Does the telecom sector need a new growth driver?

Revenue growth rate to moderate to single digit as voice traffic slows

Even as regulatory woes of the telecom sector have been discussed ad nauseam, new challenges are emerging for the sector. Over the last 10 years, the sector grew rapidly as mobile tariffs came down and companies added subscribers by the millions. So long as telecom operators were adding subscribers and revenues, even as mobile tariffs kept coming down, all was well. But with penetration saturating, revenue growth of wireless telecom players is slowing. Rumit Dugar of Religare Institutional Research believes the industry’s revenue growth rate is likely to moderate to high single-digit from FY14, given peaking subscriber penetration.

Since the Supreme Court cancelled 122 mobile licences last year, competitive pressures have abated for the bigger players, as many new entrants are now merely regional players and tariffs have started rising, albeit very gradually. All these developments, coupled with the failure of the spectrum auction, gave indications that the sector would turn around smartly. While revenues and profits could move up on improved pricing, the sector is unlikely to see double digit growth with mobile traffic slowing sharply. For starters, annual subscriber addition is down to four million from the 12 million seen in early 2012. Total subscribers indicate penetration levels of 86 per cent.

In a price-sensitive market like India, the link between tariffs and minutes of usage is rather strong. In the past, companies have seen volumes dip as tariffs were hiked. The October-December quarter is a seasonally strong one but mobile traffic grew between three and five per cent sequentially for Bharti, Idea and Vodafone. In order to get a sense of how traffic has come off, one needs to look at traffic growth in Q1FY12. Bharti had clocked a traffic growth of 20 per cent in Q1FY12, which is down to 10 per cent in Q3FY13. Idea’s traffic had grown 35 per cent in the June 2012 quarter, which has fallen to 16 per cent in Q3FY13. According to Dugar, with tariffs likely to harden going forward, minutes of usage and, thereby, traffic growth, is expected to slow further. Revenue per minute, a key measure of profitability, remained stable sequentially in the third quarter but declined three to five per cent year-on-year for the GSM incumbents, says Motilal Oswal Securities.

In a market where voice traffic is stagnating, data could have been the game-changer but is not so yet. Though 23 per cent of Bharti’s customers have access to data services, the contribution of data to gross revenues is a mere five per cent. With the government allowing players in the BWA space to offer voice services, competition is unlikely to abate substantially for the incumbents. A strategic reinvention is probably the need of the hour.