Home India Surging diesel prices add to the woes of already stressed telcos

Surging diesel prices add to the woes of already stressed telcos

Most mobile tower sites depend on the fuel and tower companies largely pass on maintenance expenses to the telcos, analysts said.

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India’s mobile phone operators face a 5-10% hit on operating margins due to the increase in diesel prices, another setback for the telcos already under severe financial stress due to intense competition, analysts said.

Most mobile tower sites depend on the fuel and tower companies largely pass on maintenance expenses to the telcos, analysts said. Diesel prices have risen about 11% since March 1. “There will be a significant impact on operational costs negatively for telecom operators and could hurt the earnings before interest, tax, depreciation and amortisation (EBIDTA) margins by 5-10%,” said Hemant M Joshi, partner-technology, media and telecommunications, at Deloitte India.

For operators, increase in energy costs will have to be absorbed while reeling under the impact of tariff wars, Joshi added.

A quarter of the 4.7 lakh towers in India are diesel-free sites, which use a bare minimum amount of the fuel to ensure smooth operations. The retail price of diesel in Mumbai was Rs 73.79 per litre on Tuesday, compared with Rs 66.30 on March 1. Impact of diesel price rise will be seen in the next few quarters, analysts estimated. Bharti Airtel, Reliance Jio Infocomm, Vodafone India and Idea Cellular didn’t respond to email queries seeking comment.

Some telcos have already taken a hit and their earnings statements in the next couple of quarters will cite increased diesel prices as one of the factors that affected profitability, according to Sanjiv Bhasin, executive vice-president for markets and corporate affairs at brokerage IIFL.

Bharti Airtel’s India operations, Idea Cellular and Vodafone India are already in the red, mainly due to the price war started by Jio.

However, tower companies will not be left unscathed because in some cases, they share fuel costs with operators.

“The earlier arrangement was on a ‘pass-through’ basis wherein tower companies were reimbursed by the telcos for the power and fuel costs,” said Shobhit Agarwal, partner-advisory, at KPMG.

However, some tower companies have shifted to a fixed-cost model where only part of the increase in power and fuel expenses – due to higher tariffs or costs – is passed on, depending on terms of agreement.

Power and fuel typically constitute 30-40% of the operational expenses for a tower company and the extent to which a rise in diesel prices can be passed on to mobile network operators will depend on the agreements between them, said Agarwal.

An infrastructure provider does not take the price risk and all rate revisions — up or down — are passed on to the telcos, said an executive of a leading tower company who did not want to be identified.

The Tower and Infrastructure Providers’ Association said the hit on margins may be much lower this time because diesel dependency has reduced with a shift to renewable sources of energy such as solar power and fuel cells. In some cases, telcos are sharing tower sites, thereby increasing cost efficiencies. “In 2011-12, mobile sites used 7.34 litres of diesel per tenancy per day, while in 2015-16, it dropped to about 4 litres of diesel per tenancy per day. A 1% increase in diesel price leads to 0.1% impact on EBITDA margins, so an 11% rise in diesel prices will affect operating margins as well, but not in a large way,” said Tilak Raj Dua, director general of TAIPA.

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