Sunil Jain: Wrong call, Mr Sarma

Investors in Indian telecom stocks, both here and overseas, have to be seriously concerned about the quality of regulation in the sector. For one, an ill-considered statement by Trai chief JS Sarma on how he would make it mandatory for all mobile phone operators to offer pay-per-second billing plans (of the type introduced by some new entrants) made share prices of top telcos fall 15to 20 per cent. That Sarma made this statement in Geneva without even issuing the mandatory consultation paper was bad enough; it suggested he was unaware that India had the lowest tariffs in the world and that, with seven operators in every circle (and seven-eight more licensed), the competition was as cut-throat as it could get (see chart). It doesn’t help that prior to heading Trai, as a member of the TDSAT, Sarma upheld the government’s dubious decision to give licences at bargain-basement prices to new operators. It is these very operators who are now in a position to reap a huge premium on these licences and are offering thenew one-second pulse and other plans.

Combine this fall in average tariffs per minute (for Bharti-Airtel, these fell from 65 paise a minute in Q1 last year to 58 paise in Q1 this year) with the fall in the talk-time of each user, and the impact is even more dramatic—for Bharti-Airtel, the monthly average revenue per user (ARPU) fell from Rs 350 to Rs 278 (21 per cent versus 11 per cent for tariff rates) in the same period; per minute tariffs fell 12 per cent for Reliance Communications and ARPU 25 per cent; it was 16 and 26 per cent, respectively, for Vodafone; 11 and 17 per cent for Idea Cellular. On an average, according to a Bank of America-Merrill Lynch report, ARPUs in India fell 23 per cent on a Q1-to-Q1 basis in the last one year—this was the largest fall in the world—as compared to a fall of 1-2 per cent in markets like the US and the UK, and 5 per cent in China. SMSs, to give an instance of the area where telcos had a significant cushion, are now available for 7-8 paise each if you buy a lakh SMSs—30-40 per cent of all SMSs today are these ultra-discounted ones. Not surprising then, that firms such as Bharti have been downgraded to ‘underperform’ by analysts like Macquarie just a few days ago.

More worrying are the matters Sarma has pending; matters, it would appear, he thinks are less important than cutting the already bare basic tariffs. While there are issues like port charges and making all licence fees uniform, top on that list is the Subodh Kumar report which, in a nutshell, says the government has to stop doling out 2G spectrum on the basis of the number of subscribers a firm has. This has huge implications. Today, by offering virtually zero tariffs, firms are getting in subscribers by the lakhs and, by virtue of these subscribers, are becoming eligible for extra spectrum—their low tariffs, meanwhile, ensure the government share of their revenue is negligible!
 

Not moving fast on the Subodh Kumar report gives the telecom ministry more wiggle room to allocate some extra spectrum for free to chosen firms. It also gives it more discretion when it comes to approving mergers. And not moving on the uniform licence fees allows dishonest telcos to disguise one set to revenues as another to pay lower licence fees.

Sarma’s track record so far has been quite poor. He needs to fix it. For both himself as well as the telecom sector.