Life beyond average revenue: Telcos hooked to 3G premiums

The telecom sector story in India is no longer about monthly average revenue per user (ARPU). Many pundits argue that the story is over unless structural changes give it a new spin. They feel that the future is about a single national licence and a recast of rules for mergers and acquisitions in this space.Yet, over the past few days, telecom companies have managed to draw investors in big numbers.

Over the past two weeks, the BSE Sensex fell 10 percent. Bharti Airtel shares rose 12.2 percent while Idea Cellular has gained 22 percent. Reliance Communications gained nine percent in value. “The competitive landscape is becoming more benign,” said Morgan Stanley Securities in a note on Monday, referring to an upward price revision by mobile companies recently. As companies announced their earnings for the June quarter 2011, analysts noted that companies have hiked prices. The companies have either increased per minute usage charges or reduced the number of free minutes on offer.

The US-based investment bank Goldman Sachs is cautious about the recent price hikes. The brokerage cites an example of a similar price revision after intense tariff war in Indonesia. Operators in that country saw about 15 percent jump in revenue per minute in just one quarter. There was no correlation found between minutes of usage to subscriber per subscriber and operating profit margin (earnings before interest, taxation, depreciation, and amortisation) (EBITDA) increase despite those sharp tariff hikes. The second and third players in the market improved their operating profit margins after raising tariff while the market leader could not.

“We also do not rule out this happening in India and hence, currently are cautious infactoring in sharp EBITDA margin improvement led by tariff increases,” Goldman Sachs said in a note.

Morgan Stanley expects companies like Bharti Airtel, Idea Cellular and Reliance Communications to grow overall revenue by 14 percent over the next 3 years on the back of a surge in demand boosted by higher usage of the 3G network. The brokerage also conducted a survey among mobile users and found that 14% or 124mn existing subscribers would soon switch to 3G services.

The table above shows the premium that telecom companies could collect over the conventional 2G services. The 3G data packages are priced at four times more than 2G for subscribers with usage of 250 MB per month. It is 90% for higher consumption of 2 GB data per month.

“3G has, so far, neither endured any tariff war nor been given any subsidies on handsets,” Morgan Stanley said.