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For telcos, consolidation looks to be the way to go
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  • For telcos, consolidation looks to be the way to go

For telcos, consolidation looks to be the way to go

Rajanya Bose • December 20, 2014, 04:06:17 IST
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CRISIL, the credit rating agency, expects smaller players in the telecom space to find it hard to continue putting funds into expanding and building a better network. This might push them to the merger route instead.

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For telcos, consolidation looks to be the way to go

It’s not a question of if but when in India’s telecom sector. For long, pundits have talked about a consolidation. Companies like Idea Cellular enjoyed an ‘M&A’ premium in the stock market for the last few years. This means shares of Idea Cellular traded at a higher price-earnings multiple in comparison to other listed companies like Bharti Airtel or Reliance. This was in anticipation of the role this company could play in the potential consolidation among telecom companies.

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[caption id=“attachment_49615” align=“alignleft” width=“380” caption=“The average revenue per user or ARPU for small players is half of larger players like Vodafone and Bharti Airtel.Reuters.”] ![Vodafone.Reuters.](https://images.firstpost.com/wp-content/uploads/2011/07/vodafone3.jpg "vodafone") [/caption]

CRISIL, the credit rating agency, expects smaller players in the space - MTS, Videocon and Uninor, to name a few - to find it hard to continue putting funds into expanding and building a better network. “The fact that 3G spectrum has mainly gone to established players will act as a trigger for the consolidation process,” the agency said in a release on Wednesday.

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Here are some factors that could push smaller telecom companies towards a merger with larger players.

* The average revenue per user or ARPU for small players is half of larger players like Vodafone and Bharti Airtel. Crisil says major reasons are for over 50 percent inactive subscriber base and low usage among active users. So, the small players are only 5 percent of subscriber market share at the end of last fiscal year; their revenue market share, which was much lower at 3 percent, has moved up, but quite sluggishly in the past 8 quarters. So, it is all the more difficult for smaller players to put in more money and continue to operate at low subscriber rates.

* Smaller players have only got 3 out of the 93 3G slots. This means they will not be able to provide high speed data services, meaning even lower chances of getting high-end subscribers. The mobile number portability in January 2011 also meant subscribers were shifting from smaller to bigger players. The small players cannot enjoy economies of scale and suffer as their low-end subscribers have low minute usages. “This, in turn, has led the smaller operators to suffer from higher than estimated cash burn and worsening profitability,” Crisil observed. In other words, smaller operators cannot turn profitable anytime soon and deteriorating financial strength would drive them to consolidation.

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CRISIL expects average revenue per user for major telecom players to jump by 8 percent (compound rate) over 2011-16 on back of increasing consolidation in the telecom industry. As a corollary, they anticipate a healthy 14-15 percent annual growth in mobile services revenues, as against muted annual growth of 7-8 percent in the past 2 years.

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It was the late entrants to the telecom space who had gone for aggressive pricing and brought down the prices, and average revenue per user (ARPU) has gone down drastically for the industry. Yet, the ARPU for smaller players is far worse for the bigger ones. For two years now, ARPUs for smaller players have been almost half of the larger players. Crisil says the major reasons are 50-55 percent inactive subscriber base for smaller players and low usage even among active subscribers.

See table below:

![](https://images.firstpost.com/wp-content/uploads/2011/07/crisiltelco.jpg "crisiltelco")
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Bharti Airtel Vodafone 3G inthespotlight CRISIL Bharti Enterprises IDEA Cellular Limited Average revenue per user
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