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lthough growing competition will further erode margins, the outlook for the Indonesian telecommunications sector remains stable, according to rating agency Fitch Ratings.

The agency expects the top five operators of PT Telekomunikasi Indonesia Tbk (Telkom) with “BB+”/positive outlook; PT Telekomunikasi Selular (Telkomsel) with “BBB-”/stable outlook; PT Indosat Tbk (Indosat)’ with “BBB-”/stable outlook; PT XL Axiata Tbk (XL), with “BB+”/positive outlook and PT Bakrie Telecom Tbk (BTEL), with “B”/negative outlook to continue to control 90 percent of the market.

“Subscriber growth and infrastructure leases are likely to support revenue growth. Fitch expects many telcos to attempt to diversify into more value-added services to compensate for declining revenue in voice and SMS,” Any Sirapurna, the associate director in Fitch’s TMT team, said in a statement.

The price war in the principal revenue generators, voice and SMS, is likely to have bottomed out in 2011, although competition in data services is now intensifying.

Fitch expects smartphone and tablet penetration will be lower than telcos’ expectations until product prices drop to more affordable levels.

As a result, low penetration rates in mobile data services are likely to defer any long-term evolution (LTE) investment well beyond 2012.

Operating EBITDAR margins for 2012 are likely to be eroded by low-single-digit percentage points, but should nonetheless remain higher than most other Asia-Pacific telcos, Fitch said.

Credit metrics are likely to improve in 2012, as growth in cash flow from operations is likely to outpace growth in capital expenditure (capex) and dividends.

The ratings of some Indonesian telcos are constrained by the sovereign rating or country ceiling,
so positive developments may not lead to rating upgrades for all companies.

Conversely, upgrades in the country ceiling and sovereign ratings are likely to lead to upgrades in Telkom’s and Telkomsel’s long-term foreign-currency and local-currency (IDR) debt and a revision of the outlook on Indosat’s LTFC IDR debt to positive from stable.

The agency also expects Telkom’s discussions on acquiring Singapore Telecommunications Limited’s (SingTel, “A+”/Stable) 35 percent share in Telkomsel to conclude in 2012.

Despite long-running discussions, Fitch does not expect Telkom Flexi to merge with BTEL, but a merger is possible between Telkom Flexi and another CDMA operator.