Competitive pressures to continue for top telcos

Any hike in rates could translate to market share loss for the bigger players

Competitive intensity in the Indian telecom space is unlikely to ease anytime soon, going by the fact that a smaller operator such as Telewings Communications Services, which offers services under the Uninor brand name, has turned a corner, posting an operating profit for the March quarter.

The management has indicated this trend in profitability should continue. The Indian subsidiary of Telenor, the Norwegian telecom multinational, was able to post a positive Ebitda (earnings before interest, tax, depreciation and amortisation) and improve its operating performance, due to an increase in revenue and the positive impact from lower interconnect rates. The Telecom Regulatory Authority of India (Trai) had, in February, reduced interconnect charges (IUC) by 30 per cent to 14p per minute. As a net payer of these, the cut helps smaller players such as Uninor. Higher profitability, along with aggressive pricing and good growth of smaller players, is expected to keep competitive pressure high in the voice market. This is likely to make it difficult for the major incumbent operators (Idea, Bharti and Vodafone) which have more than 70 per cent revenue market share, to raise rates post the spectrum auctions in March.

In fact, between the December 2014 and March 2015 quarters, Idea Cellular's year-on-year average revenue per minute (ARPM) for voice was down nearly 10 per cent and Bharti Airtel's by 2.5 per cent. In the March quarter, Idea's voice realisation fell 4.8 per cent and Bharti's by 3.8 per cent on a sequential basis.

Sunil Tirumalai and Chunky Shah of Credit Suisse say the trend of improving profitability at smaller operators, along with pricing pressure is contrary to Street's belief that the sector is under stress and should lead to consolidation.

Lower rates from the smaller companies are making it difficult for the larger ones to raise these. The smaller entities already account for 17 per cent of revenue share and 20.5 per cent of voice minutes.

In this context and despite no increase in voice prices, Telenor's India operations are now Ebitda-positive, which indicates the company has been managing operating costs well and has benefited from a cut in termination rates. Its strategy of keeping prices low while working on operational efficiency seems to have paid results. In fact, an increase in prices should help entities like Telewings to improve market-share.

Vivekanand Subbaraman of HDFC Securities says, "Telenor is likely to see tariff (rate) increases by incumbents as an opportunity to gain ground and is unlikely to participate in these."

Boosted by a 26 per cent growth in subscribers and 16 per cent in traffic, revenues were up 19 per cent year-on-year in the quarter to Rs 1,109 crore. At the operating earnings level, the company reduced loss to Rs 43 crore from Rs 84 crore in the year-ago quarter. This was on the back of reduced termination rates and tight control on costs. The company is expected to maintain the positive Ebitda trend. Analysts say it has retained some of the benefits from a cut in termination charges and passed on the rest to customers, keeping competitive intensity high.