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Business – Telecom sector headed for shakeout as overcapacity, new norms dent profits

Rashmi Pratap

MUMBAI: The Indian telecom sector could be going the airline way. Once the rising star of India Inc, the local telecom industry is now grappling
with the problems of overcapacity created due to unregulated lending, new licensing norms and excess vendor financing.

The sector could likely see a shakeout, which may help it regain its lost glory, said analysts and company officials.

“Overcapacity is a characteristic of bubbles,” said Idea Cellular managing director Sanjeev Aga. “At the national level, overcapacity implies wasteful deployment of national resources (like spectrum) and just offers falling tariffs temporarily.”

Since June, the country’s telecom players have been indulging in a price war that had seen tariffs being slashed by a large quantum. After Tata DoCoMo introduced the one-paise-per-second rate, other competitors have had to follow suit, prompting most companies to witness a fall in profitability.

Analysts too derated telecom stocks post the country’s biggest tariff war that brought down call rates. And, that’s not the end. Along with new capacity, competition is expected to rise as new players with deep pockets make a line for what was till last year, one of the India’s fastest growing sectors.

In 2007, the government allotted licenses to new players, including Unitech, Datacom, Loop Telecom and Swan Telecom (now Etisalat ).

The growth is evident as mobile phones are becoming common. In a country of 1.15 billion, the mobile subscriber base totals about 500 million people. New as well as existing operators are expanding infrastructure to service more people at lower tariffs.

The same trend was witnessed in the aviation sector, which has now nose-dived from its peak in 2007. According to industry estimates, telecom operators are ready with lines to accommodate another 200 million people in the next one year.

Mr Aga said markets tend to be merciless in working out the sector overcapacity. “The greater the overcapacity, the greater the short-term pain. But, this is the market’s way of separating the efficient from the inefficient, and restoring balance. The efficient usually emerge stronger from the test and are unchallengeable,” he added.

The sector’s woes began when the government handed out new licenses to players in 2007, despite not having enough spectrum.

Rekha Jain, executive chairman of the Telecom Centre of Excellence and professor at IIM Ahmedabad, said: “When the government knew that an operator requires a minimum amount of spectrum (4.4 Mhz for GSM) to start services, how could it allow everybody to come in? And now, everybody is setting up networks. The government wanted competition, but it has created overcapacity, which will lead to consolidation.”

Banks have added fuel to the fire through indiscriminate lending. “Bank and vendor financing is encouraging overcapacity in the sector, despite the fact that new players’ plans look unsustainable in the long-term,” HSBC Securities and Capital Markets analyst Rajiv Sharma said in a recent report.

“Some of the leading operators are now restructuring their loans,” said industry sources. “If that continues to be the case, there may be some bankruptcies in the sector within two years from now,” said a top official at a telco on condition of anonymity.

A top official at a public sector bank said telecom has received easy lending because it is an important part of infrastructure. “The current state is an aberration and will correct itself,” he opined.

HSBC’s Mr Sharma, however, said: “The current scenario, with 10-11 players, is unsustainable and a reflection of poor government policies. We are of the view that market with 5-6 players is ideal in the Indian context.”

He pointed out that even if the entire spectrum were to be made available in India, it would still be insufficient to cater to all the players.

“It may be more logical to promote investments in telecom infrastructure, encourage rural penetration and rural broadband rather than focus on market structure,” he added.

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December 12, 2009 - Posted by | Uncategorized |

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