Indian Telecom Story (Part XV): Net operating margins at Risk

An extension of an earlier post, which has discussed the problem of reducing operating margins for Telecom Operators in India in the of falling ARPUs and high operating expenditures; this post profiles the predicament for Airtel. If Airtel being such an established player in the market is facing a crunch in its operating margins, the performances of other marginal players and new comers could be under serious doubt!

Airtel registered a 17% YOY revenue increase. However, its quarterly sequential revenue growth seems to be tapping out at 1.19%. Thus the revenue growth is slowing down. Net profit is up 26% but that is mainly because of lower financial costs and spends. Operating profit margins are reduced from 30% in last year to 27% this year.

The concern for Airtel is that the growth in number of subscribers is hitting a plateau. With more competitors, the subscriber figures growth may actually dip. The ARPU has decreased 20.6% YOY. With both these numbers going south, it would be difficult for Airtel to keep up its performance in the next few quarters.
Applying the same analogy to other operators and the new comers, one would expect some congruence in the statuses. The overall market situation is same in all cases and thus the performances would not be very different for other operators. It is in this context one needs to evaluate the price discounting options that the new operators are resorting to. It may be a short cut to establishing a quick base but sustainability and profitability are very big questions. Couple that with the high initial spends of getting a toe hold in the market, the break even seems to be distant. Ask Virgin Mobile for validation.

Indian Telecom Story (Part II): ARPU and Profitability

Exhibit 1
Exhibit 2

The Indian Telcos kept adding 20 million subscribers every quarter of 2008. However, more and more "bottom of the pyramid" numbers have taken a toll on the ARPU. COAI figures on ARPU show that for the Q3, 2008, the ARPU stood at $5.5 per user (GSM). The ARPU for CDMA users was less than $5. The ARPU has been sinking at 10% every year (2005 - 2008 base - Refer to Exhibit 2). Given that the growth rate of mobility has been over 50% per year, the shrinkage has not hurt the Telcos as much. (Not Yet!). Add to that, policy decisions, which have made it possible for Telcos to share infrastructure which hence reduces Capex incurred by the Telcos.

However, growth over 2008 - 2013 is expected to slow down to about 25% CAGR. If ARPUs keep dropping at this levels, TELCO margins could come under a lot of pressure.

Mobile number portability is certain to see the light of the day in mid 2009. Markets where MNP has been implemented had initially seen huge churn in their customer bases. It is expected that the rates would be between 25 - 50% for the Telcos. Most of the consumers who would churn out would be the High and Mid ARPU consumers looking for better service. These consumers are critical to profitability figures. 9% of consumers bring in 29% of revenues and 45% of the margins. (Exhibit 1) That would be a very big chunk to loose with deep impact on the profitabilities.

Finally, there are lot of other players who would enter into the market. Reliance is already aggressive in its GSM roll outs. Then there are international players such as Etisalat and Telenor who are putting things in place for their Indian foray. This combined with MNP would directly impact in terrms of erosion of market shares held by the incumbents.

So far, not much has been seen interms of Telco activity to stand upto this challenge. It will be a hard fought battle as it begins sometime this year.