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Telecom
During 3QFY2011, almost all telecom stocks slumped, with
Bharti Airtel (Airtel), Reliance Communication (RCOM) and Idea
dropping off by 2.5%, 13.7% and 6.2%, respectively. These
stocks were set on fire by the report issued by the CAG. As per
the report:
(1) 85/122 new licenses issued in 2008 did not fulfill the
eligibility criteria
(2) The Department of Telecom (DoT) favoured RCOM by
accepting its license entry fee for dual-technology spectrum
before others
(3) The licensing/spectrum allocation policy resulted in a loss
of revenue of ~`1,76,000cr to the exchequer as the entry fee
for spectrum licenses in 2008 was pegged at 2001 prices
Following this, the DoT has issued show cause notices to new
operators such as Etisalat, Videocon, Uninor, Loop, S Tel and
Allianz Infratech (merged with Etisalat), because, as per the
DOT, these operators had suppressed information to bag
licenses and have failed to roll out services as mandated.
Recently, Etisalat and Sistema Shyam have paid penalty of `9.9cr
and `11cr, respectively, to the DoT for failing to launch mobile
phone services on time.
Amongst the listed players, RCOM was set on fire as CAG also
found a violation of rules in the equity structure of Swan Telecom
as Reliance Telecom (GSM subsidiary of RCOM) had more than
the maximum 10% stake in the company. The quarter also
witnessed some key developments, including 1) rollout of mobile
number portability (MNP) in Haryana, which allows a subscriber
to shift from one service provider to another without changing
the mobile number and 2) launch of 3G services by operators
such as Tata Teleservices and RCOM.
MNP as a non-event: Haryana witnessed the launch of MNP
during the quarter, which proved to be a non-event as the
anticipated escalation in the churn of post-paid customers fell
through. Pan India rollout of MNP is due in January 2011.
3G launch by private players: Not at an irrational price
RCOM gave respite to the industry by launching 3G services at
a premium to Tata Docomo, for usage lower than 1 GB, thus
ruling out the possibility of any irrational pricing by other
incumbents going forward.
New players continue to gain subscriber market share
Over September-November 2010, the Indian subscriber base
grew at an average rate of 2.9% mom. Amongst the incumbents,
Airtel, RCOM, Vodafone, Aircel and Idea grew at an average
rate of 2.1-3.1% mom, whereas BSNL outperformed its peers
by growing at an average rate of 3.7% mom. New entrants,
including Uninor, Etisalat, Videocon and S Tel, grew at average
rates of 19.9%, 55.8%, 4.5% and 12.5% mom, respectively.
Thus, a trend was spotted with most of the incumbents (Airtel,
RCOM, Aircel and Vodafone) losing out their market share to
new entrants. Whereas, BSNL and Idea bucked the trend of
losing out their market share to new entrants and gained market
share by 0.2% and 0.1%, respectively, over the same period.
Over September-November 2010, subscriber market share of
new entrants such as Uninor increased by 0.6%, whereas market
share of Videocon and S Tel remained stable at 0.2%.
The net addition run rate of incumbents faced a churn during
August-September 2010 due to tightened security norms as well
as rollout of 2G services by new operators, including Uninor,
Etisalat and Videocon. In October-November 2010, incumbents
again supported strong net additions, with Airtel and Vodafone
leading the pack by adding 3.1mn subscribers each in
November 2010.
Circle-wise net additions
In the first two months of 3QFY2011, all the circles witnessed
impressive growth in subscribers with Metro, A and C circles
growing by 2.1-3.4% mom, whereas B circle growing by 3.1%
despite having the highest subscriber base.
In November 2010, Metro lost its share to A and B circles in a
big way, which stood tall with market share of 34.1% and 42.6%
in subscriber net addition, respectively. On an absolute basis,
in November 2010, all circles except Metro grew rapidly, with
B circle leading at 9.3mn net addition (28.9% mom), followed
by A and C circles at 7.4mn (28% mom) and 3.2mn (15.7%
mom), respectively. Net additions in Metro circle trended
downwards by 3.2% mom at 1.9mn.
MOU to marginally firm up
From 2QFY2010-1QFY2011, Airtel and Idea witnessed a
secular growth trend in their minutes of usage (MOU); however,
they witnessed a decline in the seasonally weak 2QFY2011.
RCOM, on the other hand, has been consistently experiencing
a decline in its MOU. For 3QFY2011, we expect MOU for Airtel
and Idea to grow marginally by 0.5% and 0.2% qoq,
respectively; whereas for RCOM, we expect MOU to continue
to decline at 1% qoq.
VAS share to grow
We expect VAS share to have grown in 3QFY2011, on account
of the festival season leading to higher exchange of text and
other value-added services. This should help the downside in
average revenue per minute (ARPM) to be limited due to lower
voice ARPM resulting in from higher growth in B and C circles.
ARPM to remain flattish
ARPM registered a free fall at a ~5% CQGR over the past nine
quarters on the back of entry of new players and the price war.
However, the price war logged by these new entrants has turned
into a curse for their own sustainability. The confidence of no
further possibility of a price war resurfacing was instilled by the
rational pricing move for 3G services by RCOM vis-à-vis Tata
Docomo, i.e. no case of undercutting. Therefore, we expect
ARPM to remain flat qoq for 3QFY2011.
ARPUs to inch up
For 3QFY2011, we expect the combination of flat ARPM and
marginal improvement in MOU to push average revenue per
user (ARPU) marginally up by 0.4% and 0.3% qoq for Airtel
and Idea, respectively. However, for RCOM, ARPU is expected
to fall by 2.0% qoq due to slippage in MOU.
EPMs to remain stable
For 3QFY2011, we expect EBITDA per minute (EPM) to remain
flat for all the three telcos as stable ARPM, marginal uptick in
MOU and strong subscriber growth will set off cost escalation
due to higher access charges.
Outlook and valuation
For 3QFY2011, we expect revenue growth to be driven by strong
growth in subscriber base, flat ARPM and a marginal uptick in
MOU. Amongst the top three operators, we expect Idea to
register revenue growth of 5.0% qoq and RCOM to grow at
5.5% qoq. Airtel (including Zain) is expected to post growth of
3.8% qoq. On the EBITDA margin front, we expect Airtel to
record an expansion of 56bp qoq on the back of lower personnel
cost and decreasing network-operating expense (NOE) with
higher subscribers per cell site. Idea and RCOM are also
expected to post EBITDA margin expansion of 7bp and 30bp
qoq, respectively, for 3QFY2011. The sector continues to be
haunted by issues related to the 2G scam. We believe industry
dynamics point toward a possible consolidation in the long run
and expect only select few operators, including Airtel, Vodafone,
RCOM, BSNL, Aircel, Idea and Uninor, to be the survivors out
of the current 14 operators. Airtel continues to be our preferred
pick amongst telcos due to its low-cost integrated model (owned
tower infrastructure), potential opportunity to scale up in Africa,
established leadership in revenue and subscriber market share,
and relatively better KPIs.
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