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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India telecom sector
Mobile data… the silver lining
2G - a life-changer; 3G- a game-changer
News flow in the last six months has been dominated by depressing headlines
related to the 2G telecom scandal. The clouds of uncertainty around the new
telecom policy are forcing long term investors onto the sidelines. We however
urge such investors to keep an eye firmly on the big picture. Voice-based
telecom changed peoples’ lives and the way many small and micro-businesses
operate. We also acknowledge, however, that the low hanging fruit (read: urban
subscriber) has been tapped and 2G ARPMs continue to fall with rising
penetration. We believe the next uptick in revenues/margins will be driven by the
pick-up in data/3G over next 3-5 years. This can dramatically impact sector
landscape and earnings, currently under pressure due to hyper-competition.
US$100 handset- just one piece of the mosaic
We believe the mobile phone will emerge as the primary data/internet access
device in India. We try and assess the impact on ARPU/revenue and margins.
For this, we have gone through regulator and independent consultant reports
and analysed trends in five developed and developing markets. We also
conducted multiple interviews with operators, experts and potential users. We
conclude that there has been too much focus on the cost of handsets, with
US$100 emerging as the ‘magic’ number which would lead to an explosion of
smartphone penetration. While this is an important factor, our study shows that
there are further five key drivers of data growth, including mobile internet usage
and mobile internet substitution, increased speed, value-added and video-based
services. We think the pace of off-take can be faster than many developed
markets. The penetration of personal computers in India is low (~30% versus
~63% for mobile phones). The inertia faced by other markets (such as Japan)
during substitution is unlikely to be felt in India. We therefore believe that many
independent consultants are likely to be positive surprised by 3G/data
penetration in India. We forecast ~150 mn 3G subscribers across India by 2016.
Competitive position similar to the golden period of 2G
Importantly, we think that the scale up in 3G will turn out to be profitable for the
players involved. This is because of our belief and forecast that “3G tariffs will be
competitive but still profitable”. Fears that profitability of the 3G roll-out will be
affected by a 2G style hyper-competition are unlikely to materialise, in our view.
This is due to the oligopolistic nature of the market, with just 3-4 players in each
circle. On this aspect, the competitive landscape is very similar to the golden
period in 2G telecom (of 40%+ EBITDA margins) from 2002 to 2008.
Incumbent leaders likely to emerge stronger
Our competitive landscape analysis suggests that incumbents which hold the top
two positions in ‘Metro’ and ‘Category A’ circles are best placed to benefit from
customer upgrading to 3G. The biggest benefit is for those incumbents who also
hold 3G spectrum in the corresponding circles. We believe Bharti and Vodafone
are best placed to benefit, followed by RCOM and Idea. Our exercise also leads
us to believe that our current estimates on 3G off-take and margins are quite
conservative. To reflect our increased bullishness, we have increased our
earnings estimates (from FY12 onwards) and target prices by 2-6%.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India telecom sector
Mobile data… the silver lining
2G - a life-changer; 3G- a game-changer
News flow in the last six months has been dominated by depressing headlines
related to the 2G telecom scandal. The clouds of uncertainty around the new
telecom policy are forcing long term investors onto the sidelines. We however
urge such investors to keep an eye firmly on the big picture. Voice-based
telecom changed peoples’ lives and the way many small and micro-businesses
operate. We also acknowledge, however, that the low hanging fruit (read: urban
subscriber) has been tapped and 2G ARPMs continue to fall with rising
penetration. We believe the next uptick in revenues/margins will be driven by the
pick-up in data/3G over next 3-5 years. This can dramatically impact sector
landscape and earnings, currently under pressure due to hyper-competition.
US$100 handset- just one piece of the mosaic
We believe the mobile phone will emerge as the primary data/internet access
device in India. We try and assess the impact on ARPU/revenue and margins.
For this, we have gone through regulator and independent consultant reports
and analysed trends in five developed and developing markets. We also
conducted multiple interviews with operators, experts and potential users. We
conclude that there has been too much focus on the cost of handsets, with
US$100 emerging as the ‘magic’ number which would lead to an explosion of
smartphone penetration. While this is an important factor, our study shows that
there are further five key drivers of data growth, including mobile internet usage
and mobile internet substitution, increased speed, value-added and video-based
services. We think the pace of off-take can be faster than many developed
markets. The penetration of personal computers in India is low (~30% versus
~63% for mobile phones). The inertia faced by other markets (such as Japan)
during substitution is unlikely to be felt in India. We therefore believe that many
independent consultants are likely to be positive surprised by 3G/data
penetration in India. We forecast ~150 mn 3G subscribers across India by 2016.
Competitive position similar to the golden period of 2G
Importantly, we think that the scale up in 3G will turn out to be profitable for the
players involved. This is because of our belief and forecast that “3G tariffs will be
competitive but still profitable”. Fears that profitability of the 3G roll-out will be
affected by a 2G style hyper-competition are unlikely to materialise, in our view.
This is due to the oligopolistic nature of the market, with just 3-4 players in each
circle. On this aspect, the competitive landscape is very similar to the golden
period in 2G telecom (of 40%+ EBITDA margins) from 2002 to 2008.
Incumbent leaders likely to emerge stronger
Our competitive landscape analysis suggests that incumbents which hold the top
two positions in ‘Metro’ and ‘Category A’ circles are best placed to benefit from
customer upgrading to 3G. The biggest benefit is for those incumbents who also
hold 3G spectrum in the corresponding circles. We believe Bharti and Vodafone
are best placed to benefit, followed by RCOM and Idea. Our exercise also leads
us to believe that our current estimates on 3G off-take and margins are quite
conservative. To reflect our increased bullishness, we have increased our
earnings estimates (from FY12 onwards) and target prices by 2-6%.
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