According to an ICRA note, Indian telecom industry, which is witnessing intense competition and pricing pressures, is expected to be stabilized in a few quarters.
It said as the merged Vodafone and Idea stabilize, and the subscriber base of the existing operators diminishes, the competitive intensity is expected to moderate.
"Consolidation transactions over the last two-three quarters released a sizeable subscriber base which provided opportunities to larger telcos to enhance their subscriber market share, thus keeping the competitive intensity high," Harsh Jagnani, Sector Head & Vice President - Corporate Ratings, ICRA.
From March 2017 to March 2018, the larger telcos together added 202 million active subscribers and a large portion of this - 192 million came at the expense of discontinuing telcos. Now the subscriber base of the discontinuing telcos has largely diminished. But the impending merger of Vodafone and Idea, and the ensuing integration of the two may see some erosion of subscribers, giving an opportunity to other operators, ICRA said.
" Thus, we expect that a stable industry structure, with three operators holding more than 90% of the market share, to coincide with the stabilization of Vodafone-Idea merger. Till such time, the pricing levels in the industry are unlikely to witness material improvement," Jagnani.
However, the research firm said that by early next fiscal, the industry is likely to witness better outlook driven by improvement in pricing levels.
Over a longer term, recovery in the sector would hinge on the back of a consolidated structure, better pricing power and sustained data usage.
Meanwhile, the debt levels of the industry, which remain elevated as of March 2018, are expected to witness some reduction by way of asset monetization and promoter funding.
It also said that consistent downward revision in prices has resulted in one of the steepest falls in the industry average revenue per user (ARPU) levels with the estimated blended ARPU falling from Rs. 169 in Q1 FY2017 to Rs. 127 in Q4 FY2018 - with the industry adjusted gross revenue (AGR) falling from Rs. 40,450 crore to Rs. 25,640 crore in the same period.
The overall high operating leverage of the industry means that the decline in revenues has percolated to pressure on profitability and cash flows. Further, the industry is weighed down by high debt levels and capital expenditure (CapEx) requirements.
Commenting on the industry CapEx requirement Jagani said: "The CapEx to sales ratio for the telcos has increased significantly - at around 30 percent against the average of 15 - 20 percent seen in the past. One respite is that spectrum auction is not expected in the medium term as the operators are well stocked following recent inorganic acquisitions. Such high capex makes it challenging to generate adequate returns with the prevailing ARPU levels, thus necessitating a restoration of pricing power."