Brokerages have re-rated the sector as the new NTP framework may end many of the ills that plague the industry.
India’s beleaguered telecom sector has been upgraded to “buy” in recent times. Interestingly, except for Bharti, most analysts were bearish on the sector till February end. What has caused the change of heart? Most analysts say their interaction with policymakers and industry gives them the confidence that the worst is over.
The first piece of good news is that the tariff war is seemingly over, as balance-sheets are already stretched. After two-three years of stagnant to declining profits, the sector’s earnings are likely to rebound in FY12 and FY13. According to a report by Standard Chartered Equity Research, traffic growth of 11-26 per cent, coupled with lesser fall in revenues per minute will deliver a bounce-back in earnings before interest, taxes, depreciation and amortisation (Ebitda).
Analysts expect Ebitda growth in FY13E to be 15-29 per cent, driven by 1-2 per cent improvement in revenue per minute and moderate traffic growth.
Competitive intensity, too, is getting rationalised quickly, as data shows that less than 50 per cent of the subscriber base is active for new entrants. According to Citi, damage from multi-SIM is nearing saturation and mobile number portability seems to be benefiting incumbents. Besides, the new entrants have a limited scope of countering the deterioration in business given a high fixed cost structure.
Broadly, analysts believe the industry traffic growth could sustain at a cumulative aggregate growth rate of 18-20 per cent over the next two years, as the pressure of double SIM driven by tariff wars is over. Also 3G will act as a lever of growth, but this has not been factored in the stock prices yet.
Data of mature customers suggests average revenue per user (ARPU) has been rising (up 5-11 per cent per annum) for customers.
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While return to profitability is great news, the framework of the new telecom policy has been the game changer for most brokerages. It’s apparent that life will become even more difficult for new entrants, as they are stuck at 4.4 MHz and will have to pay around Rs 4,000 crore for the additional spectrum.
If they are serious about rollout of services, they will have to increase spectrum to 6.2 MHz, an additional outflow of Rs 4,000 crore. With profitability more than five years away, most new entrants will not sink in this kind of money. This will inevitably enhance the opportunities of consolidation and will also weed out non-serious players.
While much has been written about the upfront payment that incumbents will have to pay for excess spectrum (beyond 6.2 Mhz), analysts say this will be offset by the proposal to replace the slab-wise spectrum charge with a uniform revenue share (irrespective of spectrum held). TRAI is likely to recommend the modalities of new spectrum pricing norms and spectrum charge, after which the policy is likely to be finalised, say telecom analysts. Bharti and Idea seem favourite picks in the sector.