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Jio effect? Telecom industry is at its weakest, govt will have to step in

Indian telecom industry is at a critical juncture & improvement is crucial for its long-term health

Naveen Kulkarni 

Telecom Industry
Contribution of telecom services to GDP has declined from 2% of GDP in FY09 to just 1.2% in FY17

How did it get so bad?

The Indian sector has been under pressure for the last 8 years because of rising competitive and intensity. During this period the contribution of services to has declined from 2% of in FY09 to just 1.2% in FY17. The return ratios for the players has also consistently declined during the period and all the companies do not manage to earn their cost of capital because of continuous investments in purchases. While competitive intensity has changed with entry and exit of players, the intensity has consistently risen because of auctions. The at this juncture is at its weakest because of the high degree of financial leverage and margins impacted by rising competition from new player In the current state, the has insurmountable challenges which are leading to huge wave of consolidation. 

structure is a key determinant for profitability
In the pre 2008 era, the Indian was one of the most lucrative markets marked by high growth rates and reasonably concentrated was not auctioned but given on subscriber-linked criteria. The system was not perfect and it could be gamed by operators. This led to flurry of new entrants in 2009 which led to significant crash in tariffs and sharp decline of profitability. After the crash in tariffs (which never recovered), the rising for led to increase in financial stress which has limited the incumbent ability to invest. Thus with the entry of Reliance Jio, consolidation to augment capacities is the only viable solution. The in totality has over capacity and the only way the demand versus supply will match in the future is through consolidation.

Where do we go from here?
The is now composed of three sets of players:
1) Established incumbents like Bharti, and Cellular which have executed well in the past and have strong brands. merger with will solve the capacity constraints of both the players

2) Weaker players like Telenor, MTS, RCOM, BSNL, and which are exiting or are consolidating for survival. Even after consolidation, the operators ability to invest will pose a challenge

3) which has defined the technological and strategic landscape.

In future, the will see slower investments and more consolidation. With so much supply in the market, revenue will grow with usage albeit with a lag. We expect 11 per cent revenue over the next 5 years but most of the growth will be back ended post consolidation. The weaker players will have to exit but their presents a structural problem for an exit. In this regard, the government might need to step in to improve the profitability to ease the exit of players and solve the structural issue. The government has many levers to improve the profitability which include reducing service tax to usage charges. All or any of these measures can improve the profitability significantly.

Finally, little help from regulator
The Indian is at a critical juncture and faster improvement in profitability will be crucial for long-term health of the sector. consolidation is critical but government interventions to improve profitability will help the sector immensely. The Indian sector has immense potential for growth but realising the potential is in the hands of government and regulator. 

The author is Co-head of Research at Phillip Capital 

Disclaimer: Views expressed are personal. They do not reflect the view/s of Business Standard.