India not for the faint-hearted

India’s mobile sector got a share-price bounce recently. Bharti Airtel and Vodafone India, the country’s two biggest operators, reported encouraging top-line numbers for the quarter ended June. With voice and data revenue climbing, is it possible that the Indian mobile market – so long plagued by razor-thin margins and a volatile investment climate – has turned a corner?

The short answer is no. While increases in service revenue are welcome, helped by a growing 3G subscriber base, there are still too many market uncertainties to say with any conviction that India’s operators – many of which are carrying heavy debt – are out of the woods.

For one thing, the government – wrestling with a gaping budget deficit gap – seems determined to get as much money out of operators as possible.

Aside from the failed auctions for 2G spectrum in November and March, because of excessive reserve prices, there are plenty of instances of India’s authorities trying to squeeze operators.

Back in December, the Department of Telecommunications (DoT) simply ignored formal applications made by Vodafone and Bharti to renew their 2G licences in the relatively lucrative metro circles of Delhi, Kolkata and Mumbai. The operators, announced the government department in March, would need instead to bid for the spectrum in an open auction, so raising the prospect of more balance sheet pressure.

For their part, Vodafone and Bharti maintain they have the right to extend the 2G licences, which are due to expire in November 2014. And Vodafone’s initial reaction to DoT’s decision was nothing short of calling the department inept, claiming the rejection contained “several fundamental flaws, contradictions and jurisdictional errors”.

Vodafone, adopting a more conciliatory tone, subsequently offered to pay the government around $655 million for its 2G licences, and so avoid an open auction. There are no guarantees this will be accepted, of course, but the whole episode illustrates growing tension in the sector.

And DoT looks more zealous than ever to hand out fines, which increases operator anxiety. As a punishment for entering into so-called 3G roaming pacts to offer services in circles where they don’t have 3G spectrum (which DoT deems are illegal), Bharti, Idea cellular and Vodafone now face hefty fines. The root of the problem, though, is surely a lack of spectrum.

And more fines are on the way. DoT has been re-visiting the 2003-2005 period to address what it claims are other roaming violations. It then slapped a fine of about $100 million on Bharti in May, followed later by a smaller fine of around $16 million on Vodafone. Whatever the rights and wrongs of the case, it seems strange that DoT has taken so long to mete out its punishment.

It is a worrying trait of the Indian market that goalposts can shift suddenly and dramatically. Think of the tax legislation brought in by the government to try and bypass an earlier ruling by the country’s Supreme Court that Vodafone was not liable to taxes in relation to its acquisition of Hutchison’s Indian unit in 2007. Think also of the abrupt cancellation of 122 2G licences in 2012 amid accusations of corruption. That move left many foreign investors with their fingers burnt.

Excited by the prospect of high Indian growth, foreign telcos have perhaps tended in the past to jump into the market and ask questions later. Unless operators have extremely streamlined operations, they may struggle to make a profit in a place that has one of the lowest voice call prices in the world. The opaque and unpredictable investment climate hardly helps either.

And it’s worth looking at Bharti’s Q1 results again. While analysts were impressed that its Q1 contained encouraging signs of ARPU growth, the three months ended June were nonetheless the fourteenth consecutive quarter in which the operator posted a fall in net profit. If the largest mobile operator in India is struggling, it hardly bodes well for smaller-scale rivals.

It’s far too soon to talk about long-term growth and stability in India.