Next 24-36 months will be most difficult for Indian Telecom companies but best for subscribers. Most of the Fund managers are now stating to take a cautious call or a ‘Warning’ messages to investors.
Normally when any business which is great for consumers is best for the Company, but Indian Telecom Operators are different here.
What happened suddenly which changed the Market dynamics & impacted Balance Sheets and P&L of the companies?
Most telecom companies will now be adding significant amount of debts to their Balance sheets. Debt to Equity ratio for leading Telco is increasing. Bharti only had 75 paisa as debt which will now be almost Rs.3 for a Rupee of Equity. Obviously this skewed ratio is also because of purchase of Zain’s Africa assets few months ago, but not only because of this.
In case of Idea its debt to equity ratio will go from 0.67 to 0.96 in just year’s time. Reliance Communications Balance sheet is already highly stressed and has not improved after paying the 3G spectrum amount. Same applies to all 3G spectrum winners.
Interesting part is all the leverages coming to Telco’s are at a time when there revenues are steadily declining Quarter on Quarter (QoQ). Indian Telecom Operators says they are in Business of “Manufacturing Minutes” and it will increase as more and more operators launch their services that have been granted license to provide Unified Access Service (UAS) to consumers.
‘Minute’ Statistics:
Quick recap – In year 2008 Indian Telecom Industry Manufactured 250 Billion minutes. Currently it is manufacturing 600 Billion.In year 2008 it sold each minute for 60 Paise today it sells it for about 35 paise.The running cost of Manufacturing this minutes without taking sunk cost into account is stuck at around 25 paise per minute.Above stated is the case of Airtel, which has the lowest cost, because of its completely outsourced Business model. For rest it is even higher.
In coming months there will be much ‘free cash’ flowing out of the balance sheet to battle in the market for all the operators and here Bharti is also no exception.
What is changing Business Dynamics:
All 4 parameters which define the Industry have turned adverse now:
1. Customers
2. Competitiveness
3. Regulations
4. Raw Materials
Population (Potential Customers) was one the biggest pain reliever for Telecom Company, but now customers have changed behaving like they use to a decade ago. One cant even blame them, as telecom operators manufacture minutes and customer buy those minutes and cycle goes on. As per Telecom Operators there are around 30% of customers today using more than one SIM card.
As per the Research there is class of the people who owns 17-18 Active SIM cards, this means customer keeps one Primary SIM card which gives him constant connectivity (prime purpose) and they uses other SIM cards for cheaper phone calls (outgoing), SMS & Data usage base on the tariffs of secondary operator.
This can be equated through ARPU (Average Revenue per User) as Airtel having ARPU of Rs.220 is mostly a primary SIM whereas Uninor with ARPU of Rs.92 can be Secondary, tertiary or even quaternary SIM in the market where there are as many as 12 operators.
Either you cut prices directly with complicated plans or device an Intelligent tariff plan which does the “Perception Management” in mind of Consumers – Same way Tata DoCoMo did it with its per second billing last year. Bharti responded by cutting prices on various plans, but soon each operator had to jump into the mud-bath. Results were not good for any. Telecom earnings started dropping sharply even though subscriber’s additions were creating new bench marks every month.
All the top operators revenue dropped from around 7-10% in each quarter of last fiscal year. At the same point of time Revenue per Minute also saw a continuous decline of around 6-7%. And this is what is putting the pressure on financials as the cost of manufacturing minutes is not declining too much.
This pressures has now given birth to a new concept of calculating “Profitability Per Minute” (PPM) and now this has become one of the most critical criteria’s of delivery which earlier used to be only “Subscribers Addition”.
Another Bad news is that cost of Manufacturing minutes will zoom up in short time – primarily because Telcos have paid 9 times the base price in Mumbai and Delhi & 5.7 times in Bihar in recently concluded 3G auctions. Nobody expected such higher prices not even Telecom consultants, Analysts, Fund managers, not even the operator themselves & not even Government who hosted the auctions. Basic expectations were 2-2.5 times the auction price, but now the operators have given full stress to their balance sheets.
One important Strategic aspect here is, Operators have used Voice revenues they earned for the auctions as Data revolution is yet to arrive in India and 3G will be the door for that. Another strategic move is, over last 7 years this is the biggest chunk of spectrum Govt has released. Although Govt. failed in creating spectrum capacity as all the 12 operators wanted to have it and that is the prime reason why spectrum is being sold at premium price. Telecom operators are clear that subscriber Acquisition is the only thing till 2012-2013 as there is still lot of potential untapped (India has only ~ 51% wireless Teledensity) and then to convert the same customer base from Voice driven market to Data Driven Market.
Capital Expenditure to upgrade infrastructure to support 3G will cost between $500 million to $1.5 Billion depending on the operator and hence profitability will decline. As per the global trends, over next 18-20 Months EBITDA for most of the companies may get down by 2-3% from their current position. For Eg. – Reliance Communications has seen EBITDA slide from 41% to 31% in last 6 quarters.
Even a decade ago such turmoil affected the Indian Telecom Industry, but it handled all four critical parameters in strategic way. This time also for Industry this is the Road less travelled but Vision & Goals are clear to achieve it.
About the Author:
Tejas Dave is Regional Telecom Research/Business Analyst associated with one of the leading Telecom Operator in India. Previously he has worked with other Telecom operators and Worlds Largest Tower company. His role primarily gives him an opportunity to closely work with senior leaders of the Company,Industry and Government. He is also associated with Academic and professional organisations like WB India & AMA.
Pratap Madgulkar April 1, 2011 at 7:41 pm
too good information presented here …
Here I wanted to tell everyone , that this telecom co. are spending too much and then trying to take it from us .
Just want the ads , filmstars / cricketers and other logo change and music .
better they all know now that after MNP only service is base and custCare is another imp thing .
when a ambani can see the future of India calling any person 15p/min (less than postcard price) , there must be a chance to do this .
If this companies save that useless compitation cost of adv and provide better service , they cn still cut the rates .
In india people are price sensitive . also they can provide advt tunes b4 call to genrate amts.
they take 30Rs avg pp / pm for a song to be played as tone … 99% profit here
same way sms still few ppl take 25p that is 95% profit
there shuld be a different model for India . EU / ANZ / US model will not work here. this is same like oil co.
every time they provide some price for petrol & other things are in loss ans final balance sheet is full of profit …
chirag shah April 1, 2011 at 1:06 pm
Dear Mr. Tejas Dave,
What do think of getting company mergering ….. are you doing any analysis about the same if yes do share with yes…. since now all the new telco’s are having shared infra…… with GTL , VIOM, Indus do you feel that can reduce some opex …. and they have more better approach towards market
S Adnan April 1, 2011 at 1:05 pm
I think now more and more p eople will comment here out of temptation….
Only a small number of people will go for 3G due to the cost of the data plans and expensive mobile price of 3G enabled mobile phones India.
Amit.G April 1, 2011 at 8:49 am
@Srihari Kolusu
your idea of banning dual sim phones and converting prepaid to postpaid is baseless.
postpaid services loot lot of money, u dont even cme to knw when did u spoke for 1500rs!!! prepaid is very good choice, revenues can be increased by reducing operating costs,hiking tariff from current 30p/m to 40p/m and reduced payment to brand ambasadors. Do u knw airtel spent 300crores to change its logo n music.
Srihari Kolusu April 1, 2011 at 5:37 am
Analysis on Telecom Revenues are appreciatable and i personally congratulate Mr.Tejas Dave for giving us Valuable Information. It is all about Market Dynamics, operators has to follow the trend, very simple logic – customer will take Sim only when he get very good Competitive offer. Thats why he is taking separate sims for Voice, Data & SMS.
TRAI has to come with following recomandations:
1. One person one Sim.
2. Ban all Dual,Triple Sim handsets in India.
3. Convert Prepaid to Postpaid (Only Postpaid Connection in India).
Recomandations to Operators:
1. Give Quality Customer Care Services.
2. Decrease OPEX.
3. Reduce Wasteage of Resources.
Azar March 31, 2011 at 5:01 pm
@Emad
I guess better u should be banned permanently as most of the time u ll be telling non sense, First Docomo & now uninor
rajiev March 31, 2011 at 4:49 pm
why emad!
Emad March 31, 2011 at 4:46 pm
Telenor should be banned permanently
rajiev March 31, 2011 at 4:12 pm
means no network complain on tata docomo network!
Amit.G March 31, 2011 at 4:10 pm
@PD
It is doubted tat both etisalat and telenor may pose threat to national security as they may share information to pakistan. but both companies have told govt not to tell like tat as they are multi national companies and this type of rumour will affect ter brand image throught the world, instead they are ready for any sort of investigation wrt this.
Amit.G March 31, 2011 at 4:06 pm
@PD
@PD
CBI is doubting that essar is having stake in loop mobile too, but according to NTP no company is allowd to hold shares in 2 companies, even reliance had share of 10% in swan telecom now etisalat, tats t reason y these companies are getting trashes.
loop will act as though it doesnt know essar or else it will be terminated from services.
even AIRCEL is said to have links with terror outfit LTTE.
Mustan March 31, 2011 at 3:51 pm
Its all over the Print media and television
Emad March 31, 2011 at 3:47 pm
C.B.I is tracing you beware!!
saurabh gupta March 31, 2011 at 3:40 pm
sorry to say but that might be an technical error as i dont face this kind of isuue ever with my tata docomo……….
saurabh gupta March 31, 2011 at 3:37 pm
t u mad or some agent of another company i m using TATA DOCOMO from last 16 months and its very supporting and its from the house of tata which means trust and please dont comments like that without any proof………
rajiev March 31, 2011 at 3:30 pm
bechara yash ,koi nahi sunta uski
PD March 31, 2011 at 3:15 pm
Then what will happen to loop…..who will use loop……!
yash March 31, 2011 at 3:02 pm
GUYS M NOT BLAMING DOCOMO WITHOUT ANY PROOF,2 DAYS BACK I HAD SEND FEW SMS’s to my frns no. But in a next bit i got a call frm unknw no. And he claimed that he was also getting my sms thn i askd him send me those sms which u hv recivd frm my no. AnD THN I WAS SHOCKED HE SEND ME D SAME SMS WHCH I HD SEND TO MY FRNS NO. LET ME CLEAR U HERE THT EITHER ME OR NTHR MY FRND KNW THAT PERSON ,M REALLY V V SAD
PD March 31, 2011 at 2:53 pm
The “Perception Management” haa….. The operators should cut their per celebrity pay out for the loathsome ads. Per 10 sec cost, as read, in TV ad is nearly 30 lakhs during the last world cup final.. No operators, as on now require the celebrity punch. Change the MANAGEMENT perception now…… None will opt or even change, just by seeing the ads…
Amit.G March 31, 2011 at 2:36 pm
@MaNoJ
Economic times, Mpaper
MaNoJ March 31, 2011 at 2:27 pm
How can you blame to DOCOMO without any proof.
If you have just comment and save the people!
MaNoJ March 31, 2011 at 2:25 pm
What is the source of the news?
ARJUN March 31, 2011 at 2:23 pm
RAJA AND OTHERS LIKE SHAHID BALWA HAD TO BE HANGED. BECAUSE OF THOSE IDIOTS ONLY TELECOM INDUSTRY HAS GONE WORSE
Amit.G March 31, 2011 at 2:22 pm
BREAKING NEWS:
DOCOMO TO INVEST 800CRORES IN TATA FOR NETWORK EXPANSION
VODAFONE WILL BUY ESSAR’S 33% STAKE FOR 5BILLION DOLLARS
MaNoJ March 31, 2011 at 2:16 pm
The last two paragraph of your comments are awesome
LOL..
Amit.G March 31, 2011 at 2:05 pm
This is very sad thing, when india was in recession as all IT companies were out of pace, it was telecom sector which generated 36% of total revenues to govt. now the situation has gone worse, ppl are misusing the offers given to them, it costs 200rs for an operator to acquire one customer. now bcos of 2G scam even telecom shares have cme down. but its for sure in future we will find 6 operators/circle n all will be charging same tariff. this trend wont be ter for many days!!!
pankaj March 31, 2011 at 1:51 pm
dont say stupid things docomo is the best nd i am sure it is the best
yash March 31, 2011 at 1:39 pm
AN IMPORTANT WARNING FOR ALL GSM TATA DOCOMO USERS- DOCOMO IS PLAYING WITH UR PRIVACY ,U GUYS EVEN DNT KNW WHERE UR SMS R GONE,OH MY GOD PLS SAVE US FROM THESE DEVILS
yash March 31, 2011 at 1:37 pm
NICE ARTICLE BRO
Kritika March 31, 2011 at 1:23 pm
Thanks Tejas for sharing Nice insights of Telecom Business.
Its very rare to find such interesting information in one single article.
Thanks
Sanjay Bhagat March 31, 2011 at 12:58 pm
In india all have a big problem they wanted to increase their subscriber base.
They beleive that if subscriber base is increase ARPU & revenue will increase but it is not necessary . Now a days all operators give new new scheme . You go in a local market their u will find out many retailer give u free sim with 90 rupees talktime becuase area manager only want to increase subscirber base & he give commision to relater if sim customer talk 5 rupees after activation of sim.
And one more thing i want to say if u do business in market u always find many compitiors but u should have to find out how make money but existing customer & U mention “Operators have used Voice revenues they earned for the auctions ” but i think in coming days u will find out free locals call in a state only u pay for downloading & std calls. SMS pack will be also free because of comptition .
So I think that In india goverment approved only 6 big telecom players those have 2 & 3G both spectrum & cancelled only 2G spectrum operators because in future all have 3G mobile , 3G netowrk where no one use only voice chat …
Thanks
Sanjay Bhagat
Abhijit March 31, 2011 at 12:54 pm
I m also in that class of people as I own all operators sim card of gsm & cdma both. 2 as primary numbers and others for just use their new activation benifits and then throw it.
Manisha March 31, 2011 at 12:52 pm
Good article.
Bharat March 31, 2011 at 12:40 pm
Nice article..something really about telecom industry