Telecom: Data the mainstay

Excessive competition could ease as new players may get exit route; cost of licence renewal and spectrum could be high.

The telecom sector, which has been reeling from hyper competition, the 2G scam aftermath and tariff war, is likely to see some revival. Analysts believe the growth in data usage until the advent of 3G will propel mobility growth, especially when voice revenues are dwindling due to tariff wars. According to some analysts, data services are expected to add 300 basis points to mobility revenues over FY11-14. ICICI Securities expects the launch of 3G services to propel data usage from the current 12 per cent of mobility to 23 per cent by FY15. This would be similar to the 3G play-out across countries.

After the tariff war ignition in the Indian mobility space in October 2009, contribution to revenues from incremental volume growth has been marginal. The steep reduction in tariffs was not supported by rising paid minutes. As incumbents have stayed away from further tariff-based competition, the second half of FY11 witnessed a sharp reversal as incremental minutes have started to track back to historical averages.

New tariff plans of incumbent players have stabilised at 33-45 paisa voice ARPM (average revenue per minute), indicating little possibility of further slippage. Marginal players, however, continue to have aggressive plans, with ARPMs as low as 33 paisa, but they have still failed to garner high subscriber share and the roll out of the network has been poor.

Post-paid ARPMs are currently on the higher side at 45 paisa and may witness some pressure. Despite aggressive tariff plans, new players continue to lag significantly in revenue market share, as their subscriber base is largely non-primary SIM holders and they attract the deal seeking subscriber. While the pressure on tariff from hyper competition may ease, the road is not all smooth for the sector.

Regulatory pressures are expected to persist and the cost of licence renewal and spectrum could also be high, thanks to the recent corruption scandals. No doubt, the sector has outperformed the benchmark indices, driven by improved operational performance and earnings upgrades over the past few quarters, but the headwinds continue.

The next six months are critical for the sector as a lot of the regulatory issues may get ironed out by then. However, the tariff war in the voice space should continue, as new players have failed to find acquirers and, therefore, continue with their attempts to capture market share.