Profitability Elusive for India's Telcos

Indian telecom tycoon Sunil Mittal thinks his country's communications sector is poised to begin a turnaround this year.

The chairman of Bharti Enterprises, the parent company of Indian service provider Bharti Airtel, disagrees with the assessment of India Ratings and Research, a Fitch company, which continues to maintain a negative outlook for the telecom industry until 2020.

"Ind-Ra believes the pricing recovery in FY20 is unlikely to be sufficient to compensate for the revenue loss witnessed in the preceding two years," said the company. "The EBITDA for the top two private telcos will improve but not to the extent that it would lead to any meaningful recovery in their standalone credit profiles."

That comment about India's "top two private telcos" is a reference to Mittal's company Bharti Airtel Ltd. (Mumbai: BHARTIARTL) as well as the Vodafone Idea Ltd. merger, which last year brought together Vodafone India and Idea Cellular. Those companies have continued to lose out to the Reliance Jio new entrant, a low-cost rival that has turned the Indian telecom market upside down.

"Ind-Ra expects Reliance Jio Infocomm Limited's (RJio) dominance to increase as it would continue to seize market share in terms of both subscribers and revenue from Bharti Airtel Limited (Bharti) and Vodafone-Idea Limited (Voda-Idea) in FY20 and could eventually emerge as the largest telecom player in the industry," said India Ratings and Research.

India's telecom sector is clearly going through tough times. Following RJio's launch of 4G services in September 2016, it has witnessed a spate of mergers and acquisitions that has left India with just three private operators, from 12 previously, as well as a government presence in each service area. Tata Teleservices and Telenor were acquired by Airtel while Vodafone and Idea merged to fight competition from RJio.

Despite consolidation, India seems to have become an even more competitive market since the arrival of RJio. Offering free services during the first six months of operation, the young company forced other players to slash prices or lose customers. Revenues and profits have fallen across the industry.

Yet the declines have been accompanied by rocketing usage of data services. Moreover, the industry now toils under debts of around 8 trillion rupees ($112 billion). Airtel, Vodafone-Idea and RJio collectively account for about INR3 trillion of those debts. Consolidation has also triggered major job losses across the sector.

Mittal said in a recent interview that pricing power is likely to return to the industry this year. RJio, however, insists that its prices will always be a fifth less than the next cheapest package in the market. If it continues to deliver on that promise, the price war seems unlikely to end soon.

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What's more, RJio is now targeting expansion in the home broadband segment of the telecom market with the launch of its JioGigaFiber brand. To support this push, it has acquired two existing broadband players, Den Networks and Hathway Cable and Datacom Ltd. Given its usual aggressive and predatory tactics, RJio's move outside the mobile market is likely to put additional pressure on the older operators.

The other challenge for those older operators is the need to invest heavily in network upgrades and modernization. Vodafone Idea recently approved a rights issue of INR250 billion ($3.5 billion) to support 4G expansion, while Airtel is investing in upgrades as well as the deployment of fiber. That will make it even harder for the industry to record profits. RJio, meanwhile, is planning to reduce its capital intensity -- or capital expenditure as a percentage of revenues -- as it completes network rollout in different areas.

On the plus side, the process of consolidation looks to have run its course. And while operators will struggle to attract new customers in such a fast-developing market, customer spending is likely to improve in the second half of the year and 2020, according to India Ratings and Research.

— Gagandeep Kaur, contributing editor, special to Light Reading

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