Telecom stocks are back in favour, but their re- rating after tariff hikes in some service areas from mid July may be a tad premature.
Stock prices of Idea Cellular Ltd and Bharti Airtel Ltd have risen 18% and nearly 6%, while Reliance Communications Ltd and Tata Teleservices Ltd have lost 4% and 2.1% since 16 July. The benchmark Sensex on the Bombay Stock Exchange has fallen 6.3% in the same period.Idea and Bharti gained as they are relatively better placed in terms of debt and cash flows to service the debt, and have higher operational matrices like average revenue per minute and actual active users as a percentage of total user bases. Reliance and Tata are saddled with more debt and lower operational matrices, and are thus discounted by investors.
Tata DoCoMo, which triggered a tariff war in 2008, cut- ting call rates to one paisa per second leading to a savage cannibalization in the industry, again took the lead. Only this time, it hiked tariffs for new customers on 16 July.
Market leader Bharti followed and was joined by the other large incumbents, Vodafone and Idea Cellular.
The industry will have to continue paying a price for penetration, according to a study by J.P. Morgan's Malvika Gupta. The study conducted across 10 emerging markets in Asia, Latin America and Africa , showed that all markets paid for penetration growth via average revenue per minute (ARPM) declines.
ARPM is a key indicator of telecom operator health.
“The maximum period of price stability has been five to eight quarters. China Unicom has seen eight quarters of price stability recently with ARPMs at RMB16, but ARPMs continue to decline on a year-on-year basis and the ARPM is being supported by data revenue,“ the report said. India
Still, while headline penetration is around the 70% mark, in real terms of actual active users, penetration in the Indian market still hovers around the halfway mark. Does this mean that, tariffs which are already the lowest globally will have to go further down?
“Tariffs have already reached a stage when there is no elasticity left, so no matter how much lower they go, you aren't going to see an incremental rise in customer volumes,“ said Prashant Singhal, the head of Ernst and Young's telecom practice.
Some of this might have to do with the fact that in real terms, about 500-550 million active users already exist and net additions could only be to the tune of 100-150 million be- fore a realistic ceiling is hit. Added to that is the fact that urban markets are almost fully saturated and the only growth left in terms of customer additions comes from rural India.
Telecom firms are no longer chasing customer volumes for the sake of volumes but are consciously moving to revenue margin per subscriber as a key performance indicator, said Romal Shetty, head of telecom practice for India
“The second call they've made is to focus on the retention of customers who're more likely to be brand loyal rather than chase the customer who'll move for a minutely better deal elsewhere,“ Shetty said.
Telecom companies concur.
Himanshu Kapania, managing director of Idea Cellular, said the larger operators are no longer worried if customer acquisitions slow in the near term. “The main force is com- petition rather than market expansion that is at work here,“ he said.
Mature markets typically have three operators or four at the most. India
“When the tariff decline happened in 2008, there was a consumer pull towards lower tariffs through the entry of new operators. That pull is on the decline but there is no certainty at this point of time, we'll have to wait and watch”, Kapania said.
The key event that everyone is watching out for, according to Kapania, is whether the bleeding new entrants also hike tariffs to adjust their profitability or they decide to further enhance competition by taking this opportunity to further cut tariffs.
“Current trends indicate that they (newer entrants) want to concentrate on urban markets to make better returns on the investments already made rather than expand their market. If that is the force at work, then the staying power of the tariff adjustment is here”, he said.
According to the study done by J.P. Morgan's Gupta, eight quarters is the maximum peri- od for price stability, with five quarters being more common.
Periods of price increases are even smaller, lasting typically for two to three quarters, with five quarters being the longest time hikes have lasted, it found.
Periods of price increases are even smaller, lasting typically for two to three quarters, with five quarters being the longest time hikes have lasted, it found.
Indonesia's Excelcom increased rates over five quarters, but this was after about a 93% fall in ARPM over seven quarters, as it chased penetration.
In Nigeria , prices declined 18% over four years, while in Ghana India
“The emerging markets case studies across regions make it hard to argue that India
Since June 2004, when mo- bile penetration was in single digits, the number has risen sharply and is at about 73% of the total population. ARPM in India
Since June 2004, when penetration was still in single digits and ARPM was almost `1.70, it has dropped to below `0.45 for the market leaders.
(Source-: mintlive.com)
