Statsguru: Tough times ahead for telcos

The telecom sector is headed for tough times. The sector’s top line contracted by five per cent in Q3FY17 as shown in Chart 1. This is unlikely to be a one-off case with projections showing a steeper contraction in Q4FY17.
 
With Reliance Jio unleashing a tariff war, other telecom operators rushed to match its offers. As a consequence, average revenue per user (ARPU) has fallen as shown in Chart 2. The decline in data revenues is much steeper as seen in Chart 3.
 
And while consumers have benefited from the sharp fall in tariffs, it has hit the profitability of telcos. The sector’s profitability has been declining over the past years (Chart 4) and with the ongoing tariff war it is unlikely to perk up in the near term. 
 
The financial condition of the industry continues to be precarious. As Chart 5 shows, companies are saddled with high levels of debt, which now outstrips their aggregate market capitalisation.
 
Jio’s entry has led to a wave of mergers and acquisitions in the sector, the latest being that between Idea and Vodafone. While the merger has ended up creating the largest telecom operator in the country with an enterprise value of Rs 1.5 lakh crore (Chart 6), the fundamental question is whether it will have enough financial might to fend off Jio.
 
This tariff war is also likely to end up impacting the sector’s contribution to the government’s tax kitty. Chart 7 shows that the sector’s direct contribution to government revenue has risen quite sharply over the years. This does not include other charges and taxes the government collects from telcos. These could now be under pressure.

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