Telecom sector outlook negative on continuing regulatory woes: India Ratings

India Ratings' outlook on the Indian telecommunication services sector remains negative for 2013 considering increasing regulatory costs for incumbent and new operators. The issue of regulatory uncertainty has now been replaced by increasing costs which will impact the financial profile of most operators, including incumbents over the short to medium term.

The cancellation of telecom licences and muted response to their re-auction have resulted in consolidation in the telcom industry. In line with the agency's expectations, telcos have raised tariffs and/or tweaked plans to increase average revenue per minute, which will lead to an improvement in their operating performances and partly off-set the negative impact of the recent regulatory developments.

India Ratings expects that there is limited room for further consolidation in the industry. While there may be some corporate actions involving small operators, any M&A activity involving large operators is not likely in the short-term.

As the government has already taken major policy decisions regarding the telecom sector, India Ratings expects lesser regulatory uncertainty for the sector in the near term. The regulatory overhang is likely to fade out over the next 12 months. This will enable a fresh inflow of capital into the sector.

With an already high subscriber base, there is limited opportunity for telcos to grow revenue by adding new subscribers. Therefore, India Ratings expects them to now focus on other growth levers like higher mobile data services adoption, value-added services, tariff hikes, among others.

Higher mobile data services adoption will be driven by the availability of compatible mobile devices, affordable data plans and rapidly rising internet users.

A stable outlook may result from significant tariff hikes by operators to offset additional regulatory charges, leading to an improvement in their business and financial profiles or a reversal of negatively impacting regulatory decisions taken so far by the government.