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Fitch Ratings expect Indian telecom industry's average revenue per minute- ARPU to improve from the current level of 43 paise per minute in 2013 as competition abates
Indian telecom companies' (telcos) gradual increase in voice tariffs demonstrates the restoration of some pricing power, which is positive for the industry following a prolonged period of price-led competition during 2008-12 which eroded profitability and weakened balance sheets, says Fitch Ratings.
Since the beginning of 2013, most Indian telcos have raised tariffs by at least 30% either by increasing the headline tariffs or by reducing free minutes. Reliance Communications - the fourth largest private Indian telco and a price-aggressor - has increased its headline voice tariff on GSM and CDMA network by 33% to 2 paise per second from 1.5 paisa per second. Earlier in January 2013, Bharti Airtel and Idea Cellular, the largest and third-largest telcos, announced reduction of promotional minutes, which effectively increased revenues from subscribers on associated discounted plans by 20%-30%.
"We expect industry average revenue per minute to improve from the current level of 43 paise per minute in 2013 as competition abates. Industry monthly churn rates are also likely to decline to 3%-4% from 8%-9% in 2012," the ratings agency said.
Competition has been easing with the departure of three operators following India's Supreme Court decision in February this year to cancel 122 licenses on the grounds of corruption during the 2008 licence allocation process. Three other operators including subsidiaries of Norway's Telenor and Russia's Sistema have significantly scaled back their operations.
Fitch Ratings said, "Only four of 10 participants make positive earnings before interest, taxes, depreciation, and amortization (EBITDA) and we believe that there will be further consolidation once the regulator relaxes M&A guidelines. The market is unlikely to support more than six profitable operators in the medium term."
Since 2008, Indian telcos have been suffering from both from tariff declines and cost pressures. Smaller operators started a price war by offering voice calls as low as one paisa per second. The prepaid nature (over 95%) of the market, growing population, and a price-sensitive customer base lured operators to fight for market share by cutting tariffs. Simultaneously, high spectrum costs resulted in a large burden on telcos' balance sheets.
Out of the four operators with positive EBITDA, net debt/EBITDA leverage ratio ranged between 2.0x (Idea Cellular) and 5.4x (Reliance Communications) for the financial year ending March 2013.
Fitch revised its outlook on Bharti to stable from negative on 13th May following an equity injection of $1.26 billion from the Qatar Foundation Endowment. Bharti's 2014 funds flow from operations-adjusted net leverage will improve to below 2.5x. The outlook revision also factored in a likely improvement in Indian tariffs and manageable regulatory risk.
Cash flows of Indian telcos will also benefit from the government's decision to allow regulatory payments to be made over the life of the licence, instead of up-front lump-sums previously. "We estimate that Bharti can absorb a maximum of $1 billion annual cash outflows whilst retaining its current rating, which should be sufficient to cover two key regulatory issues - one-time fees on excess spectrum (over 6.2MHz) and future spectrum fees," Fitch Ratings said.