said that going forward, if low tariffs are to continue, margins for operators would be under pressure. “It has always been a challenge for operators as the average revenue per user (ARPU) have been witnessing a steady decline. Operators offer low tariffs and are successful in increasing the minutes of usage, as such the pressure on margins could be rectified. However, the industry is likely to see such fluctuations in the future before the sector witnesses any consolidation,” Brekke said.

Price-led competition intensified in the third quarter 2009-10, with major operators cutting tariffs aggressively during the quarter (switching to per- second billing from the previous per-minute system). Consequently, ARPM declined at a faster pace of 5 per cent 6 per cent quarter-on-quarter in 2009. Voice ARPM declined from Rs 0.75-0.85 in the first quarter of financial year 2008 to Rs 0.45-0.55 in second quarter of financial year 2010. Fitch expects ARPM to continue to decline in 2010 due to the addition of mainly lower-end incremental subscribers and expected further pricing pressures due to the entry of new greenfield operators. However, the rate of decline will be lower than in 2009 due to growing data revenues.

Fitch states that capital expenditure, as a percentage of revenue remained high in financial year 2009-10 for private telcos (an average of 55 per cent), on the back of increased network coverage in smaller cities.

Capital expenditure for financial year 2010 is expected to be lower, however for financial year 2011, it will be higher for the 3G licence auction winners, assuming the 3G licence fees and its subsequent rollout in financial year 2011 is implemented. The free cash flow (FCF) of major private telcos has remained negative since inception due to higher capital expenditure and financing costs, and this trend is likely to continue, except for Bharti Airtel, which is expected to generate mildly positive FCF in financial year 2010 and financial year 2011, excluding the 3G licensing outlays.

According to a Macquarie report, the ongoing tariff war is likely to cap any meaningful re-rating of Indian telecom stocks in the next six to nine months. “Recent tariff actions are likely to result in muted top line growth for next four to six quarters for the Indian wireless operators. In addition to the slowdown in top line, intense competition leaves little cost cushion — hurting the margins of these players,” the report said.

However, mobile number portability is considered only a modest risk, and revenue from 3G services is not likely to be significant in 2010.

This is due to the fact that the Indian wireless market is already predominantly pre-paid and has a high annual churn rate of 40 to 48 per cent. Increased retention costs would mainly relate to the post-paid segment, which only accounts for around 5 per cent of overall subscribers in India.


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