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| RCom: Win some, lose some |
| Shobhana Subramanian / Mumbai Oct 07, 2009, 00:18 IST |
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The new offer will win the telco market share but may not help it make money.
 With telecom operators vying with each other to offer customers lower tariffs, it’s not surprising that telecom stocks are tumbling. In the last two sessions, Bharti has lost 18 per cent, RCom has fallen 17 per cent and Idea Cellular has come down by 12 per cent. Clearly investors are anxious at the way rates are dropping; After Tata DoCoMo introduced the per second billing scheme, Idea came up with special rate of 50 paise for both local and STD calls on any network in Mumbai city.
In between,Tata Teleservices offered local calls at just Re 1, irrespective of the duration. And now Reliance Communications (RCom) says it will charge 50 paise per minute for pretty much all calls. That’s much below the industry tariff of Re 1 for an outgoing local call. RCom’s plan will mean lower rates for almost all calls except international calls and roaming.
While the scheme should help the telco gain subscriber market share, how much money it will make is another question. A back of the envelope calculation done by Kotak Securities shows a maximum revenue per minute potential of 35 paise for RCom. That, it points out, is lower than Bharti’s cost of producing a wireless minute of 39 paise per minute in the June 2009 quarter. This is also around 29 per cent lower than the industry ARPM (average revenue per minute )for the June 2009 quarter.
In fact, JP Morgan estimates that RCom’s ARPM could come off quite sharply to around 40-42 paise in the medium term. But the average cost per minute in the last quarter was around 40 paise per minute. So, RCom’s margins can get squeezed unless it manages to reduce costs. Understandably, RCom wants to make it more difficult for new entrants to get a foothold in the market but now it appears that even incumbents like Bharti Airtel or Vodafone may be prompted to lower call rates.
That cannot help RCom and although operating margins will be cushioned to some extent, thanks to an under-utilised GSM network, margins could come off to 37 per cent in the current year and 34 per cent in 2010-11, says JP Morgan. Meanwhile Trai reportedly is toying the idea of making the one second billing mandatory, a move that would disrupt profits for all players with industry revenues coming down by about 15 per cent. That is making analysts even more cautious prompting them to trim earnings estimates across companies with the biggest cut being made for Idea Cellular.
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