Fitch: Ideally There Are Enough Of Four Cellular Operators In Indonesia

Fitch rating agency give his views on the telecommunications segment in Indonesia and India. With the various similarities between these two markets, of course the trends that occur in these two countries are similar. Fitch said the current trend is consolidation, where weaker and smaller telcos will be acquired by larger ones. Ideally, according to Fitch, in the long term only four cellular operators in Indonesia can make a profit.

Fitch's opinion is based on balance sheet, cash flow and profit. Consolidation will increase the level of operating profit and cash flow, but transactions such as these can weaken the acquirer's profit balance if funded by debt sources.

Fitch noted that small companies in these two countries continue to struggle to grow their market and achieve positive EBITDA. Their strategy of relying solely on the fast-growing data market proved unsuccessful, as they were unable to achieve scale of growth and generate significant profits due to competition from larger telecommunications companies.

In Indonesia, the consolidation process is already underway, while in India the lack of clear regulations relating to mergers and acquisitions in the telecommunications sector hinders this process. Telecommunications companies in India are still waiting for the easing of regulations that are rumored to be carried out later this year.

The three largest operators in Indonesia have in fact controlled 85 percent of the total market revenue. This resulted in the fight for the rest of the cake by at least five other operators to be unbalanced. The consolidation process was already underway this year when XL Axiata announce acquisition of Axis which is majority owned by Saudi Telecom.

We predict that this consolidation process will not stop until it reaches the ideal equilibrium position. With four GSM operators and three CDMA operators still active, it is not surprising that some companies will "change". The change was either closed because it continued to lose money, was acquired or finally chose to become an MVNO (Mobile Virtual Network Operator) which "drew" the network to a larger operator.

The MVNO concept, although it has been studied by regulators, has not yet been implemented in Indonesia. A research in 2011 conducted by a research team from the Department of Electrical Engineering, FTUI, stated that the competitive profit of the MVNO business (if implemented) in Indonesia is low and a reduction in the bargaining power and number of existing operator customers is needed to encourage the development of the MVNO business in Indonesia.

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