Indian Telecom Industry: Consolidation Paving Way for Stability

Published on 13 Mar, 2019

The Indian telecom industry has witnessed significant changes over a period of time. Currently, it is in the consolidation phase amid intense competition, declining revenues, and high capex requirements. With increasing data usage among consumers, companies are shifting focus from traditional voice calls to wider digital consumer space such as content and mobile banking solutions. This paradigm shift is expected to be the key to stabilization and growth in the industry in the coming years.

Evolution of Telecom Industry in India

The Indian telecommunication industry has undergone a major transformation in the past few decades. The industry started out as a monopolistic market and gradually transformed into a sector dominated by private players. The reforms were largely backed by the government that started off as a market participant, transitioned to a facilitator, and then moved to a regulatory role. In its bid to further promote the sector, the government opened it up to attract investment. India is currently the world’s second-largest telecommunications market, after China, with a subscriber base of 1.19bn*.

Clocking a compound annual growth rate (CAGR) of ~7.3% over the last decade, the telecom industry is among the significantly emerging sectors in the country. Growing dependence of consumers on wireless communication bodes well for the industry.


Government Reforms Support Growth in the Sector

The Indian government has enacted various policies such as the National Telecom Policy and New Telecom Policy and taken steps such as allowing spectrum trading and sharing, facilitating transparent allocation of airwaves through auctions, and implementing Right of Way rules to boost growth in the telecom sector. This has facilitated the transition from deregulation in a monopolistic structure to the rise of a competitive market.

Following reforms, foreign direct investment (FDI) inflow in the telecom sector has increased. The government approved 100% FDI in the telecom sector in 2014. According to telecom minister Manoj Sinha, FDI in telecom grew nearly five times over the last three years from $1.3bn in FY 2016 to $6.2bn in FY 2018. The Indian communication services segment attracted $32.5bn in foreign investment from April 2000 until December 2018. The government introduced a new telecom policy (NDCP 2018) in September 2018, which aims to create 4mn jobs, draw $100bn in investments by 2022 and increase the sector’s contribution to 8% of GDP from 6% in 2017.

The government has played a significant role in shaping and developing the Indian telecom industry by enacting reforms. It is expected to bring in more reforms, going forward, in order to support and promote the industry.



Key Trends in the Industry

Intense competition among private players has pushed the industry toward stagnation.

  • Growth in Wireless User Base Decelerating: Increasing penetration of smartphones, along with introduction of affordable data packs and free voice calls, has decreased the need for multiple connections. Consequently, growth in subscriber base fell from 13.3% in FY 2012 to 1.1% in FY 2018.
  • Declining ARPU: With the entry of Reliance Jio in the market in 2016, average revenue per user (ARPU) took a hit. The sharp decline in voice and data tariffs triggered intense price wars, denting the profitability and operational metrics of most operators. ARPU slid to INR67 in Q2 FY2019 from INR125.9 in Q1 FY2016$. The cumulative debt of telecom operators stood at INR7,700bn (USD107.9bn)^, while revenue came in under INR2,500bn (USD35bn)^, implying financial distress.
  • Rising Data Consumption: Wireless data consumption is increasing, fueled by several factors such as availability of data at low cost, introduction of policies (such as Digital India and demonetization) that created a strong foundation for growth in online consumer base in the country, and rise in mobile banking. The number of internet subscribers in India is expected to double by 2021 to 829mn@. Companies are increasingly directing their efforts toward improving online content, as monthly data usage per smartphone is anticipated to increase at a CAGR of 14% from 6.8 GB in 2018 to 15 GB by 2024&.
  • Investments in Optical Fiber Network: Fiber is expected to play a key role in enhancing broadband connectivity and building robust 5G capabilities. Hence, the domain could attract investment from telecom operators. Increase in penetration would enable operators to lower tariffs and identify new avenues for monetization. This is expected to boost APRU and ensure stabilization in the telecom market. The total length of fiber cable installed in the US and China is 400mn km and over 1bn km, respectively, vis-à-vis close to 10mn km in India#; this indicates significant untapped potential in home broadband services in the country.


Telecom players are under significant pressure amid shrinking subscriber base and declining ARPU. However, given the surge in consumption of online data services, they would do well to focus on evolving technologically as this is likely to help them sustain and remain competitive in the industry.

Consolidation in the Industry – Recent Acquisitions and Mergers

The telecom industry has changed drastically since the entry of Reliance Jio in 2016. It witnessed a wave of consolidation as companies looked to offset increasing pressure on subscriber base, decreasing revenues and lower costs, and strived to remain competitive. Many small operators, such as Aircel and Reliance Communications Ltd, were forced to close operations. Other minor players such as Tata Teleservices and Telenor were acquired by Bharti Airtel, while Vodafone India merged with Idea Cellular. The three big players in the industry now are Reliance Jio, Bharti Airtel, and Vodafone-Idea.

We believe that consolidation has entered the final phase with a major reduction in the number of players. It could boil down to a final war between Airtel and Jio as both seem to be better equipped to further invest in newer technologies to compete effectively. Vodafone-Idea, on the other hand, is beset with internal challenges pertaining to a complex integration that could take a toll on the merged entity’s combined resources.

The Way Ahead

The telecom industry is currently in turmoil, fraught with rising pricing pressure due to continuously declining ARPU and intense competition. Debt levels also remain high due to reduction in organic cash flow and high capex requirements, resulting in low stabilization. Going forward, industry players are expected to continuously invest in developing advanced technologies. The rollout of 5G is likely to determine how the industry shapes up in the near future.

The ability of telecom operators to implement 5G by investing in fiber would be the key driver for the telecom market, going forward. Companies that increase investments would emerge as leaders eventually.

Conclusion

The telecom industry is undergoing a difficult transition from being voice-centric to data-centric and will remain under pressure in the near term. However, in the long term, upon consolidation, we expect it to stabilize, with players undertaking technological upgradation with support from the government. Considering the rising consumption of mobile internet and a likely addition of 500mn new internet users over the next five years, the industry is poised for growth, and represents tremendous potential.


References:

* - IBEF

^ - The Cellular Operators Association of India's (COAI) annual report FY 2018

$ - The Hindu BusinessLine

@ - Businessworld

& - Gadgets.ndtv.com

# - Financial express




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