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Price Hike Prospects Boost Telcos

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India's telecoms sector is back on the radar of investors after market leader Bharti Airtel raised call tariffs last week for the first time in at least two years, raising hopes for an improvement in wafer-thin margins that have hobbled the industry.

With more than 850 million subscribers, India's mobile phone sector has been the world's fastest-growing. But a vicious price war in the 15-player market that broke out in the second half of 2009 has strained companies financials, knocking down local call prices to as low as one-fourth of a U.S. cent a minute.

Burdened by declining margins and heavy payout for third-generation (3G) radio airwaves in a state auction last year, Bharti last week increased call prices in some regions by about a fifth, which will bolster its margins in coming quarters.

Rivals Vodafone Essar and Idea Cellular have also taken similar price increases in some regions, sources with knowledge of the matter said.

"The industry has been suffering margin pressure for quite some time despite high subscriber additions," said K.K. Mital, head of portfolio management at Globe capital in New Delhi. "Now it's time to work towards improving profitability and cash flows and that is what they are doing."

"Once 3G is fully operational, a lot of new business opportunities will be there. And there may be some consolidation in the sector, which will be a positive."

Bharti is seen reporting next week quarterly profit fell about 10 per cent, dragged by its money-losing African mobile operations and also due to the cost of 3G network in India.

Companies including Bharti, Vodafone's Indian unit and Reliance Communications and several other firms last year paid a total $24 billion to buy 3G and broadband radio airwaves and have in recent months rolled out 3G networks.

A pick-up of the premium data services facilitated by 3G networks should improve profits as these generate higher margins compared with voice calls. Voice calls currently account for more than 85 percent of the sector's revenue.

Investors will also be watching for any positive news from Bharti's Africa operations, which it bought last year in a $9 billion deal and became the world's fifth-biggest mobile carrier by subscribers.

The operations, which were making losses when Bharti bought those, are yet to turn around and have been a drag on its earnings. Bharti is also said to be eyeing an initial public offering of its tower unit in India, which would help cut debt.

Reliance Comm, Bharti's closest rival in India, is expected to report net profit fell by about a fifth for the quarter ended June, which would be an eighth straight quarterly profit decline for the company.

Reliance Comm, which is struggling with more than $7 billion of debt, has said it has received several offers to sell its 95-per cent stake in its telecoms tower arm, but is yet to announce a deal.

Regulatory uncertainty after a massive licensing scandal has also engulfed the sector, although it mostly involves the smaller firms who face risk of losing their licences.

The CBI have charged 14 people including a former telecoms minister, officials of Reliance ADA Group that controls Reliance Comm and local joint venture partners of Norway's Telenor and Abu Dhabi's Etisalat.

Shares in Bharti, with a market value of about $37 billion, have gained a fifth year-to-date, making them the best performer in the 30-share BSE index that is down more than 10 per cent.

Fourth-ranked Idea Cellular has gained about 30 per cent this year, but Reliance Comm shares are down about 30 per cent.



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