Bhagyashree Bhati, Research Analyst Industry Research, CARE Ratings
The telecom companies have an opportunity to increase or tap revenues from the gain in momentum of data usage by consumers and can benefit by providing bundled services at competitive prices to keep a hold on their market share and to keep a check on their profitability.
The telecom industry is witnessing consolidation. With this, the industry will have large players like Vodafone-Idea, Bharti Airtel-Telenor, and other operators like Reliance Jio, Reliance Communications-Aircel. This will be different from the existing situation where the industry consists of 11 players. The earlier proposed merger of the state-run BSNL–MTNL is now ruled out.
Intense competition among 11 players is believed to have resulted in Indian customers paying one of the lowest telecom tariffs in the world. The largest telecom market (China), on the other hand, comprises three players. Stiff competition among these players can be attributed as one of the reasons for the industry to enter the consolidation phase.
In addition to this, price wars initiated by Reliance Jio Infocomm that affected the sales and profits of the industry pushed the players toward consolidation. The company entered the market in September last year which disrupted the telecom industry with introduction of its free data services, free voice calls in the initial months of its launch.
These free services aided the company in gaining fourth position in terms of wireless subscriber's base as on June 2017 and the company managed to gain a share of 10.4 percent despite being a new entrant. The company follows the top three players that include Bharti Airtel, Vodafone, and Idea who have a share of 23.7, 17.9,and 16.5 percent, respectively. The top three players and other operators like Reliance, Aircel, Tata, and Telenor saw erosion in their share as on June 2017 compared to the same period last year.
The latest entrant (Reliance Jio) has been impacting the telecom service providers industry's sales and profits for the last three quarters in a row. Sales of the industry declined and its profit margins deteriorated in each of the quarters during October 2016 to June 2017 compared to each of the corresponding quarters a year ago. This was mainly due to price war and intense competition created by Jio. The industry in fact posted losses at net level in the March 2017 quarter and the June 2017 quarter compared to profits reported in the same period last year.
Apart from this, the telecom industry is facing the problem of increase in debt on account of network expansions and expensive spectrum acquisitions undertaken by the telcos.
Considering stress in the industry, the inter-ministerial group (IMG) along with the telecom operators was set up to assess stress in the telecom sector. The telecom operators raised the following demands:
- lCut in license fee to five percent from the existing rate of eight percent
- lFlat one percent spectrum levy
- lThe deferred payment liability of spectrum be aligned to the life of the spectrum, that is, 20 years with a moratorium of five years and repayment of 15 years
As per market view, the IMG however is unlikely to meet all the demands and has recommended extension in the deferred payment period for spectrum acquisition to 16 years from the existing 10-years period. This recommendation if accepted by the government will help the telcos to improve their cash flows. The IMG is likely to change the method for interest calculation from prime lending rate to the marginal cost of fund-based lending rate. However, no significant change is recommended by IMG with respect to cut in license fee and spectrum levy.
The stress in the sector has called for some relief measures from the government and has also paved the way for consolidation. This acceleration in consolidation will reduce the number of telecom operators thus increasing the industry's efficiency with two companies coming together to share their network coverage assets. Also, the telecom companies have an opportunity to increase or tap revenues from the gain in momentum of data usage by consumers and can benefit by providing bundled services at competitive prices to keep a hold on their market share and to keep a check on their profitability.