India's Telcos to Benefit From Improving Regulatory And Competitive Framework

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India's telecommunications industry is all set to turn an important corner. Improving regulatory risk and moderating competition in India will support the credit profiles of the country's top telecoms according to a report from Standard Poor's Ratings Services.

"We believe India's telecom industry is entering a consolidation phase, given significant regulatory changes and a considerable shift in the competitive environment," said Standard & Poor's credit analyst Abhishek Dangra. "The top three players in the industry--Bharti Airtel Ltd., Vodafone India, and Idea Cellular--are likely to strengthen their market position because smaller, weaker players are likely to find it increasingly difficult to acquire expensive spectrum and lack the scale to run profitable nationwide operations."

According to the report, India's telecom industry is entering a new phase where the market leaders are likely to drive competition. This is in sharp contrast to a few years ago when small players and new entrants shaped competition with price wars. In addition, the intense competition in India's telecom industry should slowly moderate as a result of consolidation. The data segment is likely to propel the next wave of growth and competition in the industry.

Policies announced in 2014 provide long-awaited guidelines for important issues that had been mired in uncertainty, ambiguity, and the lack of a policy framework. While Standard & Poor's believes the new policies on spectrum renewal, mergers and acquisitions, and spectrum trading significantly improve regulatory risks for Indian telecoms, the risks will still be above-average compared with those in global markets. This is because some ambiguity in past policies has resulted in legal disputes between the government and the telecoms, and greater clarity needs to emerge on the policies rolled out in 2014.

"We believe the new policies are significant and provide a good starting framework for improving the industry's prospects," said Mr. Dangra.

The report notes that ambiguity about the new guidelines and any reversal of policy direction from the regulators, a new government, or the judiciary is a key risk for India's telecom industry, although this appears less likely. Aggressive and prolonged price wars, including those in the data segment, along with the entry of new players could also be detrimental to the industry.

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