High operational costs impact telcos’ profit

Source: The Hindu Business Line, Jan 19, 2017

The performance of telecom companies in the first half of 2016-17 paints a harsh picture of the industry. High operational costs ate into its profits. Though data revenue increased and made up for the drop in voice revenue, net profit plummeted over 50 per cent for top players in the listed space as interest costs increased.

Sluggish growth

Bharti-Airtel and Idea Cellular posted revenue growth of 6 per cent and 8 per cent respectively in the first half of the year, but net profit declined.

Higher interest on borrowings on account of spectrum acquisition in 2016 weighed on their profits. Tata Communications saw a marginal decline in sales. Its net profit too declined 47 per cent primarily because of the exceptional loss from impairment of its business Neotel. However, the sale deals of Neotel and the data centre businesses resulted in a surge in its stock price to about 68 per cent.

Reliance Communications also registered a sharp decline in net profit, because of the drop in revenues as well as higher finance costs.

Pricing pressure

Revenues dropped 4.5 per cent compared to the same period last year while interest costs were 13 per cent higher. Since the third quarter results have not been announced, the impact of RJio is not known yet.

The launch of RJio has added to pricing pressure in the industry, leading to intense tariff cuts by other players. Bharti-Airtel and Idea Cellular have slashed their data tariffs rates — by offering 67 and 45 per cent extra benefits respectively for the same price. The impact of demonetisation and RJio’s free services will begin to show in the coming quarters.

The real price war will begin when RJio’s free period ends.

The data coverage gaps, particularly for 4G services, were taken care in the spectrum sale last year. Idea Cellular acquired 349.3 MHz of spectrum for approximately Rs.12,800 crore in 1800 MHz. Bharti-Airtel cemented its leadership position with acquisition of 173.8 MHz (across bands) spectrum for Rs.14,244 crore. Reliance and Tata Communications made respective bids for spectrum across frequency. With adequate availabilityof spectrum, players from here on are expected to focus on quality of services and better network infrastructure.

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