The Indian telecom sector is facing several challenges. The uncertain regulatory environment has not only affected telecom operators’ profitability but has also impacted investors’ perception about the sector. However, the future outlook is positive as operators take initiatives such as tariff hikes and cost control measures to improve profits; and devise strategies to tap opportunities in the data segment, which is expected to witness significant growth due to the proliferation of smartphones and tablets, and the adoption of value-added services (VAS). Key operators share their perspective on the road ahead for the telecom sector...
What is the future outlook for the sector?
Sandip Basu
There is uncertainty regarding regulations and policy, which has impacted investor confidence in the sector. Banks and lenders are concerned about sector growth. Moreover, foreign direct investment (FDI) has plunged to its lowest levels, thus impacting business growth and the employment scenario.
Meanwhile, the next level of growth in terms of subscriber addition would be driven by suburban and rural markets, which are expected to add about 300 million users. Moreover, there will be an improvement in the distribution system for SIM cards, which was earlier influenced by the arbitrage mechanism. The mechanism encouraged the adoption of multiple SIM cards instead of subscriber recharge, which led to an increase in the number of inactive subscribers.
On the financial front, though revenues have been stagnant over the past few quarters, the second half of 2013-14 could witness a positive trend.
Himanshu Kapania
Despite the sector slowdown, voice and data services markets will continue to witness growth. Currently, there are 700 million voice subscribers, as per the Telecom Regulatory Authority of India. Of these, 30-40 per cent have multiple SIM cards, which implies that the subscriber base is much lower than that provided by the visitor location register. Therefore, the voice segment will witness the addition of another 350 million subscribers, who will be the first-time users in rural and semi-urban regions. Additional telecom towers will be required to accommodate new users as spectrum availability is an issue.
There has been an increase in data service uptake by enterprise and high-ARPU customers due to the growing use of social networking sites and video applications. Over the past year, Idea Cellular’s data subscriber base has increased from 7 million to 22 million, while data traffic through its network has grown to about 170 MB per day.
To encourage voice users to adopt such services, operators would need to make large investments in areas such as sales and marketing, and technology. Also, development of the ecosystem will provide a fillip to data service growth. The availability of affordable smartphones and provision of local content will be crucial. Going forward, operators would target rural and semi-urban customers.
C.S. Rao
The outlook for the sector remains positive with several growth opportunities for operators in the future. First, 300 million customers in the semi-urban and rural areas are yet to be provided voice services. Operators will need to meet their communication requirements to achieve the next level of growth.
Another opportunity lies in the enterprise customer segment, which offers higher margins. Several operators are tapping this segment to drive revenue growth. Reliance Communications (RCOM) has 85,000 points of presence and 200,000 km of fibre networks, and monetising these assets for revenue growth and improved service delivery are key focus areas.
Data service growth is also offering major opportunities for the Indian telecom industry. The sector has witnessed the uptake of high-bandwidth data services over the past few years, following the launch of 3G/4G services. Data traffic growth has increased by over 100 per cent in the past year.
However, there are challenges in 3G and 4G service provisioning. There have been concerns regarding the quality of 3G services as operators hold only 5 MHz of spectrum in the 2100 MHz band. This limits their ability to meet customer expectations in high density areas. One of the solutions is deploying carrier aggregating technology across bands. Meanwhile, the issue of scalablity associated with the technology is expected to be resolved within the next year.
For 4G services, the biggest challenge is the availability of long term evolution devices. Also, spectrum in the 700 MHz and 2500 MHz bands needs to be allocated to operators for higher data throughput.
Anupam Vasudev
The Indian telecom industry, which has so far largely relied on voice, is witnessing a paradigm shift towards data, which is poised to be the next growth driver. Moreover, the growing data usage has been led by the proliferation of social media and communication applications; and the growing adoption of smartphones, tablets and innovative plans. The rapid growth of VAS and data services is expected to account for a major share of operator revenues.
What are your expectations with regard to regulatory and market developments?
Sandip Basu
There has been uncertainty in the sector as several policies and regulations including those related to 3G roaming agreements, retrospective charges and spectrum refarming are being implemented in isolation. A fragmented approach and policy paralysis in critical areas have resulted in the absence of a comprehensive regulatory landscape. This has restricted operators from formulating long-term strategies. As a result, most of these regulations have been challenged by the operators. Further, the government is trying to maximise revenues from various fees and charges to meet its budget targets. Going forward, it should take the responsibility of facilitating telecom growth. A stable policy is required to ensure long-term sustainability and financial viability of the sector. The government must address issues related to spectrum sharing, and mergers and acquisitions. Also, an effective exit policy would ensure better decision-making regarding investments.
Further, the government needs to modify the current tax regime, under which the total tax (inclusive of levies) for an operator stands at 32 per cent vis-à-vis 5-7 per cent in Southeast Asian markets. Moreover, it should revise spectrum charges and licence fees. The government also needs to consider awarding infrastructure status to the sector, which will ensure favourable terms for loans.
To address issues related to auctions, the reserve price of spectrum should be revised and should be market determined in the future.
The government should also refund the licence fees of operators whose licences were cancelled in February 2012. Also, they should be adequately compensated for business losses. Meanwhile, the interest of foreign investors should be protected through amicable resolutions to legal issues, etc.
To encourage the adoption of green energy solutions, the government should provide a 100 per cent tax break for expenses on deploying these solutions.
Himanshu Kapania
The uncertain regulatory and policy environment has led to the exit of some operators from the market, while others have scaled down operations.
This regulatory flux is expected to continue in the near term. The government will have to address this issue by formulating a stable, pro-consumer and pro-competition policy for the sector.
One of the key issues is the limited spectrum available to operators. Though the government holds about 4500 MHz of spectrum across frequency bands, only 1800 MHz of spectrum is allocated to the operators. The disagreement regarding 3G roaming pacts can also be attributed to the limited spectrum availability with operators. Therefore, it is essential for the government to allocate adequate spectrum at reasonable prices.
Also, several operators have either exited the market or shut down operations in certain circles. Other companies that want to sell spectrum and their assets, and exit certain circles to become regional players, have been unable to do so. Consequently, there is a need for the government to formulate a comprehensive merger and acquisition policy.
C.S. Rao
There has been significant uncertainty over the past two years, but the government’s decision on key regulatory issues such as spectrum sharing has provided some clarity. It has also outlined a road map for future spectrum allocation. Also, spectrum has been liberalised, implying that any technology can be used to offer any type of service.
Some of the expectations from the government are:
• Infrastructure status should be granted to the sector
• 100 per cent FDI should be allowed
• Clarity required on the definition of annual gross revenue
• A Telecom Finance Corporation should be set up on the lines of the Power Finance Corporation.
• A tripartite agreement involving the Department of Telecommunications, operators and lenders should be introduced for spectrum acquisition.
Anupam Vasudev
Despite the regulatory and policy uncertainty, the sector is witnessing signs of recovery and is expected to grow going forward. This growth can be facilitated by providing a stable policy regime.
High opex has led to a profit decline for operators. Active infrastructure sharing will enable operators to reduce costs and capex, thus improving their profitability. The year 2013 looks promising for Aircel as it intends to focus on data.
What are your expectations with regard to growth and profitability?
Sandip Basu
Intense price competition among operators has impacted revenue growth and reduced margins. Even after consolidation due to cancellation of licences, the market remains competitive. Also, the applicability of home tariffs while roaming will impact operators’ profitability.
The recent spectrum auctions have added to the high debt levels of several operators. This has resulted in a reduction in innovation and investments as sourcing funds from banks and financial institutions has become challenging.
Going forward, profitability is expected to improve as tariffs would increase by 10-15 per cent, which will lead to an improvement in the EBITDA margins from 25 per cent to 30 per cent.
Operators will need to adopt a new pricing policy, under which tariffs vary across regions. Moreover, they will need to strike a balance between a 5 per cent tariff hike and a 1 per cent subscriber loss. Also, they will increasingly adopt the outsourcing model, which facilitates cost reduction and thereby improves profitability.
Himanshu Kapania
Telecom sector growth has slowed down in the past three years. Intense competition, low tariffs and an uncertain regulatory environment have led to a decline in investments. The sector needs a push from all stakeholders, including the government, operators, banks and financial institutions.
The voice market has remained stagnant as the increase in the subscriber base has been compensated by a decline in tariffs. However, this market is expected to grow by 10 per cent in the next year. Tariffs and subscriber addition will contribute 3-4 per cent and 7 per cent to this growth respectively.
C.S. Rao
On the cost front, the company is taking optimisation measures to ensure better margins. It is trying to increase the utilisation of its radio access network from 45 per cent to 65 per cent, which will improve the network loading form factor. The company is also trying to opitimise costs incurred in strengthening the backhaul network and intends to achieve a network loading form factor of 40 per cent, which is 28 per cent currently. Outsourcing of networks is another measure taken by the company.
Despite cost optimisation, operators need to hike tariffs to improve revenues and margins. However, this may lead to subscriber churn. Therefore, operators need to strike a balance between the tariff increase and the consequent subscriber loss. We are expecting a 5 per cent tariff increase in the next year.
Currently, data services contribute 10-12 per cent to RCOM’s overall revenues. Data revenues would increase with the growing adoption of smartphones and are expected to contribute 30 per cent to our overall revenues going forward.
Anupam Vasudev
Aircel has taken several initiatives to improve growth and profitability. These include removal of roaming charges across the country in line with the government’s decision to implement the “one nation, one rate” regime; and promotional schemes offering higher SMS, voice and data usage. The operator has also launched its mobile banking service – Mobile Money – in Chennai and Tirunelveli.
Going forward, Aircel is betting big on data services. Our data revenue doubled in 2012 as compared to 2011 and the 3G subscriber base also grew by three times. Also, with the voice market maturing, there is optimism about data services.