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Indonesia’s telecommunications sector is stable even though competition is likely to erode margins, Fitch Ratings said in a report on Wednesday.

“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 [short message services],” Any Sirapurna, associate director for Fitch’s telecommunications, media and technology team said in a note.

The rating agency expects operating cash flow margins next year to increase by less than 10 percent, but they will be higher than most in Asia-Pacific markets. Telcos’ credit-risk portfolio is expected to improve next year as Fitch expects growth in operational cash flow to be bigger than for capital expenditure and dividends.

Fitch said it believed price competition in voice call and SMS had bottomed out this year, but that the price war in data services was intensifying. However, penetration rates for smartphones and tablets are expected to remain low until these products became more affordable, it said.

State-controlled Telekomunikasi Indonesia, its subsidiary Telekomunikasi Selular, Indosat, XL Axiata, and Bakrie Telecom are expected to continue to control about 90 percent of the market share in the country, Fitch said.

Telekomunikasi Selular and Indosat are rated at the lowest investment grade, BBB-, with stable outlooks. Telekomunikasi Indonesia and XL Axiata are both rated one notch below investment grade at BB+ with positive outlooks, while Bakrie Telecom has a B rating, five notches below investment grade, with negative outlook.

Fitch said that the ratings of some Indonesian telecommunications operators are constrained by the sovereign rating or country ceiling, so positive developments may not lead to rating upgrades for all companies. Fitch rates Indonesia’s credit at one step below investment grade.

“The agency also expects Telkom’s discussions to acquire Singapore Telecommunications Limited’s 35 percent share in Telkomsel to conclude in 2012,” Fitch said in the report.

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