Telcos operating profit to rise 5% in 2 yrs: Crisil

Credit rating agency Crisil today said operating profits of large telecom players will improve by 5% in the next two years on the back of reduced intensity in competition.

"Crisil believes that operating profitability of the large mobile players rated by it will improve by 500 basis points (bps) or 5% in the next two years," it said.

The agency, which tracks Bharti AirTel, Vodafone and Tata Teleservices among others, said the improvement in operating profit will be driven by reduced competition, improved pricing power and increasing revenue from value-added services such as data and 3G.

"We estimate the operating profits of our large rated players to improve by up to 300 bps [3%], aided by future hikes in tariffs. The margins will improve further by up to 200 bps [2%] over the medium term on account of increasing revenue from data, 3G and other value-added services," Crisil Ratings director Pawan Agrawal said.

The contribution of value-added services to revenues is estimated to rise to nearly 18% from the present 11%, he said in the report.

The competitive intensity in the sector began to come down in mid-2011, as the large players hiked tariffs in select circles, which will be further enhanced with the recent cancellation of the 122 2G licences by Supreme Court.

As to reduction in average capital expenditure, the report said there will be an average reduction of 30% over the medium-term in the average capex of large players, compared to capex in the last three years.

"This is because most of these players have already achieved high population coverage and have outsourced a large parts of their passive infrastructure requirements."

However, the rating agency noted that uncertain regulatory environment remained as a business risk.

"The regulatory environment, a key element in the assessment of business risk profile, remains uncertain for mobile operators. Critical outstanding issues pertain primarily to spectrum pricing and allocation. Any adverse changes in regulations may lead to higher than anticipated cash outflows," Ratings head Sudip Sural said.