A billion users may not be enough for India's phone carriers

DEC 31, 20154:04 PM

[MUMBAI] India just signed up its billionth mobile- phone customer, joining China as the only country to cross that milestone.

Yet that 10-digit base may not be enough to keep the industry from struggling. Asia's third largest economy is crowded with a dozen wireless carriers - more than in any other country - spectrum is hard to come by and regulatory risks are high. Add it all up and it's no wonder they deliver lower profitability than phone operators in other parts of Asia, according to Sanford C. Bernstein & Co.

"There are too many of them all fighting for limited spectrum," said Chris Lane, a telecommunications analyst at Sanford C. Bernstein in Hong Kong. "In China by comparison, 1.3 billion subscribers are serviced by just three operators. The government in China allocates spectrum on the basis of need, and at no cost to the operators. As a result, the Chinese operators get scale benefits that Indian operators are unable to achieve." Indian carriers are bracing for tougher times ahead as the nation's richest tycoon, Mukesh Ambani, prepares to jump into the fray in early 2016 with the roll-out of Reliance Jio Infocomm Ltd.'s $15-billion 4G service. Billionaire Sunil Mittal, who heads market leader Bharti Airtel Ltd., recently warned that Ambani's entry could shake up the telecommunications industry and force smaller players to exit or merge with larger ones.

With competition reducing call rates to levels among the lowest in the world, average profit margins - measured in terms of earnings before interest, taxes depreciation and amortization - have ranged from 35 percent to negative 50 percent in the past five years, according to Bernstein's calculations. That compares with the 42 percent averaged in emerging Asia. Returns on invested capital are also lower in India than in other regional markets, according to Bernstein.

Still, billionaire Ambani is planning to make his splash at a time when Indians are in the early phases of transitioning to the speedier, data-efficient 4G wireless services that are prevalent across the U.S., Europe and Japan, indicating phone bills will go up because of increased data usage.

Bharti, which already offers 4G services in at least 330 cities and towns, plans to spend 600 billion rupees ($9 billion) over three years to improve its network and help fend off the competition. Vodafone Group Plc's local unit has also started the speedier services.

Concerns about added competition brought on by Jio, a unit of Ambani's flagship Reliance Industries Ltd., prompted Fitch Ratings to downgrade its 2016 outlook for the Indian phone industry to negative from stable in November. Fitch said it expects only the largest five or six operators to emerge from the likely shake-out in the industry as smaller players exit or get acquired - a view shared by Mittal in an interview in November.

Signs of such rationalization are emerging. Reliance Communications Ltd, controlled by Ambani's billionaire younger brother, is in merger talks with smaller rival Aircel Ltd and is looking to close its deal for AFK Sistema's Indian wireless unit, in a three-way deal that would amass airwaves and potentially create an operator with more than 200 million subscribers. Idea Cellular Ltd, the current No. 3 wireless carrier, has announced the purchase of airwaves from Videocon Telecommunications Ltd.

Still, it's too early to panic as telecom is a very sticky business where a new player will take a lot of time to "crack the market," according to Anand Shah, chief investment officer at BNP Paribas Asset Management India Pvt.   "People are ignoring this sector because they are fearful of the new entrant," said Shah. "Data is already at the cusp of growth and it only needs a catalyst. A new player can become a big catalyst."

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