The Indian telecom industry is heading towards consolidation owing to the recent tariff hike by Reliance Communications and Idea Cellular and also due to the cancellation of 2G licenses, according to research firm Fitch.

 It said that increase in tariff will contribute to an improvement in the financial performance and credit profile of the Indian telcos over the short-to-medium term. The agency also reflects a negative outlook on the industry.

Fitch said that other Indian telecom operators will soon increase their call rates. The Indian telecom industry is going through a phase of consolidation, due to the cancellation of 2G licenses by the Supreme Court earlier this year and a fresh spectrum auction scheduled in November 2012. The number of operators is likely to reduce after the auctions, which will reduce the competition in the sector.

It states that this is the second round of tariff hike following the one in mid-2011. Average revenue per minute (ARPM) will gradually start rising after a sharp decline over the last few years due to fierce competition in the sector.

Although higher revenue from the tariff increase will result in an improvement in profitability of telcos, some of it will cover increasing operating costs including the recently increased diesel prices. However, the complete impact of these hikes will be visible only after a few quarters, as it will be gradually implemented across circles and subscribers. Moreover, India Ratings expects the incremental revenue from the tariff hike to easily offset its negative impact on the minutes of usage, if any. At present, call rates in India are among the lowest in the world.
 
As per the data released by the Telecom Regulatory Authority of India, the mobile subscriber base was 913 million at end-July 2012, down by 21 million from the base at end-June 2012 due to deactivation of inactive subscribers. With an already high subscriber base, there is limited opportunity for telcos to grow by adding new subscribers. As a result, India Ratings expects telcos to now focus on other growth levers like tariff hikes, an increase in data services usage, value-added services, among others.

"India Ratings has a negative outlook on the Indian telecom industry. Most the Indian telcos have stretched balance sheets as they had raised debt for acquiring 3G/ broadband wireless access spectrum in 2010 and/ or roll-out of network. Owing to a lower-than-expected take-off of 3G services and subdued operating performance, the credit profile of most of the telcos has weakened over the last few years," it said.