India's improving financials mask deeper problems

India's largest mobile operators have stabilised their financials following a number of years of price wars, with EBITDA margins improving after 2012 and rising capex painting a picture of a market in good health. However, behind these top-level numbers lies a two-tier mobile market in which even the largest operators need to continue to seek scale to remain viable in the long term.

Largest operators have stabilised their financials, improved EBITDA margins

Over the course of this recovery period, four of the larger players in the market – Bharti, Idea, Reliance and Vodafone – have all improved their market positions, with Bharti and Idea able to grow both revenue market share and EBITDA consistently year-on-year. Vodafone has lagged behind these two, essentially maintaining its position within the market, while Reliance has lost revenue market share but improved its level of profitability. The latest financial year has seen a number of these operators revise their spending plans upwards, from estimates that already represented a significant jump year-on-year.

Source: GSMA Intelligence

But consolidation is required to address profitability and debt pressures

These top-level numbers mask the fact that India is a two-tier mobile market in which even the largest operators need to continue to seek scale to remain viable in the long term. Beyond the top three operators, which together account for 60% of the market in terms of connections, the remaining operators are either struggling to achieve profitability (e.g. Telenor), carrying far too much debt or have investors looking to exit (e.g. NTT DoCoMo's joint venture with Tata Teleservices).

The Indian market is already the most competitive in the world, as measured by the Herfindahl-Hirschman Index; as a result, India’s EBITDA margin of 33% in 2015, while an improvement year-on-year, still lags behind regional peers such as Bangladesh and Pakistan, which have margins in excess of 40%. Consolidation is inevitable given market conditions. The intent is there: talks between Tata and Telenor reached an advanced stage last year before failing, while Reliance Communications announced non-binding discussions with shareholders of Aircel in December 2015. Should these opportunities not be grasped, then the danger is that data pricing will come under further pressure, particularly with the introduction of 4G services in the market, sending profitability downwards once more.