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India: Telecom Services
Equity Research
Sound from the ground: MNP activity uptake; focus on postpaid
MNP unlikely to change market shares; but risks to postpaid tariffs
We do not expect any material changes in market share from MNP (Mobile
Number Portability), which is scheduled to be implemented on a pan-India
basis from Jan 20. However we expect a near-term increase in S&M costs,
network expenses, and churn rates. We do not expect a meaningful
proportion of corporate subs moving from incumbents to new entrants
given the better network QoS (Quality of Service). Instead, we believe
these subs will negotiate tariffs with incumbents. We estimate post-paid
contributes about 15%-20% to Bharti’s/ Idea’s cellular revenues and believe
5%-8% of Bharti’s earnings may be at risk. Case-studies from other markets
show limited impact from MNP in the majority of the cases.
MTNL/Loop to be impacted most? Bharti may gain in rural India
We believe operators such as MTNL/Loop Telecom, which have legacy
high-end postpaid subs but over a period of time have arguably struggled
with network quality/customer service would likely see high-end subs
churning out. In rural India, we believe Bharti could be a potential
beneficiary if subs port out from BSNL for better coverage/service.
Idea most aggressive; RCOM/DoCoMo risk losing CDMA subs
Based on our channel checks/retail observations, we believe Idea is most
aggressively marketing/educating consumers on MNP. We believe dual
technology operators like Tata DoCoMo/RCOM are not aggressive in mass
advertising as they risk losing a large part of their CDMA subs but are
selectively targeting the lucrative corporate postpaid base. In Metros, some
of the non-incumbent operators are giving a flat discount of 20-30% on the
existing bill to high-end incumbent subs if they switch to these operators.
Can MNP facilitate consolidation? Reiterate Buy on Bharti/Idea
We believe one of the key hindrances for any potential license cancellation
of new entrants is what happens to subs on these networks. In our view,
MNP rollout would help resolve this issue, as consumers could port to
another network and retain the same number and their services would not
be disrupted. We consider MNP as the last leg for any potential competitive
uptake and expect competitive dynamics to stabilize in a few months after
MNP. We believe the business case for new entrants will further weaken
after a few months of MNP rollout and expect it to be another trigger for
consolidation. Reiterate Buy on Bharti (on CL) and Idea
MNP impact: Unlikely to materially change market shares
We do not expect any material changes in market share from MNP and expect near-term
increases in S&M costs, network expenses, and churn rates. Given the predominant prepaid nature of the Indian market (96%+ subs are pre-paid), we believe operators will likely
focus on attracting the post-paid subs/high-end pre-paid subs after MNP.
In the near-term, we do not rule out downside risks to postpaid tariff and consider
MTNL/Loop Telecom the most vulnerable: We believe MNP implementation might lead
to increase in competitive pressures in the high-end prepaid/post-paid market – particularly
the corporate subs base as new entrants try to attract these subs from incumbents. We do
not expect a meaningful proportion of corporate subs moving from incumbents to new
entrants given the better network QoS (Quality of Service), and customer service provided
by incumbents. However, we expect these corporate subs to negotiate rentals/tariffs with
incumbents. This may lead to some impact on profitability of the incumbent operators. We
estimate post-paid contributes about 15%-20% to Bharti’s/ Idea’s cellular revenues and
believe 5%-8% of Bharti’s earnings may be at risk. However we expect any impact to be
spread over a few quarters.
In addition, we believe operators such as MTNL/Loop Telecom, which have legacy highend postpaid subs but over a period of time have arguably struggled with network
quality/customer service would likely see high-end subs churning out
In the longer-run, operators like Bharti who have 900 MHz spectrum and good rural
presence will likely benefit: In the long-run, we believe operators who have 900 MHz
spectrum (mainly incumbent operators like Bharti) will likely gain/maintain market share as
the 900 MHz spectrum provides a competitive advantage over 1800 MHz in terms of better
network quality at relatively lower capex. In rural India, although we acknowledge that
BSNL’s churn rate is lower (given higher loyalty), we do not rule out its subs migrating
after MNP implementation for better service quality/customer-care service. We believe
Bharti could be a potential beneficiary given its dominant presence in the rural market
among private operators. However we expect Bharti to gain market share from BSNL in
rural areas in a phased manner as it will take time for consumers to be educated on MNP.
Key conclusions on potential operator strategy on MNP based on
our discussions with industry participants
Non incumbents targeting postpaid subs and not high-end prepaid: Based on our
discussions with operators we believe the non-incumbent operators are focusing on
targeting the lucrative high-end corporate subs base of incumbents. Although the high-end
prepaid segment also forms a large portion of total revenues, the new entrants’ interest in
targeting them surprisingly appears to be relatively low as of now. None of the operators
are focusing on the mid-to-low end prepaid subs base as these consumers use multiple
SIM cards and churn frequently.
Incumbent operators: In a defensive mode? Incumbent operators believe MNP will have
limited impact on their earnings. They believe the high-end postpaid subs will prefer
incumbents given that they provide better QoS and customer care. Incumbents believe
they have ring-fenced their corporate consumers by providing bundled offerings, attractive
tariffs and dedicated call centers.
Incumbents unlikely to renegotiate tariffs aggressively; banking on these subs
porting back to them in the medium term: We believe incumbent operators are unlikely
to aggressively re-negotiate the postpaid tariffs downwards as they are well aware of their
strengths like 900 MHz spectrum and better customer care which the relatively new
entrants lack. Therefore, in our view, the incumbents may let go a few consumers who try
to aggressively renegotiate. Incumbents are hopeful that a part of such subs will return to
them given their inherent advantages which are unlikely to be replicated by the nonincumbent operators.
The challengers: Competing only on price... All the non-incumbent operators believe that
corporate/enterprises will take MNP as an opportunity to renegotiate their tariffs. While
these operators acknowledge that better QoS and customer care call-centers are necessary
for keeping the high-end postpaid happy, they believe “attractive pricing” is the most
important factor and corporates will switch if they are offered a 25-30% discount on their
current tariffs. Some of these operators do not rule out subsidizing high-end handsets to
poach some of the high-end consumers
Dual-technology operators have customized “corporate” strategy as they risk losing
CDMA subs in a mass-market strategy, in our view: We believe dual technology
operators like Tata DoCoMo and RCOM are not aggressive in mass advertising and
educating consumers on MNP unlike operators like Idea Cellular as they risk losing a large
part of their CDMA subs who are unable to migrate to other networks until now as they
would end up losing their number. We note that initial data from MNP launch in Haryana
had showed that it was mainly the CDMA subs that have ported to GSM. However we
expect these operators to selectively target the high-end post paid corporate GSM subs
base by offering cheaper tariffs.
Initial MNP launch data: Not correct representative of MNP impact
MNP is India was launched in a phased manner – with Haryana being the first circle where
MNP was rolled on Nov 24. (Entire India is scheduled to have MNP by Jan 20). The initial
data from Haryana (as per Business Standard Jan 15) shows that 140K subs (0.8% of 17.8
mn Haryana subs as of Oct ‘10) requested to be ported since Nov 24. However the actual
churn was 80k (request to port for remaining was rejected). We believe the initial lackluster
impact due to MNP launch in Haryana is not a correct representative of MNP impact in
India.
We believe the key impact of MNP will be felt in Metros where the majority of the postpaid
subscriber base for incumbent telcos exist and will likely be targeted by non incumbent
operators like Tata DoCoMo, Aircel, Idea and RCOM. We do not expect operators like
Uninor, Videocon, Etisalat to be aggressive as they have no/limited postpaid offerings.
On the ground checks and retail observations
High ARPU consumers of incumbents selectively targeted by competitor operators:
Based on discussions with operators and retail checks, we believe non-incumbent
operators in key metros are approaching select consumers of incumbent operators with
monthly bills of Rs 1,500 or more to port to their network. These non-incumbent operators
are giving a flat discount of 20-30% on the existing bill if they switch to these operators.
Dedicated call centers used to educate/poach consumers: Operators like Bharti and
Idea have set-up dedicated toll free call centers with the intent of educating consumers
about MNP and trying to poach consumers. Based on our interactions with these customer
care executives we believe 1) While Idea Cellular’s focus is more on poaching/porting in
subs, Bharti appears to be equally focused on retaining its subs base; 2) We found
executives of Idea more aggressive in responding to queries and offering customized plans
to suit the needs of consumers.
Operators unveiling MNP specific ads to educate consumers: Following our
checks/retail observations and discussions with companies, we believe Idea Cellular is the
most aggressive operator which is advertising on MNP. Recently both Bharti and Vodafone
unveiled their ads highlighting the advantages each of them has over its peers.
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