Telcos’ profit growth to double in two years: Crisil

Operating profits of large telecom companies are expected to rise 20 per cent over the next two years, twice that of about 10 per cent seen in the last five years. Half of this rise will be due to tariff increases whereas the other half will be contributed by increased data and value added services, according to a study by Crisil.

While pricing power started returning a few months back, we are now seeing tailwinds from the regulatory side too, because signs of policy clarity are emerging.

The crucial issues of spectrum availability and pricing have been partially addressed with the finalisation of the reserve price for the next round of auction in January 2014. While these signal better times for operators, a caveat is due: how quickly the rest of the regulatory creases are ironed out will remain the key monitorable.

Crisil believes that the pricing power will sustain over the next 2-3 years. For the Crisil-rated large telcom companies, average realised rate per minute (ARPM) stabilised in 2012-13, while it improved by around 5 per cent in the first half of the current fiscal as tariffs were hiked in select circles.

''Our estimates show there is still a 50 per cent gap between headline tariffs and ARPM due to discounted call rates offered to many subscribers. With competitive intensity easing, telecoms are in a better position to reduce the discounts and crunch the gap,'' said Sudip Sural, Senior Director at Crisil Ratings.

This will contribute about half of the increase in operating profits, he added.

Data usage to double
Revenue contribution from data and value-added services could touch 20 per cent in the medium term from 16 per cent in the last fiscal with large telecom players having seen data usage more than doubling in the first half of this fiscal, year-on-year.

The trend is expected to continue following a near doubling of smartphone sales over the last fiscal and higher 3G penetration following reduction in 3G prices. This will contribute to the balance increase in operating profits.

Reserve prices for the forthcoming auction in the 1800 MHz and 900 MHz bands are 26 per cent and 53 per cent lower, respectively, compared with the previous auction. The licences of large operators in circles including the metros and Category A circles would expire over the medium term. These players are expected to actively bid in the January 2014 auction to protect their market position.

''Spectrum outflows and the significant depreciation in the rupee against the dollar will curb improvements in the capital structure of large telcos, with leverage remaining at around 2 times in the medium term,'' Sural said.

While the upcoming auctions will help arrive at a market determined spectrum price, other regulatory issues such as one-time fees for excess spectrum, spectrum usage charges, re-farming of spectrum in the 900 MHz band and a framework for spectrum sharing and trading remain pending. An early resolution of these will be critical to the health of the sector.