From The Sip Trunking Experts

TMCNet:  Telecom companies go slow on rural expansion

[January 07, 2013]

Telecom companies go slow on rural expansion

MUMBAI, Jan 07, 2013 (Mint - McClatchy-Tribune Information Services via COMTEX) -- Telecom firms in India are spending more on adding capacity in the existing markets and not expanding to new rural areas although the countryside offers a huge potential for growth.

This approach defeats the objective of the national telecom policy, which focuses on increasing rural tele-density from around 39% to 70% by 2017 and 100% by 2020. In contrast, urban India has a tele-density of about 153%.

High cost of infrastructure, lower returns on investment in under-penetrated rural areas, regulatory uncertainty and high cash outgo on second generation (2G) spectrum auctions are the challenges telecom companies face while expanding in rural India, analysts and industry executives said.

"We took more spectrum in our existing markets like Bihar, West Bengal, Maharashtra and Uttar Pradesh east," said Sunil Sood, chief operating officer of Vodafone India Ltd, India's second largest telecom operator. "In these areas, we have a lot of customers and it is financially more viable for us to add capacity in an existing site than adding more sites in another area." Vodafone has to constantly increase capacity to maintain the quality of service, Sood added. When there is a growth in subscribers in an existing site, the company needs to increase capacity to prevent call drops. The more spectrum one has, the more customers one can have under the same site. Tweaking the existing infrastructure to increase capacity at a site is always less expensive than building a whole new site, he explained.

Vodafone has lowered its capex in the first half of this fiscal to Rs.1,700 crore versus the Rs.2,430 crore in the first half of the preceding year.

Idea Cellular Ltd, India's third largest telecom operator, too, has lowered its capex by 17% this fiscal to Rs.3,500 crore.

Since Idea has two out three customers from rural India, it expects revenue growth to come from subscriber growth in rural areas but "Idea's rollout strategy across the country is based on a calibrated approach to market conditions", said a company spokesman.

Bharti Airtel Ltd has spent a big chunk of its $1.4 billion capex in the first half of this fiscal on 3G and 4G expansion and Africa operations.

On the potential in rural areas, a spokesman said mobile phones will increasingly become life-enriching tools, driven by data adoption, especially in rural areas.

Companies are going slow on coverage expansion in rural areas, especially Vodafone and Idea, but market leader Bharti Airtel is still expanding into rural markets, according to senior telecom analyst Sanjay Chawla of JM Financial Institutional Securities Pvt. Ltd, a financial services firm.

"However, spending power in the rural areas is limited and initially those markets can support at most one player," Chawla said. "The telecom potential of rural markets will evolve over time and it may take two to three years before a majority of the rural population has a personal mobile connection." "Not all the companies are gung-ho about rural areas, as revenue generation relative to the investment required is lower than in urban areas," Chawla added.

The average revenue per user (Arpu) in the so-called C-circles, or primarily rural pockets, is 15-20% lower at Rs.89 per month, compared with metro circles at Rs.118 per month, according to the October Indian telecom service performance indicators report by Telecom Regulatory Authority of India (Trai).

Out of 904 million subscribers, 337.42 million are rural subscribers.

Indian telecom companies are financially stretched because of investments in 3G services and high spectrum reserve prices in the 2G auctions, which have forced them to lower their capital investment plans.

Spectrum cost has become an important consideration and may affect the appetite to acquire more capacity in most rural areas, according to Mohammad Chowdhury, leader telecom, PricewaterhouseCoopers Pvt. Ltd. "However, many operators already have the spectrum they need for more expansion, and the current constraints are more around funding constraints and a lack of certainty," he added.

India's telecom companies have accumulated debt of Rs.2 trillion, according to data collated by audit and consultancy firm KPMG India Pvt. Ltd.

The cost of setting up towers in rural areas is Rs.35-40 lakh per tower. In addition to that, there is a maintenance cost -- rent for the location of the tower and power charges as the towers mostly run on diesel in villages. In contrast, the cost of adding capacity at an existing site is negligible.

Even the tenancy ratios of tower infrastructure companies -- an indicator of the number of operators sharing a tower -- have gone below the sustainable level of two as telecom operators focused on select circles in the last 2G auction in November 2012. For tower companies, the break-even level of tenancy ratio is between 1.7 and two.

When the boom happened in the Indian telecom sector, all companies wanted more subscribers and coverage, said Romal Shetty, head of telecom and partner at KPMG. "They were getting more revenue and the margins were not under pressure. But in the last two years, the number of telecom operators has grown to 13 and with high cash outflow in 2G auction, it doesn't make sense to just go behind numbers. They need to get margins." A joint report titled Envisioning the next telecom revolution 2012, released in December by the department of telecommunication, consultancy AT Kearney Ltd and industry lobby Federation of Indian Chambers of Commerce and Industry, has found that Arpu for operators declined at an average compounded annual growth rate of about 24% between 2008 and 2011.

According to the report, bridging the rural-urban divide will require the industry to address issues affecting the economic viability of rural operations such as lower Arpu, high cost of network roll-out and operations, high sales and service costs per subscriber.

___ (c)2013 the Mint (New Delhi) Visit the Mint (New Delhi) at Distributed by MCT Information Services

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