Telecom - MNP: Not a game changer, but margin dilutor; Edelweiss

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Mobile Number Portability (MNP) was rolled out in Haryana on November 25, 2010, and pan-India on January 20, 2011. In our earlier note, MNP: Adding to operators’ woes, dated November 23, 2010, on the impact of MNP, we had indicated that market shares will not alter much, but margins could get impacted. Our analysis had indicated that Bharti Airtel’s (Bharti) EBITDA would be eroded 3-10% just on account of revenue loss as customers ‘down trade’ on existing plans, without assuming any incremental cost for retaining customers. Our initial survey to ascertain the likely impact of MNP post its implementation leads us to believe that our early thesis has been ratified. We continue to believe that MNP may not be a game changer, as subscriber switching will be restricted between a few service providers, but it could impact margins as customers are offered more bang (minutes) for the buck.

n   New offers: Pay less for more

Bharti‘s and Vodafone Essar’s (Vodafone) current offers in the Mumbai market seem to indicate that their postpaid ARPU could get diluted by about 35%. While Bharti is offering 15,000 seconds (250 minutes) talk time free for a rental of INR 249, Vodafone is offering 12,000 seconds (200 minutes). Idea Cellular (Idea), we believe, is the most aggressive, offering 400 minutes free talk time for a rental of INR 179 per month. It is interesting to note that Bharti is waiving off all charges (porting fee of INR 19, SIM card charge, and activation fee), while Idea is collecting INR 19 as porting fee and INR 99 for SIM card and activation. Our analysis indicates that an existing customer of Bharti and Vodafone will be able to maintain the outgoing talk time and yet spend 35% less with the new offers. This, we believe, could result in lower margins.

n   Corporate customers are price sensitive too

We surveyed three corporates, who together have close to 5,000 corporate connections with vendors like Vodafone, Bharti, and Tata Docomo. In Mumbai, we gather that Vodafone offers the best service and quality of network. Corporates seem reluctant to switch as there are limited options and, in any case, service providers match the best price offered in the market. Corporate customers lay emphasis on quality of network and billing and negotiate tariffs intermittently without any set lock-ins.

n   Edelweiss survey: Vodafone has 60% market share

An internal survey at Edelweiss Capital, primarily in Mumbai, revealed that 55% of those (82% with postpaid connections) surveyed indicated that they would switch operators once MNP is implemented. The most common reason behind the switch is perceived quality of network and high tariffs. Among the survey respondents, 60% had Vodafone connections.

n   Outlook: Margins at risk

The current offers indicate that the race for subscriber market share has been re-initiated and realisations are getting compromised. We maintain our cautious view on the sector as there are several uncertainties including the imminent new telecom policy and impact of MNP and 3G services. We maintain ‘HOLD/SO’ on BHARTI, ‘HOLD/SP’ on Idea, and‘REDUCE/SU’ on RCOM.