New telecos have a long road ahead for break-even
13 Apr 2009, 0413 hrs IST, Rashmi Pratap, ET Bureau
MUMBAI: New telecom operators are likely to face rough weather in the world’s fastest-growing telecom market. They will turn free-cash flow positive not before seven years. New entrants like Telenor-Unitech, Swan Telecom and Videocon’s Datacom Solutions face challenges of brand building, distribution, spectrum availability, organisation building, negative free-cash flow and scale, according to a recent UBS report.
“Based on our analysis, we expect new operators to break even on EBITDA (earnings before interest, tax, depreciation and amortisation) in fifth-year of operations and on net profit in the eighth year. We believe greenfield operators in India do not have a business case,” UBS analyst Suresh A Mahadevan said in a report. It adds that new players are likely to be acquired after the end of the three-year lock-in period.
The report states that they will face challenges related to brand building, distribution, spectrum availability, organisation building, negative free cash flow and scale. “They face a disadvantage in terms of customer mindshare as well as low tariffs which would make it harder to compete,” it adds. Importantly, UBS report speaks of M&A being an optimum way to gain additional spectrum. “Existing mobile operators are likely to find the prospect of obtaining an additional 4.4 MHz attractive at the time,” is the rationale.
Factors like lack of brand pull, unlike that of incumbents such as Bharti Airtel, Idea and Vodafone’s, apart from a lack of access to quality distributors, quality and quantity of spectrum have also been cited as reasons that could hinder the growth of new entrants.
Referring to the spectrum issue, it says 4.4 MHz spectrum on the 1800 MHz band is likely to result in much higher capex and opex requirements. This is on account of requiring almost twice the number of towers to cover a service area as compared to the 900 MHz band where most incumbents have spectrum.
According to PricewatehouseCoopers (PwC) associate director and telecom analyst Arpita Pal Agarwal, it will take 6-7 years for new operators to turn free cash flow positive.
“They are banking on getting some incremental share of the monthly additions which will build subscriber base and determine valuations. There will be consolidation in 2-3 years,” she told ET .
Acsendia Consulting principal analyst Alok Shende said the most significant risk is that of negative cash flows going beyond investment time horizons. “This development will lead to a wave of consolidation post the minimum period for M&A activity imposed by the department of telecom,” he said.
Last updated on 13/04/2009
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