In a few quarters Indian Telecom Market is likely to stabilize: ICRA

ICRA says that the fierce competition witnessed by Indian Telecom Industry recently with pricing pressure will balance out soon in a few quarters.

According to a report by ET Telecom, ICRA added that as the competitive intensity is expected to moderate, as the merged Vodafone and Idea stabilize, and the subscriber base of the existing operators will diminish.

The report also stated that, by early next fiscal, the industry is likely to witness better outlook driven by improvement in pricing levels. Over a longer term, recovery in the sector would hinge on the back of a consolidated structure, better pricing power and sustained data usage. Meanwhile, the debt levels of the industry, which remain elevated as on March 2018, are expected to witness some reduction by way of asset monetization and promoter funding.

“Consolidation transactions over the last two-three quarters released a sizeable subscriber base which provided opportunities to larger telcos to enhance their subscriber market share, thus keeping the competitive intensity high. From March 2017 to March 2018, the larger telcos together added 202 million active subscribers and a large portion of this – 192 million came at the expense of discontinuing telcos. Now the subscriber base of the discontinuing telcos has largely diminished.

"But the impending merger of Vodafone and Idea, and the ensuing integration of the two may see some erosion of subscribers, giving an opportunity to other operators. Thus, we expect that a stable industry structure, with three operators holding more than 90% of the market share, to coincide with the stabilization of Vodafone-Idea merger. Till such time, the pricing levels in the industry are unlikely to witness material improvement," Harsh Jagnani, Sector Head & Vice President – Corporate Ratings, ICRA Ltd.

ICRA said that consistent downward revision in prices has resulted in one of the steepest falls in the industry average revenue per user (ARPU) levels with the estimated blended ARPU falling from Rs 169 in first quarter of 2017 to Rs 127 in the fourth quarter of 2018 – with the industry adjusted gross revenue (AGR) falling from Rs 40,450 crore to Rs 25,640 crore in the same period, ET Telecom reports.

According to the report, the Indian telecom industry needs to make the investment to expand their reach and deploy technology to support strong data growth in the market. ICRA said that the capital expenditure (capex) requirement is coming from network expansion, technology upgradation, and greater fiberisation which is essential for data-heavy usage.

The overall high operating leverage of the industry means that the decline in revenues has percolated to pressure on profitability and cashflows. Further, the industry is weighed down by high debt levels and capital expenditure (capex) requirements, according to the Report.

The capex to sales ratio for the telcos has increased significantly - at around 30% against the average of 15 - 20% seen in the past.

"One respite is that spectrum auction is not expected in the medium term as the operators are well stocked following recent inorganic acquisitions. Such high capex makes it challenging to generate adequate returns with the prevailing ARPU levels, thus necessitating a restoration of pricing power," Jagnani said.