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Telecom Margins To Come Under Pressure

Monday, August 27, 2012
Manik Kumar Malakar

The telecom sector in India is at this point of time facing rough weather, both from the corporate as well as from the mobile subscribers’ point of view. From the company’s perspective margins are expected to come under pressure, while from the individual’s perspective tariffs may increase.

And, all this is taking its toll on telecom as there is now a pall of uncertainty hanging over the sector. “The DoT may have liberalised spectrum quantity to be auctioned from earlier TRAI-recommended 5 MHz to 13.75 MHz which is expected to create equal opportunity for both incumbents as well new players,” says Sameer Pardikar of Karvy in a Telecom Monthly Update. “The price is at a much high level than the expected 80% reduction by the operators,” he continues.

This means that companies will not seek a pan-India spectrum as well as margins will be under pressure. GSM operators need to provide 33% of the price upfront, an amount that will work out to Rs. 4,620 crore. The CDMA operators will have to pay 25% of the spectrum price of Rs. 18,200 crore.

Thus, operators may not bid for all of the circles that are being offered, but only for circles that will yield high revenues.

And even from the margins point of view there is already a pressure on realizations. “There is already a pressure on realizations, which is clearly visible from the Q1 FY13 financials of Bharti Airtel and Idea Cellular with decline in ARPM, which coupled with higher operating expenses, will put further pressure on their margins, going forward,” says Paridkar. 

The next woe for telecom companies is that their subscriber base is weakening.  According to data from the Cellular Operators Association of India (COAI), the GSM subscribers base has declined by 36 % Month-on-Month in June 12 on account of sharp decline in subscriber addition for Idea Cellular and Uninor. The GSM operators added 4.6 million subscribers in June 12, taking the total subscribers’ base to 677.4 million as of June 12 from 672.7 million in May’12.

“The telecom sector reported disappointing performance for Q1 FY13 as RPMs (Revenue per minute) declined over 2.5% Quarter-on-Quarter and margins declined by 180 bps (one basis point is one hundredth of a percentage point) for Idea and 300 bps for Bharti Airtel. The intense competition in the sector led to aggressive discounts and promotions which led to RPM dilution and the high customer churn led to increase in SG&A costs,” says Ganesh Duvvuri an analyst with brokerage Edelweiss of the sector.

In an interaction with industry players last month Duvvuri had some more bad news to report. “Our recent interactions with industry players, including infrastructure providers, COAI and a couple of telecom experts in Delhi indicate that smaller operators are losing momentum,” he says. The telecom industry feels that auctions will be held in October-November 2012 and the industry seems to have given up hopes of a reduction in reserve price of spectrum in ensuing auctions.

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