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India Telecoms Sector - Stable Outlook with Declining Margins
Fitch Ratings has today said in a new report that it maintains a Stable Outlook on the Indian telecom sector, based on the expectation that revenue growth will be supported by strong wireless monthly subscriber addition. However, it notes that profitability is likely to fall due to growing number of lower-end users, network expansion costs, increased competition and regulatory pressures.
There has been strong monthly wireless subscriber addition (around 8-10 million during FY08-FY09), and with overall teledensity still moderate at about 39% at end-May 2009, there are sound growth prospects over the medium term. Fitch expects the subscriber growth to be at a CAGR of 25%-30% over the next three years to FY12 as against a CAGR of 44% during FY07- FY09.
Wireless subscriber addition is mainly from Class B and C circles leading to lower average revenue per user (ARPU) and minutes of usage (MOU). Furthermore, Lower ARPU has been fuelled by falling tariffs due to high competition and reduced mobile termination charges.
Fitch expects that following the entry of new players (resulting in nine to 10 players operating in each circle) the industry will be pushed towards consolidation. The proposed auction of 3G licences and the introduction of mobile number portability (MNP) are also likely to increase competitive intensity. However, Fitch believes that new operators will find it difficult to garner significant share in the crowded wireless market. Although these new operators may benefit from a faster network roll-out through tower-sharing, reduced termination charges and MNP, they will face formidable challenges in terms of high subscriber acquisition costs, customers with lower-ARPU, and lack of adequate spectrum (radio frequency) quality and regulatory constraints on spectrum sharing.
An important recent development in the Indian telecom industry has occurred with most existing telecom operators demerging their tower assets into JVs and subsidiaries, and subsequently leasing these assets to other operators. Prospects for the Indian telecom infrastructure industry are robust - due to rising wireless usage, the likely preference of new operators to lease existing infrastructure and better efficiencies in rolling out rural networks.
The report also highlights the financial trends of the private and state-owned telecom companies. The private telecom operators' revenue growth was strong in FY09, but has experienced a decline in EBITDA margins on account of falling ARPU and increased spend on subscriber acquisition and retention cost. The revenues and EBITDA of state-run Bharat Sanchar Nigam Ltd. (BSNL) and Mahangar Telephone Nigam Ltd. (MTNL) have declined, reflecting the continued decline of fixed-line subscribers and falling wireless ARPUs more than offsetting the marginal rise in wireless subscriber base.
FY09 capex as a percentage of revenue remained high for private telecom operators, leading to continued negative free cash flows (FCF). However, Fitch expects existing operators' capex to have peaked in FY09, and they are expected to report stable-to-declining capex (excluding 3G) in FY10. However, total industry capex may be higher due to the entry of new operators and their significant capex plans. It is difficult to ascertain the impact of a 3G auction on financial leverage, as actual bid prices may be materially higher than the reserve price and that operators may not bid for spectrum in all circles.
The report is available on the agency's website - registration required.
Posted to the site on 17th August 2009