Jio effect? Telecom industry is at its weakest, govt will have to step in

Telecom Industry

Indian telecom industry is at a critical juncture & improvement is crucial for its long-term health

 

 

 

Breaking news : The Indian Telecom sector has been under pressure for the last 8 years because of rising competitive and capex intensity. During this period the contribution of telecom services to GDP has declined from 2% of GDP in FY09 to just 1.2% in FY17. The return ratios for the telecom players has also consistently declined during the period and all the telecom companies do not manage to earn their cost of capital because of continuous investments in spectrum purchases. While competitive intensity has changed with entry and exit of players, the capex intensity has consistently risen because of spectrum auctions. The industry at this juncture is at its weakest because of the high degree of financial leverage and margins impacted by rising competition from new player Reliance Jio. In the current state, the industry has insurmountable challenges which are leading to huge wave of industry consolidation.

 

Industry structure is a key determinant for profitability

 

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In the pre 2008 era, the Indian telecom industry was one of the most lucrative markets marked by high growth rates and reasonably concentrated market. Spectrum was not auctioned but given on subscriber-linked criteria. The system was not perfect and it could be gamed by telecom operators. This led to flurry of new entrants in 2009 which led to significant crash in tariffs and sharp decline of telcos profitability. After the crash in tariffs (which never recovered), the rising capex for spectrum led to increase in financial stress which has limited the incumbent telcos ability to invest. Thus with the entry of Reliance Jio, industry consolidation to augment capacities is the only viable solution. The industry in totality has over capacity and the only way the demand versus supply will match in the future is through industry consolidation.

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