Telecom: Story of policy surprises, subdued growth

CARE Research has come out with its report on Indian telecom wireless industry. The research firm expects Indian telecom sector to witness higher single digit revenue growth on account of expected tariff hike as the competition in the sector declined post-spectrum auction and increased contribution from VAS, though weak subscriber addition (active) will be a drag.

Key takeaways include:
 
After years of splendid growth, wireless subscriber base shrunk by 7.7 percent during June 2012-January 2013, primarily due to removal of inactive subscribers. Active subscribers continued to grow modestly at 1.8 percent over June 2012 - January 2013 period but nowhere close to the growth of 11 percent recorded during the same period a year ago. CARE Research expects total subscriber base will continue to slide in FY14 and recover mildly in FY15. Active subscribers will continue to grow though at much lesser pace than their historical average.

CARE Research expects Indian telecom sector to witness higher single digit revenue growth on account of expected tariff hike as the competition in the sector declined post-spectrum auction and increased contribution from VAS, though weak subscriber addition (active) will be a drag. As inactive subscribers continue to decline, we expect marginal improvement in the ARPUs. Profitability will be partially impacted by increase in diesel prices as the power costs are passed on to the operators by the tower companies.

As Indian telecom industry is struggling to cope with additional regulatory burdens in terms of spectrum costs, CARE Research believes that the traditional linear model of adding more subscribers to increase revenue needs transformation. Though India is still a voice-based market, VAS is growing rapidly at a CAGR of 45 percent over last few years and is expected to continue the winning streak in the near future. One of the biggest inhibitors for growth of VAS industry is inverted revenue-share model where telecom operators keep 60-70 percent of VAS revenue, which needs to be reversed.

After reduction in 3G tariffs by 70-80 percent in May 2012, the traffic has gone up exponentially. Partial roll-out of 3G has been one of the key reasons for poor adoption as 3G BTS deployment is just 12 percent of total. CARE Research believes that 3G adoption will pick up gradually as operators will find it difficult to increase BTS deployment due to huge debt burdens. 4G in India will take longer to see major adoption due to lack of coherent ecosystem globally and absence of proven voice-capabilities as Voice-over-LTE is still under trial.

Regulatory overhang that began with cancellation of 122 licenses by the Supreme Court in Feb-2012 continues as the spectrum becomes the most precious asset for the telecom operators implying a huge cash burden for renewal, refarming and additional spectrum held. As the sector goes through one of the worst regulatory impingement, policy making has come to a standstill as the battles between the policy-makers and the players have been dragged to courtrooms, delaying the decision-making and ultimately discouraging the long-terms investments in the sector.

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