JAKARTA (TheInsiderStories) – Fitch Ratings says the shift toward larger data bundles and unlimited data offerings point to increased competition in Indonesia’ mobile market and the need for continued high investment. However, pricing should remain rational, with major telcos pursuing profitable growth despite tough market conditions.
Fitch believes execution of strategy will be paramount amid a slowing economy, as operators strive to boost revenue. PT Telkom Indonesia Tbk’ (IDX: TLKM) (BBB/Stable) 65 percent mobile subsidiary, PT Telekomunikasi Selular (Telkomsel), was the last of the five domestic mobile operators to launch unlimited data plans, resulting in lost subscribers and a 3 percent in annual basis (YoY) drop in revenue share to 55 percent in first half (1H) of 2020.
PT Smartfren Telecom Tbk (IDX: FREN) (CCC+(idn)), the smallest rival and the first to launch unlimited data plans in 2H 2019, has made headway in its subscriber acquisition strategy, expanding revenue by 42 percent. PT Indosat Tbk (IDX: ISAT) (BBB/AAA(idn)/Stable) managed to increase its mobile revenue by 12 percent, followed by PT XL Axiata Tbk (IDX: EXCL) (BBB/AAA(idn)/Stable) at 10 percent and PT Hutchison 3 Indonesia’ at 8 percent.
“We expect competition to intensify, particularly in the more saturated Java region. However, the extent of competitive data bundles offered will depend on operators’ available capacity and subscribers’ ability to pay,” Fitch said on Friday (08/28).
It says, despite its unlimited data offerings, Telkomsel still has a premium pricing strategy compared with rivals. The incumbent derived 26 percent of revenues from legacy services in 2Q of 2020, making its profitability vulnerable to structural shifts to lower-margin data revenue than for XL Axiata (8 percent of revenue) or Indosat (14 percent of revenue).
“Our base case envisages average capex revenue in the low-to-mid 20s during 2020 – 2021. There is a risk that more capital expenditure may need to be deployed to accommodate the long-term effects of a spike in data demand, and stronger appeal for an upcoming spectrum allocation of the 2.3GHz frequency band,” said the agency.
XL Axiata and Indosat are also funding network expansion and fiberization efforts through other means, such as finance leases. A trend of negotiating lower tower rentals on contract renewal will provide an avenue for telcos to manage cash outflow, even as tower capacity increases.
“We expect XL and Indosat to eventually repurpose the 2G spectrum for 4G services to accommodate increased data traffic. A similar move, however, would be difficult for Telkomsel in light of its larger 2G user base,” adds by Fitch.
The effects of the pandemic have been subdued for Indonesia’ mobile market, with industry revenue relatively flat in 2Q of 2020, compared with the 3 – 4 percent YoY contraction in the Philippines and Thailand. Base on the rater analysis, this is partly due to Indonesia’ fixed-broadband market being significantly under-served due to limited fixed-line infrastructure.
“We now forecast 2020 revenue growth in the low-single digits, from mid-single digits previously (2019: 6 percent), although a prolonged economic slowdown could temper prospects in 2H20,” the report said.
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