Trends and Outlook

Changing sector dynamics bring opportunities and challenges for stakeholders

The past year was marked by interesting twists and turns in the telecom sector, bringing both hope and challenges for stakeholders. On the positive side, there was steady progress on 4G roll-outs, regulatory interventions on several key topics, improvement  in the call drop situation, spurt in mobile manufacturing, release of new right-of-way rules, and increased uptake of digital payments. The year also saw the dramatic entry of Reliance Jio Infocomm Limited (RJIL), which in an unprecedented move offered its services free of cost for a specific period and rolled out aggressive tariff plans thereafter. Two mobile virtual network operators – Plintron and ADPAY – also entered the market, further adding to the intensity of competition. Domestic mobile manufacturing also gathered steam, with mobile phones worth Rs 900 billion manufactured in the country during 2016-17, recording a growth of 67 per cent in value terms over the previous year.

On the downside, the industry’s financial position took a serious beating with debt levels reaching a staggering Rs 4.6 trillion and revenues spiralling downwards. According to brokerage and investment firm CLSA, during the year ended March 2017, total operator revenues declined for the first time since 2008-09. Industry revenues slumped by 2.6 per cent from Rs 1.93 trillion in 2015-16 to Rs 1.88 trillion in 2016-17. With banks joining the operators’ chorus for a bailout package, the government formed an inter-ministerial group (IMG) comprising officials of the telecom and finance ministries to look into the matter. Adding to industry woes, the Goods and Services Tax [GST] Council decided to impose an 18 per cent tax on telecom services. Telecom operators red-flagged the move saying that the increase in the tax rate for telecom services from 15 per cent in the pre-GST regime would be far more than the effective increase in input tax credit provided under the GST regime. The industry further opposed the GST since a number of key industry inputs such as diesel and electricity have been kept outside the purview of GST and there is no tax credit on telecom towers, despite the fact that towers are essential for rendering telecom services.

Consolidation remained the catchphrase throughout the year, driven by greater policy clarity around spectrum trading and sharing and operators’ attempt to achieve stronger balance sheets, potentially higher profit margins, and more firepower to survive competition. The sector witnessed two major consolidation moves. The Vodafone Group agreed to merge its Indian business with Idea Cellular to create the country’s largest telecom operator. Meanwhile, Bharti Airtel signed a definitive agreement with Telenor India to acquire the latter’s assets and customers in seven circles. In the telecom infrastructure space, monetisation of tower assets, either by sharing or fully offloading them, emerged as a key strategy for operators to seek fresh capital.

Indian Infrastructure takes a look at the key trends in the telecom sector over the past year and the way forward…

  • Data uptake surged but tariff wars led to lower realisations: The year witnessed an explosion in data uptake on the back of 4G service expansion. In fact, the year turned out to be a milestone one for 4G in India as the mass launch and uptake of services took place across the majority of cities and towns. RJIL’s launch, in particular, proved to be a key factor in accelerating the shift towards a data-driven economy. While the average data consumption per user increased, it did not translate into overall revenue growth for operators. To counter the RJIL impact and hold on to customers, incumbents slashed their tariffs considerably, pushing volumes at the expense of per unit realisations. The move had a deleterious effect on their earnings and profitability.
  • Improved call drop situation, but still a long way to go: The sector finally achieved some improvement in its call drop situation, with around 57 per cent of the subscribers reporting instances of call drops at the end of March 2017 as against 64 per cent in end-December 2016, as per a survey conducted by the Department of Telecommunications. Further, as per a Telecom Regulatory Authority of India (TRAI) report, all operators met call drop norms during the three-month period ended September 2016. The improvement, though modest, was driven by enabling policy and regulatory moves pertaining to tower installation and spectrum availability. Telecom operators added new tower sites and upgraded their network infrastructure to improve the quality of service. Operators reportedly installed more than 160,000 base transceiver stations across the country during June-December 2016. Further, the launch of real-time call quality monitoring applications and operator-assisted drive tests helped improve the situation.
  • Spectrum auction a damp squib, but hopes still high: The spectrum auction conducted in October 2016 lasted only five days, with limited industry participation. Only about 40 per cent of the bandwidth on offer was sold and the bids yielded less than 12 per cent of the total base price of Rs 5.6 trillion. There were no bids in the 700 MHz and 900 MHz bands owing to apparent mispricing. However, the government’s support in making large amounts of spectrum available was lauded, as also its move to harmonise spectrum in the 1800 MHz band for efficient utilisation.
  • New implementation strategy for BharatNet: In order to expedite the pace of implementation of the BharatNet project, the cabinet approved a revised implementation strategy and extended the project deadline from December 2018 to March 2019. As part of the modified strategy, the implementation will be done by states, state agencies, private sector companies and central public sector undertakings. Further, the project will use a mix of media, including underground fibre, aerial fibre, and radio and satellite media, rather than only underground optic fibre, which was the initial strategy. Meanwhile, last-mile connectivity for service delivery in every gram panchayat will be done through any technology including Wi-Fi and the infrastructure created under BharatNet will be shared with all categories of service providers on a non-discriminatory basis.
  • Monetisation of tower assets: The telecom infrastructure space saw increased interest from private equity (PE) players. In December 2016, Reliance Communications (RCOM) signed binding agreements with Brookfield Infrastructure and its institutional partners to sell a 51 per cent stake in its tower business for Rs 110 billion. As per the terms of the deal, RCOM’s telecom towers will be demerged into a separate company that will be wholly owned and independently managed by Brookfield Infrastructure. This will be the second largest independent and operator-neutral tower company in India. RCOM and RJIL will continue as major long-term tenants of the new tower company, along with other existing third-party telecom operators. In March 2017, Bharti Airtel completed the secondary sale of a 10.3 per cent stake in its subsidiary Bharti Infratel Limited to a consortium of funds including PE firm KKR and the Canada Pension Plan Investments Board (CPPIB). The transaction involved the sale of over 190 million shares in Bharti Infratel for Rs 61.94 billion.
  • Mobile wallets get a push; payments bank business picks up pace: Demonetisation, coupled with the government’s digital push, increased the adoption of mobile wallets. Most wallet providers witnessed a massive spurt in daily transactions on their platforms. Moreover, both the average recharge amount and the number of recharges grew significantly after November 2016. Telecom operator-owned wallets also witnessed growth in business post-demonetisation. For instance, Idea Cellular saw a significant rise in the usage of its wallet, along with a surge in money being loaded in the wallet by customers through debit cards and internet banking. The momentum, however, declined as the remonetisation exercise picked up pace, indicating the return of people’s preference for cash. Meanwhile, Airtel Payments Bank became the first payments bank to roll out its commercial services across the country in early 2017. The bank, a joint venture (JV) between Bharti Airtel (80.1 per cent) and Kotak Mahindra Bank (19.9 per cent), is offering an interest rate of 7.25 per cent on deposits in savings accounts. Since then, three other payments banks have launched their operations – India Post Payments Bank, Paytm Payments Bank and Fino Payments Bank.

Outlook

The Indian telecom industry is looking at challenging times ahead given the high degree of financial leverage, tight margins and unsustainable stress levels. These issues, if not addressed quickly, could lead to a financial collapse in the sector. While the industry has resorted to consolidation as a self-correcting measure, government intervention to improve industry profitability cannot be ruled out. In this regard, the industry is awaiting the recommendations of the IMG on the systemic issues of viability and repayment capacity, and its suggestions for the resolution of the stressed assets issue in the sector.

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