Call charge cuts hammer Indian telecom stocks

NEW DELHI/BANGALORE, INDIA: A price war among Indian mobile operators that is expected to cut profitability knocked telecoms stocks on Tuesday, though market leader Bharti Airtel pledged to maintain financial health.

Second-ranked Reliance Communications on Monday cut all call charges across networks to a flat 50 paise (1 U.S. cent) per minute, which analysts said could trigger more cuts in a market which already offers some of the world's cheapest rates.

"This is what you call hyper-competition," said a telecoms analyst at brokerage MF Global, who expects the price cuts to hit firms' operating profit by at least 10 percent starting from the fiscal year that ends in March 2010.

He also saw a 13 percent fall in telecoms' 2010/11 earnings.

Raising further concerns about the sector's future profitability, telecom regulator TRAI said it might make it mandatory for firms to offer a per-second billing option. Most firms charge calls on a per-minute basis.

"There will be pressure on the telecom sector," said R.K. Gupta, managing director at Taurus Asset Management.

"TRAI has spoken about per-second billing; this will bring down revenues and future profit margins will also be under pressure."

Reliance Communication's price cut was not the first, but was the most aggressive in the current round, which started when sixth-ranked operator Tata Teleservices introduced a per-second billing plan.

Last month, Bharti Airtel cut call rates to 50 paisa per minute, but only for calls to phones on its network.

"My view is the prices are at rock bottom. Is there a further cushion available for it to go down? Very little," Bharti Airtel Chairman Sunil Mittal told the ET Now channel from Geneva.

"There will be some pressure for some operators who have not reached scale," he said, but added the existing five or six large operators had less to worry about.

Citigroup analysts said a "carpet reaction" to Reliance's cut by other telecoms would be a risk to the sector's earnings.

BHARTI PURSUING 'AFFORDABILITY'

Bharti Chief Executive Manoj Kohli said the market leader had its own strategies and would not respond to competitors' moves.

"We pursue affordability as well as financial health. That policy will continue," Kohli told reporters in Bangalore.

Morgan Stanley said in a report Reliance Communication's lower charges would be a hindrance for new operators, and could stagnate industry revenue growth for the next 12 months.

Bharti shares fell 10.2 percent to their lowest close since April 23. The fall, the biggest in a year, wiped more than $3 billion off Bharti's market capitalisation and saw the company drop one notch to India's fifth most-valuable listed firm.

Reliance Communications fell 10.6 percent to a five-week closing low of 268.25, and fifth-ranked Idea Cellular closed 8.3 percent lower at a five-month low of 64.75 rupees.

London-listed Vodafone, which controls India's No. 3 mobile firm, Vodafone Essar, was underperforming a firm FTSE 100 at 1120 GMT.

On the Bombay and National Stock Exchanges, more than 84 million Bharti shares changed hands, more than four times the average volume of the past 30 days, and Reliance Communication's volume of 43 million was also more than four times normal.

In an August report, HSBC analysts estimated per-second billing could hit the sector's revenue by 10-15 percent. Such a billing plan would be the most disruptive for the sector, they said.

Indian mobile operators are adding more than 10 million subscribers a month, but margins and key metrics such as average revenue per user (ARPU) have been diminishing.

Indian telecom tariffs have fallen sharply from levels of about 30 cents a minute earlier in this decade.