After a long lull, the year 2014 brought back a sense of optimism in the telecom industry. The year was marked by several important developments. It started with the telecom auctions for the cancelled licences of 2008, wherein the government received bids worth Rs 611 billion. It also saw Bharti Airtel, the country’s largest operator, registering its first growth in profit after many months of decline. Reliance Jio Infocomm Limited, which is yet to commence operations, bid for 2G spectrum. The sector’s revenues also grew, driven mainly by an almost 100 per cent increase in data revenues.

There was progress on the regulatory and policy fronts as well. Foreign direct investment (FDI) approvals to various foreign operators sent out a positive message to investors. Also, the Make in India initiative and fund allocations for domestic equipment manufacturing are likely to help reduce telecom equipment imports and increase FDI flows into this sector.

However, several key issues still remain to be addressed. These include restrictive merger and acquisition (M&A) clauses, and lack of regulations for over-the-top services and clarity in the spectrum roadmap. Spectrum refarming and sharing policies are also awaiting government review. In addition, a comprehensive review of the definition of adjusted gross revenue and rationalisation of taxes and levies is crucial.

tele.net takes a look at the key highlights of 2014 and the emerging trends…

Spotlight on spectrum

The year started on a positive note with a successful spectrum auction, which saw the government raking in over Rs 600 billion. The success of this auction was instrumental in restoring sector confidence, given the backdrop of two failed auctions (in November 2012 and March 2013). There was intense competition (Rs 235.89 billion for 46 MHz) for acquiring the more efficient spectrum in the 900 MHz band in the metros during the auctions.

The sector is now preparing for another round of spectrum auctions, which was recently approved by the union cabinet. In the spectrum auction, the government will sell 380.75 MHz of 2G spectrum in three bands – the premium 900 MHz, 1800 MHz and 800 MHz bands. Spectrum in the 2100 MHz band might also be put up for auction simultaneously after the defence ministry vacates it. This will be the biggest ever spectrum auction in India and is likely to fetch the exchequer at least Rs 648 billion.

Inching towards the 1 billion subscriber mark

From a subscriber base of nearly 915 million as of December 2013, the industry reached a subscriber base of 964.2 million as of November 2014, registering an increase of 5.4 per cent. This was largely on account of the growth in the number of mobile subscribers. It is important to note that even though the mobile subscriber count has come close to the 1 billion mark, the overall growth rate has slowed down. The number of wireless subscribers increased by around 6 per cent, from 886.3 million as of December 2013 to 937.06 million as of November 2014. The corresponding period in 2013 witnessed an addition of only 16.41 million mobile users.

The highest growth was recorded in the quarter ended December 2014. While the Telecom Regulatory Authority of India is yet to release the data for December 2014, over 22 million users were added in October and November 2014. In contrast, during the quarter ended September 2014, there were 18 million net additions in the mobile segment.

Meanwhile, the number of wireline users declined by 4 per cent from 28.89 million as of December 2013 to 27.14 million as of November 2014.

Data finds its niche

Despite slow growth, several mobile service providers started witnessing an upside in their ARPUs. This could be due to better pricing, improving realisations or a boom in data volumes.

During 2014, telecom operators gained heavily from the rise in mobile data usage, which was driven by applications such as WhatsApp, Facebook, WeChat, Viber and Skype. The impact was evident in their financial results. For instance, Bharti Airtel, in the period July-September 2014, reported a 94.6 per cent increase in mobile data traffic over the previous year, accounting for 11.1 per cent of its total revenue. Idea Cellular reported an increase of over 125 per cent in mobile data revenue during the same period. Vodafone India reported data revenue of Rs 25.53 billion in the first half of 2014-15 and it now contributes 13.5 per cent to the company’s service revenue.

An encouraging trend has been the increase in the adoption of rich media-based services by data users. While this trend is currently limited to a few cities, it is set to grow in the coming years, thereby setting the backdrop for the launch of high speed 4G services.

Mixed broadband performance

While the anticipated big shift to data has not taken place yet, data as a business witnessed significant growth during 2014. The availability of low-cost smartphones gave the much-needed stimulus to mobile broadband and increased overall data consumption. The number of wireless (mobiles and dongles) broadband users increased from 40.27 million as of December 2013 to 66.56 million as of September 2014.

Currently, about 93 per cent of the 259 million internet subscribers in the country access the internet via mobile devices and the total mobile broadband connections in India stand at 79.2 million.

Among the available wireless data services, the adoption rate for 2G-based internet services remains the highest. However, the growth rate of 3G services also picked up pace. This was made possible essentially because of competitive offerings such as dongles and 3G data services available at better prices as well as the rapid roll-out of 3G infrastructure by operators. 4G technology is still at a nascent stage, with Bharti Airtel being the only operator at present to have made some progress in terms of a roll-out. However, in order to fulfil the roll-out obligations, all 4G licensees are expected to launch these services in 2015.

As compared to the mobile broadband market, the home broadband segment remained an underperformer. Players who had invested significantly in fixed infrastructure such as optic fibre cable were able to deliver better services. However, this was not a pan-Indian phenomenon and remained concentrated in a few cities. The government’s Digital India initiative and move to make telecom a priority sector for research and innovation are likely to provide a fillip to the industry.

Debt management

Many operators tried to improve their margins by undertaking various operational restructuring exercises in order to manage their highly leveraged balance sheet.

For instance, Bharti Airtel was able to cut its $10 billion debt (net debt at Rs 622.15 billion as of September 2014) by 10 per cent with the sale of 4,800 towers in Nigeria to the American Tower Corporation for $1.05 billion (Rs 64.6 billion). Prior to this, the company had sold 6,600 of its Africa-based towers to Eaton Towers and Helios Towers for a reported sum of $1.4 billion (Rs 84 billion).

Idea Cellular too reduced its net debt by more than Rs 73.5 billion in the first half of 2014-15 and is more comfortably placed on parameters such as interest cover and overall leverage compared to its peers.

In contrast, some operators are finding it difficult to reduce their debt, thereby leading to suppressed margins. Reliance Communications (RCOM) is one such player. As of June 2014, the company had a net debt of Rs 402 billion. For 2013-14, the net debt to earnings before interest, taxes, depreciation and amortisation ratio was 5.2, as compared to 2.3 and 2.4 for Bharti and Idea Cellular respectively. The deleveraging process, however, is picking up. Recently, the company raised Rs 61 billion through a qualified institutional placement and warrant issuance to promoters. Following this, its net debt stands at Rs 355 billion; this should help save Rs 6 billion in annual interest costs. In 2015-16, RCOM may reduce its debt to Rs 250 billion through the securitisation of its tower proceeds, a stake sale in Global Cloud Xchange (formerly Reliance Globalcom) and monetisation of real estate.

Incumbents gain as competition eases

While none of the planned M&A deals between operators could materialise during 2014 due to policy uncertainties and lack of clarity, the year did witness some indirect consolidation in the industry. Customer preference shifted towards big players that offered stability, security and good network coverage. This trend is evident through the increased share of a few operators in the total subscriber base vis-à-vis others. The share of some incumbent telecom operators including Bharti Airtel, Vodafone India and Idea Cellular in terms of both market share and revenues increased during the year. These companies are now posting an increase in profits as the competition has reduced in most of the service areas where they operate.

Among the newer operators, Telewings (erstwhile Uninor) made strong inroads into the sector during the year. The operator’s share in the total subscriber base increased from 0.38 per cent as of December 2013 to 4.53 per cent as of November 2014.

Betting big on m-commerce and financial inclusion

In India, m-wallets and m-commerce picked up pace in 2014. From e-commerce companies to radio taxi operators, m-wallet usage was being promoted significantly. As per market estimates, mobile already accounts for 11 per cent of e-commerce sales and its share is estimated to increase to 25 per cent by 2017. In 2015, m-commerce will become more important as most of the companies are shifting to it. This is likely to pose a significant opportunity for telecom operators to increase revenues.

Another ongoing trend is the tie-up between banks and telecom companies for the payments bank model proposed by the Reserve Bank of India. Payments bank licences to telecom companies would result in better financial inclusion and help in increasing reach. Further, according to sources, about 115 million bank accounts have been opened under the central government’s Jan Dhan scheme. These accounts will be activated by RuPay cards and later through mobile phones as well. Above all, a natural evolution to hassle-free transactions augurs well for the mobile payments segment.

Outlook for 2015

Overall, 2014 had been a year of mixed results for the sector. While there was a lot of ambiguity on the policy and regulatory fronts, the sector is certainly back in growth mode.

The year 2015 is expected to be significant for the industry as a large number of issues and challenges are likely to be addressed by the government. First, there will be a resolution of spectrum issues due to the expiry of licences of several incumbent operators. The industry is expecting a big-ticket multiband spectrum auction slated for early 2015, which is likely to witness aggressive bidding as operators vie for airwaves to ensure business continuity. Once these operators are able to buy back the necessary airwaves, they can refocus on their operational aspects. The industry is also expecting firm guidelines on spectrum trading and refarming.

Going forward, industry players can expect a profitable year as data services pick up. With major operators preparing for the launch of nationwide 4G services, mobile broadband will experience exponential growth even though overall subscriber growth may remain slow.