Telecom: Regulatory issues, 3G to decide future course

Operational stability with a steady pricing scenario and strong network traffic are factors that may work in favour of the domestic telecom sector. Robust subscriber addition and firm average revenue per minute (ARPM) have eased the pressure on profitability to some extent .

But, regulatory uncertainties such as licence renewals and the extent to which 3G rollout gathers momentum will be crucial for the sector in the medium term. In its recent recommendations, TRAI suggested re-pricing and re-framing of the spectrum along with an increase in the spectrum charge. If implemented , it may put pressure on the profitability of telcos, which have suffered over the past 18 months due to a steep fall in tariffs . Also, the full impact of mobile number portability ( MNP), launched in November 2010, is yet to be felt.

According to a TRAI report, at the end of February, only 3.8 million subscribers, or less than 1% of the total reported user base, had opted for MNP. Analysts feel as and when there is a substantial increase in the number of subscribers opting for MNP, telcos’ expenditure may escalate as they try to retain postpaid customers. However, the initial positive response to the 3G services should bring some relief to the operators .

Bharti Airtel, for instance , reported a net addition of 5 to 6 lakh 3G subscribers since its initial launch in January. Even though this is miniscule compared with the overall subscriber base, the company expects 20-30 % increase in average revenue from 3G subscribers. But analysts feel higher revenue from 3G users alone may not be sufficient. “Although cash flows from the 3G launch are likely to cushion the over leveraged balance sheets of the incumbents , it is unlikely to have a significant impact on the declining average revenue per user,” says Gartner’s telecom analyst Neha Gupta.

She feels per minute revenue realisation will continue to dip in the coming years given the competitive scenario. At the current market price, Bharti trades at a trailing P/E of 18.9. Idea Cellular and Reliance Communications command a P/E of 22.9 and 11.3, respectively. Given the uncertainties in the sector, the valuations do not seem cheap. The new telecom policy expected by mid-April may bring clarity on merger guidelines. This should aid the much-awaited consolidation in the sector.