The fierce bidding in the broadband wireless auction that ended on Friday is not likely to trigger further value destruction in the already troubled domestic telecom sector. However, the entry of Reliance Industries (RIL) in the broadband telephony may give rise to a tariff war in this highly lucrative segment of the domestic telecom sector.
The impact of immediate cash outflow post-bidding will be limited since big listed players have either opted out of the process or participated only in a few circles. Bharti Airtel, the country’s largest telecom player, has won licences in four circles for a total of Rs 3,314 crore. Its peers Reliance Communications (RCOM) and Idea Cellular decided to give it a pass.
For Bharti, the cash outflow due to broadband is just over 8% of the total investment of Rs 58,000 crore made by the company in 3G licences and in acquiring Kuwait-based Zain Group’s African telecom operations. Some analysts feel that such a small proportion of outflow can be accommodated into the other two bigger payments without extensively stretching the balance sheet.
For both RCOM and Idea, the balance sheets would have no effect of the broadband bids. Given this, net debt — long-term debt minus cash equivalents — as a percentage of operating profit before depreciation (EBITDA) works out to over 3.5 for each of the three players. This means the top-rung of the telecom sector may have to shoulder a similar debt burden.
However, Bharti’s leverage, measured in terms of debt-equity ratio, will shoot up to 1.6 compared with that of one for the other two. Analysts think that this would come down to healthier levels in future once it turns around Zain’s African operations.
Another factor to watch out for is the impact of Reliance Industries’ entry into the broadband fray. Analysts at Networth Stock Broking feel that this would most likely trigger a tariff war in the enterprise segment pulling down the operating margins from existing level of 40-45% for the segment. However, the impact on the overall consolidated margins would not be significant as telcos earn a substantially lower portion of revenue from this segment. In that, RCOM would see lesser impact since its enterprise revenue and operating profit contribute just over 15% to its total revenue.
Bharti, which earns 20% of its revenue and 25% of operating profit from enterprise services, would face a higher exposure to the risk of lower margins. But the pure play broadband players such as Tulip Telecom, and Tata Communications may see an erosion in margins in case of a tariff war. Also, according to Prakash Diwan who heads institutional business at Networth Stock Broking, smaller players like Tulip Telecom may benefit by outsourcing their expertise in this business to the new entrants.
The effect of a possible price war in the wireless broadband will also be felt by players such as You Broadband and Cable, which currently provide wired broadband services. You’s CEO EVS Chakravarthy anticipates a pressure on pricing, as broadband prices will be dragged down by competition. “While pricing will be under pressure, I think, the overall market size will expand. Also, higher competition will bring in higher efficiencies at the market place.” He believes that this will lead to improved customer experience.
Experts also foresee emerging opportunities in the field of WiMAX solutions. “Once the operators start rolling out broadband services, companies that now provide WiMAX-based solutions would come into limelight,” says Mr Diwan.
WiMAX holds promise especially for rural internet connectivity, given its ease of installation of last-mile connectivity. “The ongoing programme of unique ID cards for citizens means that database of people in every nook and corner of the country needs to be transferred to the common repository. WiMAX may go a long way in enabling this connectivity,” says Mr Diwan. He thinks companies including Sasken and Zylog that have worked in the past on various broadband technologies may stand to gain.
The impact of immediate cash outflow post-bidding will be limited since big listed players have either opted out of the process or participated only in a few circles. Bharti Airtel, the country’s largest telecom player, has won licences in four circles for a total of Rs 3,314 crore. Its peers Reliance Communications (RCOM) and Idea Cellular decided to give it a pass.
For Bharti, the cash outflow due to broadband is just over 8% of the total investment of Rs 58,000 crore made by the company in 3G licences and in acquiring Kuwait-based Zain Group’s African telecom operations. Some analysts feel that such a small proportion of outflow can be accommodated into the other two bigger payments without extensively stretching the balance sheet.
For both RCOM and Idea, the balance sheets would have no effect of the broadband bids. Given this, net debt — long-term debt minus cash equivalents — as a percentage of operating profit before depreciation (EBITDA) works out to over 3.5 for each of the three players. This means the top-rung of the telecom sector may have to shoulder a similar debt burden.
However, Bharti’s leverage, measured in terms of debt-equity ratio, will shoot up to 1.6 compared with that of one for the other two. Analysts think that this would come down to healthier levels in future once it turns around Zain’s African operations.
Another factor to watch out for is the impact of Reliance Industries’ entry into the broadband fray. Analysts at Networth Stock Broking feel that this would most likely trigger a tariff war in the enterprise segment pulling down the operating margins from existing level of 40-45% for the segment. However, the impact on the overall consolidated margins would not be significant as telcos earn a substantially lower portion of revenue from this segment. In that, RCOM would see lesser impact since its enterprise revenue and operating profit contribute just over 15% to its total revenue.
Bharti, which earns 20% of its revenue and 25% of operating profit from enterprise services, would face a higher exposure to the risk of lower margins. But the pure play broadband players such as Tulip Telecom, and Tata Communications may see an erosion in margins in case of a tariff war. Also, according to Prakash Diwan who heads institutional business at Networth Stock Broking, smaller players like Tulip Telecom may benefit by outsourcing their expertise in this business to the new entrants.
The effect of a possible price war in the wireless broadband will also be felt by players such as You Broadband and Cable, which currently provide wired broadband services. You’s CEO EVS Chakravarthy anticipates a pressure on pricing, as broadband prices will be dragged down by competition. “While pricing will be under pressure, I think, the overall market size will expand. Also, higher competition will bring in higher efficiencies at the market place.” He believes that this will lead to improved customer experience.
Experts also foresee emerging opportunities in the field of WiMAX solutions. “Once the operators start rolling out broadband services, companies that now provide WiMAX-based solutions would come into limelight,” says Mr Diwan.
WiMAX holds promise especially for rural internet connectivity, given its ease of installation of last-mile connectivity. “The ongoing programme of unique ID cards for citizens means that database of people in every nook and corner of the country needs to be transferred to the common repository. WiMAX may go a long way in enabling this connectivity,” says Mr Diwan. He thinks companies including Sasken and Zylog that have worked in the past on various broadband technologies may stand to gain.
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