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Free incoming calls, Rs 1.20 per three minutes for outgoing calls…Reliance’s debut in the world of mobile telephony created a storm in December 2002.

R. Sree Ram        Print Edition: November, 2009

Free incoming calls, Rs 1.20 per three minutes for outgoing calls…Reliance’s debut in the world of mobile telephony created a storm in December 2002. Coming at a time when mobile operators were charging Rs 1.20 per minute for incoming and nearly three times this amount for outgoing calls, the move was hailed as the beginning of a price war that would result in huge revenue losses for the already bleeding operators.

What the research houses have to say
First Global
Underperform: The reduced tariff rates by the industry’s second largest player will deliver a serious blow to collective profitability.
Edelweiss
Cautious: A tougher environment lies ahead as players, who had refrained from price cuts, may resort to aggressive pricing.
ICICI Securities
Cautious: There are no signs of an uptick for telecom stocks.
Morgan Stanley
Concerned: ARPMs could decline by another 10% and, hence, we are concerned in the short term.
Macquarie
Underweight: While long-term value may emerge, the likely barrage of competitor responses can cap any near-term re-rating.

The industry was all but written off when the regulators, in their user-friendly zeal, decided to make much of this new deal mandatory. On the contrary, the Indian wireless industry thrived, emerging as one of the fastest growing sectors. The low tariffs brought more customers, an average of 10 million a month, into the telecom ambit. Expectedly, though the average revenue per user (ARPU) has fallen, from Rs 811 in 2002 to Rs 298 in 2007, the minutes of usage has gone up by 119%.

Now we are in the middle of another price war. Be it the per second billing proposal by Tata DOCOMO, the aggressive rate cuts introduced by newcomers like ATS, or the number portability facility, which will allow customers to switch mobile operators without changing numbers, analysts fear lower revenues for the existing telecom companies. According to First Global, a Mumbai-based broking firm, “The steep decline in tariffs is expected to significantly pull down the ARPU of all players. The tariff cuts will drive a growth in usage, but it won’t be able to compensate for the impact of the decline in tariffs on voice revenue per minute.” This is because the existing telecom players will have no option but to respond to the new tariff plans, which are already among the lowest in the world.

No wonder telecom stocks are losing appeal on Dalal Street. The share prices of Bharti Airtel, Reliance Communications and Idea Cellular have corrected 15-22% in less than five days. Concerns about the telecom market reaching a saturation stage have made matters worse. Analysts at Kotak Securities have cut the earnings (EPS) estimates for the listed operators in the range of 3-11% for the current financial year. The downgrades for the next financial year are in the range of 20-53%.

What does all this mean for customers? If the last price war made it possible for the common man to join the wireless revolution, the opportunity this time lies in telecom stocks. “We believe any further decline in stock prices from current levels could provide attractive entry points for investors,” says Edelweiss analyst Devyani Javeri. It need not be a risky undertaking. Though the current wave of launches is expected to change the face of the industry in the next five years, throwing up new market leaders, the industry consensus is that efficient players with deep pockets will emerge unhurt. “In the long term, we expect Airtel to gain from the likely industry consolidation,” says a Kotak Securities analyst.

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