Indian Telco Revenues are Expected to Improve Over the Longer Term

Indian telecom sector revenues are declining because of unprecedented price competition incited by new entrant Reliance Jio in late 2016. Revenues are largely expected to remain under pressure for at least the next 12-18 months, reflecting pricing pressures in the industry, which is undergoing a wave of consolidation and restructuring. Subsequently, revenues are likely to stabilize and demonstrate growth.

Indian telcos are expected to face revenue pressures for at least 6 quarters. The high levels of competition seen at present are likely to abate as the planned mergers and acquisitions gain traction, and market shares are redistributed. Market forecasters see year-on-year average revenue growth of about 2% over the next 12-18 months, EBITDA growth of 0% to 2% and CAPEX as a proportion of revenue lingering around 25%. The telco sector will encounter headwinds from technological shifts such as 4G advancing to 4.5G and onward to 5G, and hence the constant need for network infrastructure CAPEX and upgrades will persist.

Nevertheless, the operators are expected to weather the storm and emerge on a stronger footing not only because of consolidation, but as they implement new strategies to expand further into digital media, advertising, mobile payments and an array of enterprise services encompassing cloud and analytics to ensure the viability of future revenue streams.  

For the purposes of comparison, in emerging countries outside of India, revenue growth in the telco sector is anticipated to be in the range of 3% in 2018, lower than expected GDP growth of about 6%. Meanwhile, telco sector revenue growth in developed markets is largely anticipated to match expected GDP growth of around 1.5%.

In the Indian scenario, the ongoing consolidation and exit of smaller players will help to alleviate the pricing pressures over the next 12-18 months. The market leader, the newly formed entity after the amalgamation of Vodafone India and Idea, will be a key beneficiary as the smaller players exit and pricing stabilizes. At this stage, with fewer incumbents left in the market, an oligopolistic market structure would be created. Typically, price competition is eschewed in such a case and the players choose to instead compete on innovation, product differentiation, branding, and advertising. After the consolidation is completed, the three standing incumbents are likely to be Bharti Airtel, Reliance Jio, and the new Vodafone-Idea combined entity.

Over the longer term, the profitability of Indian telcos will be propelled by operational and capital-spending synergies after completing their proposed mergers and acquisitions. The consolidation will lead to the emergence of stronger companies with larger subscriber market shares and more robust financials, with heightened ability to make the CAPEX investments necessary to drive network coverage and availability across the country.  Telecommunications is clearly an extremely capital-intensive sector, and building scale will prove vital in maximizing return on investment for the telcos.

At the same time, it would be useful to pay attention to three budding revenue opportunities that bear strong relevance for the Indian market, namely IoT (urban), wireless broadband (urban and rural) and inclusion (rural). Telcos must capitalize on the opportunities available in the IoT space as this is at a very nascent stage at present. The early adoption of such technologies targeted at premium users (e.g. industrial/enterprise) could help to stimulate revenues for telcos.

In terms of wireless broadband services, there are approximately 350 million wireless internet users in India of which only an estimated 170 million are using 4G services. Another strategic opportunity in the market for 2018 would be expanding the base of 4G services in the country and to offer Gigabit LTE/4.5G Services, with a primary focus on Tier 3 cities and the high-mid tier markets within rural areas. To cater effectively to this segment, apart from ensuring affordable devices are available, the entire ecosystem may need to collaborate to offer consumers and enterprise segments an attractive value proposition, for example through establishing new / upgrading existing cell tower assets as well as deploying fiber optic cables in shared conduits. Hence, after the intense competition and wave of consolidation, an array of collaborative opportunities may emerge. 

As far as driving inclusion in to the rural areas is concerned, there are an estimated 200 million users who are yet to be connected with a basic telecom service. This budding subscriber base simply needs a telecom network for voice calls and SMS. Data needs would be serviced much later. Therefore, to conclude, while there may be revenue pressures in the immediate to medium term, these are likely to abate after the consolidations are completed amongst the incumbents. There are promising revenue opportunities in line with government initiatives to reinforce telecom infrastructure by 2020.  Some of these opportunities may in fact warrant collaboration amongst the players to deliver value to consumers and to fully realize the market potential.