Better Times To Ring In

The average revenue per minute (ARPM) for Q2FY14 stood at Rs 0.46, which was one of the highest posted in the preceding four quarters. This was mainly due to the reduced promotional packs i.e. free minutes and plan validities. This trend is likely to continue in Q3FY14 too as there have been no freebies on offer during the quarter and also because this quarter is regarded as a seasonally strong quarter for the telecom operators. As mentioned earlier, the healthy trend in ARPMs is likely to continue and operators are likely to reap benefits of the same not only in this quarter but in coming quarters too.

What is also encouraging is that the MOUs (Minutes of Usage) are on the rise. They stood at 437 minutes for Q2FY14 as against 417 minutes in Q2FY13. This is a positive sign, as increased MOUs coupled with improved ARPMs are likely to generate better cash flows for the companies going forward.

On the other hand, the industry has also witnessed an improvement in the data usage of subscribers. As per the recent visitor location register (VLR) data released for October 2013, of the total 888 million subscribers, 85.01%, i.e 755 million subscribers were active on the date of peak VLR. This is the next phase of growth for the sector going forward.

One interesting thing on the policy front that has happened is that in November 2013, the Empowered Group of Ministers (EGoM) has accepted the recommendations of the Telecom Commission (TC) regarding the upcoming round of spectrum auctions. The TC had suggested a 15% higher pan-India reserve price for 1800MHz spectrum (Rs 1765cr/MHz) and a 25% higher reserve price for 900MHz spectrum (only in metro circles) compared with the prices suggested by the TRAI.

This has come in at the right time as the government is auctioning 900MHz only in three circles, i.e Delhi, Mumbai and Kolkata, the licenses of which are coming up for renewal in CY2014 and CY2015. As per the schedule, auctions are set to begin on January 23, with January 4 being the last date for submission of applications by interested parties. This auction is likely to further decide the outlook on the sector in the medium term. Most of the incumbent players will however retain the 900 MHz for their operations, failing which the companies would have to incur an additional capex to realign their network.

All this suggests that Q3FY14 is expected to be fairly better than what the preceding few quarters have been. The consensus estimates are that, leading three companies viz. Bharti Airtel, Idea Cellular and Reliance Communications are likely to post a sequential growth in revenue of 2% to 4% in Q3FY14. The EBITDA margin is likely to remain stable in this quarter too and may stay in the range of around 30%.

The improvement in the regulatory environment bodes well for the sector as a whole. The telecom industry can substantially improve structurally only after data revenues start contributing significantly to the overall revenues. As the competitive intensity is receding and pricing power is coming back to operators, it can be said that incumbent players such as Bharti Airtel and Idea Cellular will probably perform well.