Rating agency Fitch Thursday said consolidation is on the cards for the Indian telecom sector as the weaker and smaller telcos may either get acquired or will merge with each other to improve financial health.
"We believe that, in the long run, India can support only six profitable mobile telcos...the Indian telcos are waiting for the relaxation of M&A guidelines which we believe will be announced by the end of this year," Fitch Ratings said in a statement.
The agency said lack of clarity over the merger and acquisition (M&A) guidelines and, in particular, spectrum acquisitions have prevented any consolidation in India so far.
Fitch said only the top (three to four) operators make a profit, while the rest suffer EBITDA losses and have stretched balance sheets.
"Overcapacity will decline in both the Indian and Indonesian telecom industries over 2014-2015," Fitch Ratings said.
"This is because some of the weaker, smaller telcos are likely to be either acquired by larger telcos, or to merge with each other to improve their financial and operating position," it added.
The agency said smaller telcos continue to struggle to gain market share or achieve positive EBITDA and their strategy of relying on the fast-growing data market is no longer working.
"They are unable to achieve meaningful scale and generate significant profit from the segment amid competition from larger telcos," it said.
The ratings agency said consolidation should improve small telcos' declining profitability as cost synergies are realised and voice tariffs benefit from lower competition.
"Mergers should also lead to lower capex as network infrastructure investments need not be duplicated. Less intensive price competition in the data segment should benefit all," it said.
Fitch said the Indian and Indonesian telecom markets are similar as there is a wide disparity in size and credit strength between the top three operators and the rest in both the countries.
Both markets are currently characterised by fierce competition, with 8-10 operators, it said.
However, the top three Indonesian companies have greater ratings headroom to make debt-funded acquisitions, supported by strong parentage, moderate leverage and high profitability, and an overwhelming combined market share, Fitch added.
"The Indian market is less profitable and more fragmented, and the top three telcos have relatively weaker balance sheets - which are more likely to be adversely affected by debt-funded acquisitions," it said.
The top three in Indonesia together account for over 85 percent of revenue market share, whereas in India their combined share is just 70 percent, it added.