India's Telecom War Isn't Over Yet

Right in the middle of a fierce fight for India's mobile telecom market, Bharti Airtel has declared that the worst may have passed. Investors would be wise to ignore such proclamations.
The comments, by Akhil Gupta, deputy group chief executive of Bharti's parent company, came after Bharti posted an 8.2% on-year drop in profit for the March-end quarter. The results reflect the stiff competition Bharti faces for its No 1. share of India's wireless market.
Twelve operators, many of them relatively new companies with large foreign partners, are slashing prices in an effort to chip market share away from Bharti and its bigger rivals. It's working: Bharti's share of the mobile market dropped to 22.6% from 24.6% a year earlier, according to data from Telecom Regulatory Authority of India.
The price-war is also eroding Bharti's profitability. Overall, revenue and subscribers rose in the March-end quarter, but average revenue per user has dropped 10 rupees -- or about 4.3% -- just since December. Margins on earnings before depreciation, interest, taxes and amortization for the mobile phone business dropped to 29.2% from 31.5% a year before.
Whether this assault on its market share continues isn't up to Bharti. Moreover, the decline that's already occurred will be difficult to reverse. Indian consumers are now accustomed to falling rates and other schemes -- something evident in the fact that a growing number use more than one mobile phone provider to take advantage of multiple offers like dirt cheap calls within a network, or lower rates at night.
The competition doesn't end there. New Delhi's auctioning third-generation wireless licenses, and prices for a pan-India license has already doubled from the base price to $1.3 billion. Citi Investment Research forecasts it could rise as high as $2 billion. Profits from the new network meanwhile will be years off.
If this is tough on Bharti, it's harder on smaller rivals which lack the economies of scale that Bharti enjoys. Bharti has proven itself able to find the resources for expansion overseas, in Africa for example, thanks to its size and market leadership. A more likely outcome for smaller players is that the price cuts and profit erosion force them to merge, or be gobbled up by larger rivals.
That will be the real sign that this bloody war is over.