India Ratings & Research (Ind-Ra) has maintained a stable outlook on the telecommunications services sector for FY16 on market consolidation leading to better pricing power, as well as higher data consumption and improved the financial profiles of operators.
However Ind-Ra believes that aggressive bidding in the upcoming spectrum auction and emergence of competition from Reliance Jio, which could substantially slash data tariffs, are concerns that could lead to an outlook review in the future.
The sector shall witness its largest ever auction in March 2015. The scarce 2G spectrum (900MHz) is available for auction only because licenses of incumbents are expiring in 2015-2016 and the agency believes that this could lead to aggressive bidding by incumbents to safeguard existing operations. Ind-Ra also expects operators to wait for the release of the additional 3G spectrum by the ministry of defence, which could take up to an year. Ind-Ra also expects a lukewarm response for the CDMA spectrum (800MHz) and the 2G supportive 1800MHz spectrum due to a lack of demand and limited spectral availability respectively.
Data revenues per user have almost doubled in the last one year for GSM (global system for mobile communications) service providers. Ind-Ra believes India’s low internet penetration (27.5% of current telecom subscribers) and increasing acceptance of e-commerce and social media shall drive a surge in data consumption. This increasing user base and rising data volumes will further provide the traction for data revenue growth in FY16.
The margins of the telecom operators in India have been supported by increasing voice tariffs and growing data consumption. However, 2QFY15 has witnessed a decrease in the blended average revenue per user (ARPU) of the GSM operators in India despite healthy voice average revenue per minute (ARPM). This indicates a decrease in the voice usage hinting at stressed minutes of usage. Ind-Ra believes that with possible moderation in data tariffs triggered by competition from Reliance Jio, overall margins growth could stabilise thus limiting further improvement in the financial profiles of the operators in 2016.
With the exit of many regional players, telecom operators are left with fewer opportunities for further market consolidation. However, existing smaller/regional players may look to monetise their holdings given the limited scope of their operations. Ind-Ra believes that the department of telecommunications needs to take quick actions to lay down M&A friendly guidelines and notify spectrum sharing and trading guidelines as recommended by telecommunication regulatory authority of India to facilitate further market consolidation and enhance available spectrum efficiency.
The sector witnessed market consolidation in 2014, with the top three telecom companies (Bharti, Vodafone, Idea) catering to more than 55% of the telecom subscriber base with a combined revenue market share of more than 67% at end-1QFY15. Ind-Ra believes that the large operators shall continue to dominate the industry with better pricing power while the regional players seem to be awaiting clarity on M&A or spectrum trading guidelines to weigh their exit options.
