Telecom - Mobile number portability: Adding to operators' woes:: Edelweiss

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n  MNP: soon to be reality, finally!

Mobile number portability (MNP) is set to be rolled out from November 25, 2010 starting from Haryana in the North. Syniverse and Telcordia have been selected to be the clearing houses, the former for West and North India and the latter for South and East India. We understand that all the required systems and processes have been created and the testing phase is completed. As per TRAI, pan-India MNP implementation is expected to be complete by January 10, 2011.

n  Process of switching operators to be simple and easy

The street has been sceptical on MNP implementation and expects the switching process to be tedious for it to make any impact on market leaders Bharti Airtel (BHARTI) and Vodafone Essar (Vodafone). However, we understand that the process of switching operators is simple with the migration likely to happen during night (with maximum switch off time of two hours) and within 48 hours of submission of application. The switch is possible even from CDMA to GSM and vice-versa. The subscriber will be issued a new SIM card by the new operator.

n  Costs likely to rise and realisations may dip

Customer acquisition cost, due to MNP, is likely to rise as the acquiring operator (Recipient) is unlikely to collect fees from the customer. Also, the Recipient will have to scrutinize the application and conduct the verification process, which involves some cost. As the Recipient will issue a new SIM card (INR 40), we believe, it is likely to be subsidized. Bharti, being the largest operator, will have to incur customer retention cost to follow the MNP process, make efforts to retain the customer and settle for lower ‘realised pricing’ in any case. Thus, we expect costs to rise across the industry while RPM for incumbents would come under pressure. 

n  EBITDA impact of 3-10% for Bharti, only from revenue loss

Bharti has a pan-India revenue market share of 33%. In its top 10 circles, which contribute 73% to overall revenues, its ARPUs are at an average premium of about 50% over its closest competitor. A majority of the street believes that MNP will be a zero-sum game for Bharti as it will also gain customers from its competitors. Our analysis suggests that even if it gains customers and retains subscriber market share, these new customers will bring in lower ARPUs than those it loses. Hence, its revenue market share could be impacted. We estimate that Bharti’s 5% postpaid subscriber base contributes about 25-30% to its overall EBITDA. MNP, in our view, provides these high margin customers an opportunity to ‘negotiate’ better pricing. Our analysis, assuming no cost increases and market share loss but only lower revenues from existing customers, indicates that Bharti’s EBITDA could get eroded by 3-10% (see page 7 for details).

n  Valuation and view: Too many headwinds

We maintain our cautious stance on the telecom sector. We believe, the recent developments in the sector would lead to more stringent regulations and review of policies. The impact of MNP, 3G services and the final verdict on 2G spectrum pricing are certain events that will lead to cost pressures. Some of the other proposals like 2G spectrum refarming and treating the entire country as a single service area thereby impacting the inter-state premium tariff could further have an adverse impact. We maintain our recommendation/rating of ‘HOLD/SO’ on BHARTI, ‘HOLD/SP’ on Idea and ‘REDUCE/SU’ on Reliance Communications.