For telecom companies, 3G breakeven can stretch

If even the most optimistic projections come true, Indian mobile telephony firms appear to be in for some challenging years ahead, especially when it comes to paying the bill for their 3G binge.

Last June, mobile operators paid about Rs67,719 crore to buy spectrum for offering high-speed, third-generation or 3G services, but remain reluctant to share estimates on how much money can they make of it.

Malvika Gupta and James R Sullivan, telecom analysts at JP Morgan, the investment bank, estimated that annual revenues from 3G in fiscal 2015 would be around Rs37,522 crore.

By their estimate, cumulatively, Indian telecom industry would have generated Rs89,997 crore over the four years till then.

A back-of-the-envelope calculation shows it is still short of what would have been spent till then, including interest on debt.

At 9%, interest payout over the five years since June 2010, when debt was taken to pay for 3G spectrum, works out to Rs30,473 crore, which, along with the original spectrum payment of Rs67,719 crore, takes the total industry 3G spent to Rs98,193crore by 2015 — or about Rs18,000 crore more than the revenue generated by that time.

To be sure, this does take into account the principal being paid off from revenue generated or the substantial capital expenditure incurred in roll out of 3G network.

Gupta and Sullivan predict 60 million 3G subscribers in India by March 31, 2012, and 249 million by fiscal 2015.

That the estimates are amply optimistic is evident from the 10-fold subscriber base growth implied for the current fiscal.

Current 3G subscriber database — including those of Bharti Airtel, Reliance Communications, Vodafone Essar and Idea Cellular — stands at about 6 million.

Analysts caution not all of them may remain subscribers once the free trials offered by different operators end.

In terms of revenue, JP Morgan estimates that 3G would represent a $1.4 billion (Rs6,189 crore) revenue opportunity at the end of current fiscal and $8.7 billion (Rs37,522 crore) by fiscal 2015.
These revenue projections may be short of what Indian telcos would have spent on 3G by 2015, but what is worse is that they may have to spend more for network upgradation by financial year 2014, according to JP Morgan, to be able to handle the expected subscriber growth.

“One 3G carrier (5MHz spectrum) allows for up to 2GB per month per user of usage at 5% penetration or 700 MB a month/user at 15% penetration,” Gupta and Sullivan note. “We believe this offers telcos sufficient headroom of 2-3 years before additional capex needs are triggered.”

It may be prudent to include a rider to all these estimates — the data tariffs, which may or may not stay at current levels depending on how competitive dynamics play out.

Himanshu Kapania, chief executive at Idea Cellular, country’s sixth largest mobile telephony operator by subscribers doesn’t think that rates will come down.

“The balance sheets of most telecom companies are already stretched, and funds are not easy to come by, so I don’t think there will be the same kind of rate reductions that we saw in voice,” said Kapania, who declined to hazard a guess on how 3G subscriber base would grow over the years.