After a few years of hiatus, the telecom sector is looking up as the gradual dissipation of regulatory uncertainties exemplified by the successful conclusion of the spectrum auction and liberalisation of mergers and acquisition (M&A) norms is being supplemented by an improvement in operating performance and player profitability.
Compared to the previous two auctions (November 2012 and March 2013), participation was far better in the auction process this time around. The aggressive bidding will raise the net debt levels of an already highly-leveraged industry. Even then, there is still a reasonable business case for the large incumbents in the industry.
The new M&A norms announced in the third week of February will accelerate much-needed consolidation in the telecom sector. Relaxing subscriber and market share norms and allowing the merged entity to hold up to 50 per cent of spectrum in a particular band and 25 per cent of total spectrum in a circle will allow large incumbent operators to acquire mid-sized and smaller rivals in individual circles. It will also offer an exit window for financially-stretched smaller operators.
But consolidation activity will not pick up overnight; rationalisation will take a couple of years to be achieved. When the shake-out eventually ends, we expect 5-6 operators to survive in each circle.
Standing in the path of early consolidation are factors such as the leveraged balance sheet of most operators, the one-time fee for excess spectrum, and the requirement to pay an additional fee to the government for spectrum not acquired through auctions. This essentially means that an additional payout will be needed to acquire operators such as Aircel and Tata Teleservices, as most of the spectrum allocated to them is at the administered price.
On the ground also, the performance of the sector is on a gradual uptrend, with the number of 3G subscribers, and average revenue per user for voice and data services increasing at an impressive pace.
Data revenues will continue to grow at a robust pace in the next few years, and will propel overall industry growth. Over the longer term, consolidation and the higher cost of acquisition of spectrum will result in an improvement in players’ pricing power. But one single player will play a crucial role in determining the extent of that pricing power: Reliance Jio Infocomm.
Reliance now gets to complement its proposed 4G data offerings with voice, but acquiring subscribers from competition will be critical for it given the high tele-density and data usage in crucial circles. Reliance will, therefore, have to cut tariffs and offer attractive packages to wean subscribers from competition; its returns in the metros and Category A circles will critically hinge on its success on doing so. This will curb the pricing power of Bharti Airtel, Vodafone and Idea, which would naturally seek to offset the outgo on spectrum acquisition through tariff hikes.
The stage is, thus, set for some very interesting times in the telecom landscape.
The author is Director, Crisil Research.
