Pain to continue for telecom companies this year – India Ratings

The era of fast growth and bulging profits are over for the Indian telecom sector, at least for the short and medium term, said India Ratings, an associate of global ratings agency Fitch.

The ratings agency maintained its ‘negative outlook’ on the sector, pointing out that costs are likely to remain high in the immediate future due to various levies and charges imposed by the government recently, and the near saturation of the domestic market.

The government of India has imposed one-time spectrum charges amounting to thousands of crores of rupees on operators for letting them use spectrum beyond the amount they were promised in their licenses.

Yesterday, for example, there were reports that CDMA operators Reliance Communications and Tata Teleservices would be required to pay a total of Rs. 2,900 crore as one-time spectrum fee. However, it is not clear what the basis of the alleged valuation is — as the true market value of CDMA spectrum is yet to be determined through a market auction.

“The issue of regulatory uncertainty has now been replaced by increasing costs which will impact the financial profile of most operators, including incumbents over the short to medium term,” India ratings said. The agency already had a negative rating for the telecom sector for 2012, and has merely extended it to this year, though the reasons are different.

The agency, however, noted the operators are increasing tariffs to set off some of the negative impact.

It also said that the cancellation of telecom licences and muted response to their re-auction have resulted in consolidation in the telecom industry. “There is limited room for further consolidation in the industry. While there may be some corporate actions involving small operators, any M&A activity involving large operators is not likely in the short-term,” it added.

It said that with an already high subscriber base, there is limited opportunity for telcos to grow revenue by adding new subscribers. Therefore, India Ratings expects them to now focus on other growth levers like higher mobile data services adoption, value-added services and tariff hikes.

The Indian telecom sector comprises companies like Bharti Airtel, Idea Cellular, Vodafone etc..