Cellular industry presents a bleak picture, with no signs of early revival

The Rs. 1,48,792 crore cellular mobile industry, reeling under the pressures of a crippling debt of Rs. 2,50,000 crore and negative growth, is now demonstrating very little hope of early revival.

The Cellular Operators Association of India (COAI), which represents GSM mobile operators that together service nearly 700 million of the 865 million mobile subscriptions, presented a bleak picture of the telecom industry at its AGM held last week.

The AGM was attended by Telecom Secretary M.F. Farooqui and several senior officials from the Department of Telecommunications (DoT) as well as industry representatives.

While the industry hopes to hit the 1 billion subscription mark by 2014, it continues to be deeply constrained by the negative growth witnessed in 2012. Subscriber growth, after crossing 900 million in 2011-12, had dropped to 865 million, equalling 13% of the global subscription base. At the end of the calendar year 2012, the Indian telecom industry closed with revenues of Rs. 1,48,792 crore or $27 billion, a meagre 2.3% of the estimated global telecom revenues of Rs. 1.16 trillion.

According to the industry, average voice tariffs of roughly 35 paise/minute (arguably the world’s lowest) are responsible for this wide mismatch between 13% subscriptions and 2.3% share of the global revenue. Further, telecom tariffs, the industry points out, have dropped 30% in the last 4 years, even in the face of annual inflation of 7-8%.

Killer costs

The COAI has argued that the “regulatory cost” including service tax, license fee, graded spectrum usage charge and revised spectrum variable price equals nearly 40% of the customer tariff.

EBITDA margins, which are universally accepted as one of the best reflections of industry viability, have also been declining in the last 5 years. In 2012, the Indian telecom sector’s EBITDA margin dropped to its lowest level to 15%, comparing poorly with a 36.1% average for Asia’s telecom sector.

The telecom industry had invested an aggregated gross block now at Rs. 6,63,000 crore, but low returns on investments (ROI) are making operators question the value of their capital investments. They attribute these thin margins to global operators exiting the Indian telecom business either entirely or substantially, reducing their geographical presence. Telecom attracted a cumulative FDI of 8% — amongst the highest for individual sectors — but the industry claims that growing industry financial leverage of Rs. 2,11,000 crore, spent to lay Indian telecom infrastructure, coupled with regulatory and policy challenges, has affected long-term investments.

Last week the Telecom Commission cleared 100% FDI in telecom. The telecom industry placed the need for large investment to meet the NTP 2012 targets of “Broadband on Demand,” which is at risk without a massive overhaul of policy initiatives relating to spectrum, easing the financial burden and the need to review the Preferential Market Access (PMA) policy.

India currently has amongst the lowest wireless broadband penetration in the Asia-Pacific region, below Malaysia, Philippines and China and nearly equal to Pakistan at 68%.

Adoption of data by Indian consumers puts India in poor light with merely 16% of its ARPU (average revenue per user) coming from data. This is less than a fourth of Japan (64%) and much less than Australia (50%), Indonesia (41%), Malaysia (38%), China (35%) and even Thailand (22%). Even where ARPU is concerned, India ranks low with Indonesia and Pakistan.

Slow 3G, no 4G

Indian consumers and the telecom industry are yet to transition to 3G and 4G, with 88% of the Indian subscribers still using 2G and barely 12% on 3G. South Korea, a leader in 4G, along with Australia, Singapore and Malaysia, was the first to transition in the Asia Pacific region to 4G services. Even China and Indonesia already have a fourth of their subscribers using 3G.

The industry’s total debt (see graphic), up 200% from Rs. 82,726 crore in 2008-09, to Rs. 2,50,000 crore in 2012-13, additionally brings the sector under tremendous financial pressure. Some residual hope for future revenues comes from the expectation of hitting the 1 billion subscriber mark by the end of 2014-15, wireless broadband subscribers crossing 100 million in 2013, and IP traffic (which has been on a steady growth path) doubling between 2012-14.

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