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Sector thesis: tariff wars not over yet
We see no respite yet in competition in the India Telecoms Sector, as we believe
tariffs have not bottomed out yet. The competition has moved away from the
headline numbers (per second/per minute) to package plans, such as daily packs
and innovative tariff plans (dynamic discount plans). We expect the launch of 3G
services and the introduction of number portability to lead to a further lowering of
tariffs in the sector, thereby putting pressure on revenue and profitability growth.
Uncertain regulatory policies continue to hamper the sector. We expect the revised
set of recommendations on the 2G spectrum to be more favourable to the
incumbent operators than the original set of recommendations. We believe that
unless the current criteria for M&A in the sector are relaxed, we may not see any
consolidation between any two large operators.
Structural outlook: three-year view
In terms of tariffs in the sector, we believe the industry will settle down to package
plans offering unlimited voice/data usage from the current per second/per minute
plans. How the revenue market share of the telecoms operators shapes up will
depend on the strategies they follow for 3G services.
In our view, some of the existing mobile operators could engage in M&A activity
or exit the market altogether over the next three years, and the telecoms market is
already quite crowded with 10-12 players in each circle. We expect service
providers with powerful brands, strong execution capabilities, high service levels
and good network quality to succeed over the long run. We would also expect the
regulators to play a key role in shaping up the telecoms industry by framing clear
policies over a period of time.
Best-positioned: Bharti Airtel
Sensing the intense competition and low growth rates in the India
Telecommunications Sector, Bharti has diversified its revenue base by acquiring
the Africa operations of Zain in a US$10bn deal in June 2010. While we believe
Bharti cannot differentiate its products from other operators in India unless it
comes out with something innovative with 3G, the catalyst for outperformance
could arise from how Bharti handles its Africa operations in 15 countries. We
believe that with its strong execution and management capabilities, Bharti will be
able to replicate the ‘minute factory model’ it so successfully executed in India, to
drive business growth in Africa.
Worst-positioned: Reliance Communications
RCOM has been responsible for the revolution in the mobile industry in India by
taking the lead in cutting tariffs. However, with tariffs already at low levels, we
believe RCOM has lost its unique selling point. Efforts to deleverage its debt-laden
balance sheet have not been fruitful, with RCOM failing to close deals for its
passive infrastructure and Globalcom segments. As we expect effective tariffs to
drop further, we believe RCOM’s balance sheet could remain stretched for a
prolonged period of time, resulting in a slow recovery.
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