Business - India;Declining ARPUs pressure margins of telecom cos

Abhijit Deb

MUMBAI: Average revenue per user (ARPU) linked to voice services, which comprises 80 per cent of the earnings for wireless telecom operators has
seen a steady decline of 4-7 per cent, quarter on quarter. The declining ARPUs, as a result, have put the margins of the telecom companies under pressure.

This development has occurred for the last four consecutive quarters for leading wireless operators like Bharti Airtel, Reliance Communications, Tata Teleservices, Idea Cellular, all witnessing a dip in their ARPUs. For instance, country's leading operator Bharti Airtel is adding more than 1 million new subscribers every month but the increasing subscriber base is not resulting in increase of usage, as 50 per cent of its incremental subscribers are first time users from rural areas who will take time to increase the usage.

“On the revenue front, growth is clearly slowing down with higher base and more importantly a consistent fall in ARPU, the topline growth has trailed subscriber base and will do so in forseeabale future,” Harit Shah, analyst at Angel Broking tracking telecom sector, said.

According to an industry estimate, ARPUs are expected to fall from Rs 275 in FY2008 to Rs 238 in FY2011E, a CAGR decline of 4.7 per cent. Overall industry revenues to grow from Rs 68,896 crore ($17.2 billion) in FY2008 to Rs 1,42,761 crore ($34 billion, assuming a Rupee rate of 42 to a dollar) in FY2011E, a CAGR growth of 27.5 per cent over the period, led by strong subscriber accretion.

“With declining elasticity of demand, a rise in MoUs commensurate with falling tariffs is also unlikely to materialise. Further, competitive intensity shows no signs of abating, rather it is only likely to get heightened with newer operators rolling out services and a further price war possible,” an analyst with Khandelwal Securities said.

Considering the fact that Indian telecom market is growing at 53 per cent annually and only 27 percent of the total population is covered, there is possibility of doubling that growth in next five years, which will mostly take place in rural areas and hence there will be pressure in margins due to the fall in ARPU.

This is the biggest challenge telecom companies face today to maintain their ARPU levels with most of the new subscribers getting added in the rural areas.

Analysts said that in the rural areas, the usage level is low and will contribute to the fall in ARPU.

Pradeep Srivastava, CMO of Idea, said, “The fall in ARPU is area of concern for us in near future but when you are going for market expansion where growth opportunity is enormous this will even out in longer run”.

To scale down the effect wireless operator are looking at increasing their value added service revenue. “For instance, in China 25 percent of operator revenue comes from VAS in Philippines its 55 percent whereas in India its only 10 per cent, so there lies huge growth potential in this domain for wireless operator,” Srivastava added.