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CRISILs perspective on risk in the telecommunications
industry
Analytical Contact : John Joseph [email protected]
In the last five years, along with rapid growth, the key risk
factors for
the players in the Indian telecommunications industry have
transformed
significantly. CRISIL believes that the changes in the telecom
industrys
fundamentals have led to an improvement in the credit risk
profile of
the industry as a whole. This paper outlines the changes that
have
occurred, and assesses their impact on the credit profile of the
players
in the industry. It examines the regulatory and policy risks,
competitive
pressures, and issues relating to investment pressures and
funding
requirements faced by telecom industry players, and concludes
that,
on the whole, the credit risk profiles of players in the
industry will
continue to show an improving trend.
Regulatory and policy risks
Historically, regulatory and policy risks have played a crucial
role in
the credit risk of the players in the Indian telecom industry.
Several
insight
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instances demonstrate this: the introduction of unlimited
competition
in the cellular and basic services, the opening up of
internationallong distance services two years earlier than
expected, and changes
in the Access Deficit Charge (ADC) and Interconnect Usage
Charges
(IUC), are cases in point. In the past, regulatory actions
affected the
long-term profitability of the operators and resulted in a
heightened
perception of event risks. This constrained the ability of the
players to
access the capital markets. However, the regulatory scenario in
the
country has changed dramatically since 1999 with the
introduction
of the New Telecom Policy.
Since then a number of issues have been resolved. These issues
include:
switching over to revenue sharing, streamlining of revenue
sharing,introduction of the third and the fourth GSM operator,
resolving of
issues related to limited mobility, and introduction of the
Universal
Access license. There is increased clarity today on the
direction of
regulation and policy. This has lowered the risk on the industry
as a
whole. However, there continue to be areas that still remain
unresolved.
These are listed below:
Carrier Access Code (CAC): In July 2002, the Telecom
Regulatory
Authority of India (TRAI) directed access service providers
to
implement Carrier Selection within 6 and 18 months, for
domestic
and international long distance calls respectively. Even after
thepassage of three years, there has been no implementation of CAC.
In
the new scenario, however, the risk of CAC to the revenues of
the
integrated players is minimal. This is because, in the absence
of
standalone National Long Distance (NLD) players, the incentive
for
subscribers to shift carriers has diminished. Some access
players
already have offerings with no long distance costs for calls
within
certain networks. At the end of 2004-05 (refers to financial
year from
April 1 to March 31), integrated players accounted for 75 per
cent of
the total subscribers (fixed and mobile). Moreover, quality of
service
is not currently a differentiator among the various NLD
operators.Hence, the impact of implementation of CAC is negligible
in terms
of loss of revenues, although some impact is expected in terms
of
increased marketing costs as players seek to minimise churn
of
traffic.
Number portability:Number portability, once introduced, would
increase
the retention cost of subscribers. The operators would need
to
differentiate their service offerings to retain their customer
base. urther,
quality of service would become increasingly important. Thus,
theoperat ing costs of companies would increase wi thout any
corresponding benefit to the topline. Companies that are not in
a
position to offer the latest services or upgrade the quality of
their
networks may experience increased net churn.
The above aspects are factors already identified by the
regulator
for introduction; however, regulatory risk from unforeseen
events
continues. The government is working on the New Telecom
Policy
2005, which among other things, seeks to introduce a One
India
Cal l Rate for local and domest ic long dis tance traf f ic .
The
introduction of such a scheme, in the absence of an increase
inloca l ca l l ra tes , cou ld have a de t r imenta l impac t on
the
profitability of players. This would be especially true for the
non-
integrated stand-alone access players. urther, the
government
aims to achieve 250 million subscribers by 2007 from the
current
level of 100 mil l ion subscribers . This may directly affect
the
fortunes of the operators, if the government tries to force
down
subscription costs to achieve the targeted rollout, either
through
direct tariff regulation or by cutting tariffs through BSNL
and
MTNL. The improving profitability of the operators, by
attracting
regulatory scrutiny, has heightened this risk. With more
standalone
players going for integrated networks, the introduction of
the
Universal Licensing Regime with a steady reduction in entry
fee
could increase the risk of competition for existing
integrated
operators. The introduction of network unbundling and
resellers,
though currently ruled out, could also increase the levels
of
competition over the long term.
Competitive pressures
Competition in the Indian telecommunications industry is
concentrated
in the mobile segment, where there are up to six operators in
some
circles. Despite intense competition, the rapid growth of the
markethas allowed these players to expand their subscriber bases
even as
they lose market share. This has, however, come at the expense
of
average realisations, with the ARPUs steadily declining to Rs.
391 in
2004-05 from Rs. 1,319 in 1999-00. The operating profitability
of
these companies has improved due to the benefit of increased
scales,
and declining regulatory costs. However, they still trail the
high
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experience shows. urther, in the event of slow off-take of
services, the
operator would not be able to recover the fixed costs from the
price-sensitive consumers. Additionally, rolling out the 3G network
would
also involve significant capex. However, players are expected to
exercise
discretion and undertake incremental rollout to service areas
that
have the requisite demand and affordability.
Some integrated operators are contemplating rolling out
wireline-based
broadband services in their respective circles. To increase the
mass
appeal and make the product successful, the players would have
to
lower the connection costs to the consumer, thereby extending
the
payback period. Though the benefit of scale economies would
continue
to apply, competition from the existing incumbent players
throughDSL as well as from the mobile operators through 3G, could
lead to
lower than anticipated returns. The risk is compounded by
the
requirement to rollout capacities in anticipation of wireline
demand.
Conclusion
Though the risks in the telecommunications industry remain,
they
have reduced considerably from earlier levels. Increased clarity
on the
regulatory and competition fronts has enabled the operators to
plan
their rollouts more prudently. Additionally, the improving
financial
health of the players has also mitigated the impact of residual
risks.
The ability of the players to access the financial markets to
fund their
investment requirements at competitive rates has also
improved
significantly. Hence, given the present configuration of risk
drivers,
CRISIL expects the Indian telecommunications industry as a whole
tocontinue to show an improving credit profile.
