MANILA, Philippines - London-based Fitch Ratings believes intense competition would continue to choke margins of major players in the telecommunications industry in the country led by dominant carrier Philippine Long Distance Telephone Co. and Ayala-controlled Globe Telecom Inc. next year.
In its 2013 Outlook on Southeast Asia Telecommunications, Fitch said major industry players in the country as well as other members of the Association of Southeast Asian Nations (ASEAN) would face margin pressures in 2013 as competition intensifies.
“In the Philippines, price competition will lead to continued margin erosion in 2013 despite the duopoly market,” the rating agency said.
The Philippine telecom industry is dominated by PLDT which is partly owned by First Pacific Co. of Hong Kong and the NTT Group of Japan, as well as Globe which is a joint venture between diversified conglomerate Ayala Corp. and Singapore Telecom.
Fitch stated in the report entitled “Southeast Asia Telcos Fit to Meet Capital Expenditures, Margin Challenges" that the growth in volume would not be enough to offset margin decline.
“Volume growth is likely to be insufficient to offset margin decline, and therefore Fitch expects the telcos’ cash flow from operations to be weaker,” Fitch said.
Intense competition and higher expenses for network modernization projects pulled down the earnings of both PLDT and Globe in the first nine months of the year.
PLDT’s net income slipped six percent to P28.7 billion from January to September this year from P30.6 billion last year amid a 13 percent increase in total revenues to P128.56 billion from P114.05 billion.
On the other hand, Globe’s profits fell 19 percent to P6.81 billion in the first nine months of the year from a year-ago level of P7.99 billion amid a six percent rise in consolidated revenues to P61.3 billion from P57.7 billion.
PLDT completed its P67.1 billion network upgrade ahead of schedule while Globe is set to finish its $700 million network modernization and transformation project in the first quarter of next year.
Fitch said Philippine telco providers are expected to book higher free cash flow next year due to lower capital expenditures.
“However, leverage will improve as FCF is likely to turn positive due to lower capex - with the completion of major network investments in 2012,” the rating agency said.
Steve Durose, head of Fitch’s Telecommunications, Media and Technology team in Asia-Pacific, said in a statement that telco providers in Southeast Asia are likely to face margin pressures in 2013 as competition intensifies.
“Demand growth is likely to match or outpace the decline in margins and growth in investment and credit metrics will generally be stable or slightly improved. In the cases where credit metrics will decline, Fitch expects few rating downgrades as these operators generally have significant headroom at their current rating level,” Durose warned.
In Indonesia, Fitch expects the dominant top-four operators would generate adequate cash flow from operations to support continued high capex while smaller telcos would continue to struggle amid declining tariffs, low profitability and weak balance sheets.
In Malaysia, most telcos would maintain their operating margins due to stable voice tariffs and rising data revenue while wireless telcos’ free cash flow margins would remain robust as capex are expected to stay relatively low.
All three Singapore telcos are likely to face pressure on operating margins due to continuing smartphone subsidies and pay-TV content costs, despite better data monetization prospects.