Rating agency Fitch said that Indian and Indonesian telcos are heading for consolidation.  This is because some of the weaker, smaller telcos are likely to be either acquired by larger telcos, or to merge with each other to improve their financial and operating position.
 
Consolidation should improve operating profitability and cash flow, but such transactions could weaken the balance sheets of the acquirers if funded by debt. Consequently, mergers of strugglers may have to be all-equity deals to retain sufficient credit capacity to support ongoing operations.
 
Smaller telcos in these two countries continue to struggle to gain market share or achieve positive EBITDA. Their strategy of relying on the fast-growing data market is no longer working, as they are unable to achieve meaningful scale and generate significant profit from the segment amid competition from larger telcos.
 
Indonesian operators have already started to consolidate, while the Indian telcos are waiting for the relaxation of M&A guidelines which we believe will be announced by the end of this year. Lack of clarity over the telco M&A regime and, in particular, spectrum acquisitions have prevented any consolidation in India so far.
 
Consolidation should improve small telcos' declining profitability as cost synergies are realised and voice tariffs benefit from lower competition. Mergers should also lead to lower capex as network infrastructure investments need not be duplicated. Less intensive price competition in the data segment should benefit all. This is particularly important, as the revenue share of lower-margin data products is increasing - as it cannibalises  the more profitable voice and text services.

The Indian and Indonesian telecom markets are similar in that there is a wide disparity in size and credit strength between the top three operators and the rest. However, the top three Indonesian companies have greater ratings headroom to make debt-funded acquisitions, supported by strong parentage, moderate leverage and high profitability, and an overwhelming combined market share. The Indian market is less profitable and more fragmented, and the top three telcos have relatively weaker balance sheets - which are more likely to be adversely affected by debt-funded acquisitions.
 
“We believe that, in the long run, India can support only six profitable mobile telcos and Indonesia four. Both markets are currently characterised by fierce competition, with 8-10 operators”, Fitch said.

“Only the top (three to four) operators make a profit, while the rest suffer EBITDA losses and have stretched balance sheets. However, the top three in Indonesia together account for over 85% of revenue market share, whereas in India their combined share is just 70%. In both countries, voice tariffs experienced a severe decline during 2008-2011 as late entrants competed strongly on tariffs in price-sensitive markets” it observed.