CRISIL Ltd. : Telcos profit growth to double in 2 years: CRISIL

December 26, 2013 Mumbai Telcos' profit growth to double in 2 years: CRISIL

Better pricing power, increasing data usage, and emerging regulatory clarity ring in good times

CRISIL is forecasting a 20 per cent increase in the operating profits of large telecom companies over the next two years. That's twice the operating-profit CAGR of about 10 per cent seen in the last five years. Half of this increase will be due to tariff increases whereas the other half will be contributed by increased data and value added services. 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 to 3 years. For the CRISIL-rated large telcos, 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. Says Sudip Sural, Senior Director, CRISIL Ratings: "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, telcos are in a better position to reduce the discounts and crunch the gap." This will contribute about half of the increase in operating profits.
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," Mr 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.

December 26, 2013

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Tanuja Abhinandan Communications and Brand Management CRISIL Limited Phone: [phone] Mobile: [phone] Email: [e-mail] Shweta Ramchandani Communications and Brand Management CRISIL Limited Phone: [phone] Mobile: [phone] Email: [e-mail]	Sudip Sural Senior Director - CRISIL Ratings Phone: [phone] Email: [e-mail] Manoj Damle Director - CRISIL Ratings Phone: [phone] Email: [e-mail]	Timings: 10.00 am to 7.00 pm Toll free number: 1800 267 1301 Email: [e-mail]

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CRISIL is a global analytical company providing ratings, research, and risk and policy advisory services. We are India's leading ratings agency. We are also the foremost provider of high-end research to the world's largest banks and leading corporations.

About CRISIL Ratings

CRISIL Ratings is India's leading rating agency. We pioneered the concept of credit rating in India in 1987. With a tradition of independence, analytical rigour and innovation, we have a leadership position. We have rated over 60,000 entities, by far the largest number in India. We are a full-service rating agency. We rate the entire range of debt instruments: bank loans, certificates of deposit, commercial paper, non-convertible debentures, bank hybrid capital instruments, asset-backed securities, mortgage-backed securities, perpetual bonds, and partial guarantees. CRISIL sets the standards in every aspect of the credit rating business. We have instituted several innovations in India including rating municipal bonds, partially guaranteed instruments and microfinance institutions. We pioneered a globally unique and affordable rating service for Small and Medium Enterprises (SMEs).This has significantly expanded the market for ratings and is improving SMEs' access to affordable finance. We have an active outreach programme with issuers, investors and regulators to maintain a high level of transparency regarding our rating criteria and to disseminate our analytical insights and knowledge.

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Last updated: May, 2013

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December 26, 2013

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