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UBS Investment Research
India Mobile Sector
2011 - Resurrection year
„ 2011 holds regulatory promise
We believe 2011 has the potential for Indian mobile sector to witness a rational
regulatory environment under the leadership of Kapil Sibal, India's new telecom
minister. Sibal has promised to come up with National Telecom Policy 2011 soon
that will address key issues such as spectrum allocation, spectrum sharing & M&A.
„ Pricing to stabilize & potentially improve
With rational regulation allowing for potential consolidation, we believe pricing is
likely to stabilize in the coming quarters and then improve in FY2013. Bharti, Idea
and RCom are all set to reap the benefits of better pricing. We do not expect any
disruptive moves by operators due to 3G and MNP implementation
„ Data - Potential growth area
We believe that the 3G services launch coupled with affordable 3G handsets is
likely to positively impact data services revenues. India lags its emerging market
peers such as China, Indonesia when it comes to data usage and we believe this is a
medium term trend worth focusing on
„ Indian mobile stocks can out-perform in 2011; Bharti is our top pick.
The Indian mobile sector has been a big under-performer since March 2009 (when
Indian markets started the recent bull run). We believe the improvement in
regulatory climate coupled with better pricing will enable the sector to outperform. We upgrade Idea to Buy (from Sell earlier). We reiterate Buy ratings on
Bharti & RCom. Bharti remains our top pick.
Since March 2009 (when the recent bull run started in India), Indian mobile
sector has underperformed significantly when compared to the broader market.
The main reasons have been concerns surrounding the
Q heightened competitive intensity in the Indian mobile sector, and
Q uncertainty surrounding the government policies and regulatory issues such
as 2G spectrum allocation and pricing, 900MHz spectrum re-farming and
M&A guidelines.
What might change in 2011?
Looking ahead, we believe 2011 will be a crucial year for the sector as we think
most of these concerns could be allayed during the year, presenting an
opportunity for telecom stocks to mean revert.
Regulatory progress - likely in the next 6-9 months
The regulatory policy environment in India has been in a state of flux over the
last 2-3 years. There have been issues related to i) 2G spectrum allocation and
pricing, ii) pricing of excess 2G spectrum, iii) renewal of 2G licenses, and iv)
M&A guidelines in the sector.
Besides these regulatory issues, controller and auditor general (CAG) report in
November 2010 raised concerns in the way Department of Telecom (DoT)
issued 2G licenses during January 2008.
UBS View:
Q We believe 2011 has the potential for Indian mobile sector to move towards
rational regulatory environment under the leadership of Kapil Sibal, India's
new telecom minister.
Q Sibal has promised to come up with National Telecom Policy 2011 soon that
will address key issues such as spectrum allocation, spectrum sharing,
trading and M&A. The minister has already stressed the need for a clear and
transparent telecom policy that offers level playing fields to all concerned
players.
Q On the concerns raised by CAG report, we do not think that government can
cancel the entire exercise of 2008 2G license issuance or ask new licensees to
pay market determined prices as these operators got licenses issued by
government of India at that point in time. Rather, we believe that spectrum
will be sold at market determined rates going forward.
Q However, we believe that government can take strict action against new
operators who misrepresented facts to obtain 2G licenses in January 2008.
Department of Telecom (DoT) has constituted an internal enquiry on these
matters.
Q We do think that if found guilty the government may impose heavy
fines/penalties or cancel licenses (in extreme case) of these companies. The
punitive action may result in freeing up 2G spectrum which could be
allocated to incumbent operators such as Bharti, Vodafone, Idea, RCom &
Tata DoCoMo.
Pricing to stabilize & potentially improve
The Indian mobile market entered a phase of hyper competition after several
new 2G licenses were granted in 2008. The voice revenue per minute declined
by 30-35% to Rs0.40/min from Mar'09 to Sep'10 as new players launched
aggressive tariff plans during this period.
However, the data points over the last two quarters suggest that voice revenue
per minute is stabilizing at Rs0.40/min level. Also, in the last 6-9 months we
have not witnessed any big move, such as per second billing, on the tariff front
at national level.
UBS View:
Q We expect rev/min to remain stable in the next 9-12 months before starting
to pick up as we begin to see some consolidation in the sector.
Q We have highlighted, in our earlier reports, that we do not expect voice rev
per minute to fall materially form Rs0.40 levels as cost/min for a new
operator is Rs0.74/min and prevailing rev/min is Rs0.40
Can 3G and MNP spoil the party?
Mobile number portability (MNP) and 3G services are expected to be launched
on a Pan-India level during the first quarter of 2011. There have been concerns
that the launch of these services may trigger another round of price war in the
sector. However, looking at the initial set of data emerging from market we
believe these concerns are over stated.
MNP – A zero sum game for incumbent players in our
view
MNP is slated for Pan-India launch in January 2011. Currently, MNP is in
testing phase in Haryana. Going by the initial data on MNP implementation in
Haryana (as per media reports), MNP has not been a big event in Haryana as
only 1% of the subscribers have opted for the service in the month of Dec’10.
We do not expect MNP to be a game changer for Indian markets as
Q India is primarily a prepaid market (with over 95% pre-paid subs) and churn
rates are already very high in the pre-paid segment when compared to the
post-paid segment.
Q Even in the post-paid segment, we think customers are likely to value
network quality, coverage, brand strength and customer service offering than
price points as these customers are high ARPU customers. And we believe
incumbents operators score very heavily on these parameters and are likely
to benefit from MNP implementation when compared to new operators. We
think MNP will be a zero-sum game for incumbent GSM operators.
3G – Pricing environment to remain rational
Government issued 3G licenses to 3 private players per service area during May
2010. Of all 3G licensees, RCom and Tata DoCoMo have already launched 3G
services in their respective service areas while rest of the players are expected to
launch 3G services in 4QFY11.
A look at RCom's and Tata DoCoMo's 3G plans indicate the pricing
environment in 3G is likely to remain stable as their plans are rational and are
not disruptive. The table below shows the 3G tariff plans of both RCom and
Tata DoCoMo
Looking ahead, we expect pricing environment in 3G to continue to remain
rational as the number of players per service area are capped and also the cost of
acquiring 3G licenses may act as a barrier for initiating any price war.
3G – Data potential
While it is too early to comment on how 3G will play out in India, we believe
that data could be the next growth driver for India in next decade as voice was in
2000-2010.
As shown in table below, the contribution of data to total revenue is quite low in
India when compared to the contribution of data revenue in other Asian
emerging market.
However, for data potential to explode in India the ecosystem surrounding 3G,
such as 3G enabled handsets, content, and awareness, has to evolve over time.
As per Gartner estimates, the smart phones sales contribution to total handset
sales in India is expected to increase from 7.5% in 2010 to 16.4% by 2014.
FII ownership levels
The chart below shows the Foreign Institutional investors (FII) ownership levels
in the three telecom stocks we cover – Bharti, Idea, RCom.
As can be seen over the last 3-4 years, the FII interest has declined in the sector
due to hyper-competitive intensity in the sector and uncertain regulatory
environment. Given most of these concerns are likely to get addressed this year,
we believe that FII ownership levels can increase in the sector as the
fundamentals of the sector still remain strong with low penetration levels and
high data potential.
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