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.
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:
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.