India Cellular Inc’s cup of woes spilleth over

The fiscal year 1998-99 was not encouraging
for the Indian cellular industry. The 35.49 percent subscriber growth didn’t suffice
in bringing the industry back on track. The industry expected a better growth rate in the
second year of services for the circle operators. But paucity of funds kept circle
operators from expanding the network according to the projections. Negative growth in the
metros adversely affected the revenue growth as the average revenue per subscriber is
highest in the metros. To add to the worries are the alarming loss figures. As a result of
declining tariffs, airtime usage has gone up. The national average airtime usage is
estimated to have reached close to 160 minutes in 1998-99. The industry estimates on the
same for the fiscal year 1997-98 was 120 minutes. But the increase in airtime usage
didn’t result in any significant growth in the revenues. Frost & Sullivan
estimate the monthly average revenue per subscriber in 1998-99 at about Rs. 1087.



As metro markets mature, circles come into the limelight

The subscriber base increased from 8,82,316 in March,1998 to 11,95,446 as on
March, 1999. An overall growth of 313,130 subscribers i.e. a monthly growth of 26,094
subscribers. The maturing of metro markets and emergence of circles found its reflections
in the market share. The metros constitute 43.46 percent of the overall market. The metro
market share in 1997-98 was 62.54 percent. When the market share of metros reduced,
circles achieved tremendous growth. The “A” category circles improved its market
share from 20.06 percent to 29.68 percent. The “B” category circles increased
its market share to 23.77 percent from 15.68 percent in 1997-98. The “C”
category circles grew from 1.73 percent in 1997-98 to 3.09 percent in 1998-99.



The second half of the fiscal witnessed 79.5 percent of the market growth. The metro
subscriber base recorded an erosion of 98,539 subscribers in the first half, thanks to its
changed focus from quantity to quality. This in effect marginalized the 117,208 subscriber
addition by the circle operators in the same period. However the metro operators succeeded
in bringing 60,234 subscribers to its fold in the second half. This had strengthened the
market expansion of 190,141 subscribers by the circle operators in the second half. The
maximum growth happened in the month of March with growth figures of 76,550 subscribers.
July was the only month which witnessed negative growth. The reason was the drastic
reduction in metro subscriber base by 76,492 numbers. This was due to a mutual
understanding among the metro operators to weed out uneconomical subscribers.



Revenues grow by 29%

The industry is estimated to have posted an overall turnover of Rs.1301.83 crore
during 1998-99, which reflects a growth of over 29 percent as compared with the previous
year. These figures exclude interconnectivity charges. Of the total revenues,
Rs. 705.26
crore was accounted for by the metro operators, while the remaining Rs. 596.57 crore was
contributed by the circle operators. The industry is estimated to have suffered an overall
loss of Rs. 1,187.42 crore in 1998-99. This estimate factors the impact of partial license
fee payment made by the operators and encashment of bank guarantees by the Department of
Telecommunications (DoT). However, if the entire license fee obligation till March 31,
1999, which includes interest, is taken into consideration, the losses will balloon to
Rs.
3797.69 crore. On account of the former profitability estimation, three metro operators
had break-even in 1998-99. But going by the latter estimation, none of the operators broke
even during the review period.



Mumbai and Delhi can break even

With the new rentals, Mumbai and Delhi operators can break-even even in the fixed
license fee regime. The problem with the Chennai and Calcutta operators is the low
subscriber base and lack of marketing efforts. Despite the reduced tariffs and increased
airtime usage, the operators did not experience significant growth in revenues. This
brings the conclusion that volumes will dictate the long-term profitability in the Indian
cellular industry. The year 1998-99 saw growth in subscriber base and reduction in license
fee payments, as compared to the previous fiscal. Accordingly the operators saw dip in
relative losses. However, these companies, which did not comply with the DoT directive
lost their bank guarantees and sank deeper into the red.



Forecast

With the increased monthly rentals, the metro operators in Delhi and Mumbai are
all likely to break-even in the current fiscal even in a fixed license fee regime. Given
the low subscriber base, it would be difficult for the Chennai and Calcutta operators to
do the same. What seems lacking on the part of Chennai and Calcutta operators is a lack in
marketing efforts. A shift to revenue sharing can save the circle operators. With the
government amenable to the revenue sharing model, Frost & Sullivan expects this factor
to be a prime driver in the consolidation of the Indian cellular market. The market is
likely to witness mergers and acquisitions in the second half of the current fiscal.



The article is based on Frost & Sullivan’s latest offering on the Indian telecom
industry titled :

Strategic Review of Indian Cellular Services Market (1998-99)