Revenue generated by the Indian telecom services sector in 2015-16 was 2,63,708croreas against 2,54,548 in the last fiscal, a 3.59 percent increase. It is projected that by 2020, data revenue contribution will be 35–40 percent of the total revenue of telecom operators. This growth is being driven by continuous increase in the number of data subscribers and usage per subscriber.

What we can expect. Aided by a spike in data usage, telecom revenue is expected to grow at a faster pace over the next 5 years compared with the previous corresponding period. Investment would intensify as operators begin 4G rollouts with another round of auctions on the anvil. Operator strategy in 4G (and spread of 3G) would be the key monitorables, although high payouts for spectrum would keep operator returns subdued. Network investments are expected to pick up as operators vie for last-mile connectivity. The government's support will lead to consolidation in the industry.

Wireless data subscribers to dominate new additions. Owing to the removal of inactive subscribers from operator networks, the wireless subscriber base declined in 2012-13. However, with increased focus and aggressive expansion by operators in rural areas, the subscriber base has been rising since then. Growing rural penetration is expected to continue driving subscriber additions over the next 5 years. Also, with rising demand for data services, 3G and 4G subscribers are expected to constitute a major proportion of subscribers by the end of 2020-21.

Wireline subscribers expected to continue opting out of wireline services. The spread and convenience of mobile services has had an adverse impact on the wireline business, where the subscriber base continues to decline. Any reversal in this trend is not expected, though the pace of decline could decelerate owing to the uptake of fixed-line broadband services.

Operating Metrics

A spike in data usage and gradual improvement in realizations will boost the telecom industry's key operating metrics over the next 5 years. Data is expected to show sustained growth and voice a downward trend.

Revenues. Mobile revenue continued to grow at a healthy pace year-on-year in 2015-16, aided by improving operating metrics and a spike in data usage. With increased uptake of data services on 3G and 4G, overall revenue is expected to increase at a healthy rate over the next 5 years, albeit with some pressure in the interim.

Profitability. After a rise of close to 200 bps in the past 2 years, EBITDA margin of operators is expected to decline in 2016-17 and 2017-18, an outcome of aggressive pricing and network deployments. It will subsequently recover in 2018-19. Owing to high capital expenditure and debt resulting from multiple auctions, the leverage and return metrics would remain subdued in the near term.

Competition. Consolidation is expected in the industry, albeit pressure of a new player's entry will continue. With some operators exiting and others downsizing operations, competitive intensity has eased. Large operators are expected to hold sway, given that they hold adequate spectrum across frequency bands and have superior service offerings, particularly in the rapidly growing data segment. While the number of players has gone down, emergence of 4–5 strong pan-India contenders will have impact on market share shuffles and pricing dynamics.

Regulations

Clarity on policies leading to increased consolidation in the industry. With the release of guidelines on the sharing, trading, and liberalization of spectrum, regulatory clarity in the telecom sector is improving. The Telecom Regulatory Authority of India has made a few announcements benefiting subscribers as well. However, the policy push to facilitate mergers and acquisitions, and promote efficient usage of spectrum is still lacking. MVNO and call drop will continue to remain monitorables for the sector.

Investments

Investment intensity to increase following regulatory, network expenditure. The mobile services segment is expected to attract the bulk of investments over the next 5 years. A large proportion will be directed toward network investment to expand the reach of 3G services pan-India and launch 4G services on a broader scale. Regulatory investments are estimated to take a toll on cash flows, with operators vying for a share of premium 4G bands. Based on analysis report by Crisil.

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