Telcos earnings before tax may dip 3-5 points amidst inflation
This could happen in the next two years unless telcos take countermeasures.
Telecommunications companies are expected to see their earnings before interest, taxes, depreciation, and amortisation (EBITDA) drop by 3-5 percentage points in the next two years, Bain & Company reported.
This is unless companies take effective countermeasures to cushion the impact of inflation.
“The effect on each telco will vary, of course,” the report read in part.
“But inflation will put pressure on most of the budget, particularly personnel costs, energy, external spending on services, leases, and capital expenditures. Collectively, these costs equal around 60% of most telcos’ spending.”
Bain added that inflation is projected to start affecting telco’s margins this year. The industry is also likely to face pressure between its margin and topline considerations in response to the faster pace of price increases.
Further, consumers looking to switch to lower-margin products amidst higher prices could affect telco companies.
“Despite the pandemic-induced demand for high-quality connectivity continuing, there’s a risk of increased churn in the market as customers reassess their spending and look for alternatives,” Bain & Company said.
“If price increases are too aggressive or the customer experience suffers from cost-cutting or labor shortages, customer loyalty could erode and contribute to further churn.”
In response to this, Bain & Company recommended that telcos make three moves, starting with getting a complete view of the company’s spending.
This should be followed by expanding the role of the CFO to help executives navigate the situation, and conduct a private equity-style diligence exercise to determine risks and opportunities.