Indian Mobile Services Sector: Struggling to Maintain Sustainable Growth

Cellular Operators Association of India (COAI) commissioned a study from PwC India titled ‘Indian Mobile Services Sector: Struggling to Maintain Sustainable Growth’. The report examines the slow-down in capital investments in the sector in spite of poor rural teledensity as well as the 3G / BWA opportunity. The study aims to highlight the deteriorating industry operating and financial metrics that make the sector relatively unattractive for attracting the much-needed further investments. Lastly, the report emphasizes the need for proactive policy interventions by the Government/regulator to support the sustenance and growth of the sector.

Key Findings

Increasing Rural-Urban Divide
While the industry has taken significant strides in the past decade, the task of providing access to mobile services at affordable rates across the hinterlands remains incomplete. The urban tele-density in the country at 156% is far ahead of the rural tele-density of 35% (at the end of June 2011). While this spells opportunity for the industry, significant investments will be required in order to increase reach in the rural areas.  

Low Internet and Broadband Penetration
India’s internet and broadband penetration are only around 1.6% and 1% respectively. This can be explained by inadequate wireline infrastructure in the country. Hence, mobile broadband, which is an opportunity for providers, will require increasing investments.

Declining Investments in the Sector
FDI in Telecom sector in India was ~ USD 1.7 billion in FY2011, down by almost 35% compared with ~ USD 2.6 billion in FY2010. Investments in the sector by leading operators are down more than 50%.

Deteriorating Top Line Growth
While operators reported an overall growth in subscriber base by 43% between 2009 to 2010, the industry grew revenues only by 5% for the same period.

Significant Bottom Line Challenges
There has been a significant increase in network operating expenses besides governmental fees, levies, charges and penalties adding to margin pressures for the operators. Rising interest rates have resulted in increase in debt servicing costs for operators. Consequently operators are under immense margin pressures with several reporting negative PATs. Similarly, most operators report a negative or low return on capital employed.

Challenges for new entrants
The challenges are magnified for recent entrants. On a combined basis these players have less than 5% of market share and have clocked only 2% of industry revenues.

The report recommends that the current state of the industry necessitates proactive government intervention in order to meet the critical objectives of accessibility, affordability and sustainability apart from maintaining healthy contributions to the national exchequer. There is a need to relook at and redesign policies bringing them in alignment with the national objectives for this critical sector.  The new National Telecom Policy should also aim to provide regulatory clarity and predictability that will support the sustenance of players and encourage further investments to drive the next critical phase of growth through rural expansion and mobile broadband (3G / BWA).