Indosat’s operating margin will decline to about 40 per cent from 42.5 per cent last year as competition intensifies in the data segment and its marketing costs rise, according to Fitch Ratings.
The decline will also be driven by a change in the revenue mix as lower-margin data services substitute more profitable voice and text services.
Fitch Ratings estimates the operator’s EBITDA margin on data is 15-20 per cent compared to more than 40 per cent on traditional voice and text.
These competitive pressures and lower data margins, Fitch said, will likely force unprofitable operators to shut down, narrowing the field from six to just four and resulting in more stability to data tariffs.
Indosat, which is 65 per cent owned by Ooredoo, is Indonesia’s second largest mobile operator with an 20 per cent market share by revenue. The operator is one of Ooredoo’s largest and fastest-growing subsidiaries, accounting for about 22 per cent of Ooredoo’s group revenue, 25 per cent of EBITDA and 25 per cent of capex in 2014.
The operator’s capex is expected to fall once it completes its network modernisation programme by the end of the year. Its capex to revenue ratio for the next two years is forecast to fall to 28-30 per cent from 33 per cent last year.
Indosat last year tripled the number of 3G sites to 15,962 to catch up with XL’s 16,000. Market leader Telkomsel has almost double that number.
Fitch said Indosat’s strategy to roll out 3G technology using the 900MHz and 2.1GHz spectrum bands will bring capex savings relative to its competitors, which use mostly the 2.1GHz band.
The ratings agency noted that Indosat is exposed to rupiah depreciation as 46 per cent of its IDR25.5 trillion debt is in US dollars, of which around 56 per cent is hedged through forward contracts. It also pays about $40-45 million in tower lease rentals denominated in US dollars, which further exposes its EBITDA to currency risk. It estimates that a 15 per cent depreciation in rupiah will add about 0.3x to Indosat’s leverage.
Fitch believes Indosat is likely to refinance its $650 million of notes originally due 2020 through a rupiah-denominated bond this to lower its US dollar exposure.