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● We have visited a few stores in Mumbai over the past few days to
get an update on the tariff/competitive situation.
● We find that after headline tariff increases by operators in late
July, the tariff situation has remained stable. Even the discount
voucher rates (which are more dynamic and truly indicative of
competitive dynamics) have remained stable, except for minor
tweaks. Thus, operators seem to be studying the impact of July
hikes before making further tariff moves.
● However, we continue to find action on subscriber acquisition
costs. While two months ago, we found that dealer commissions
were down, we now find that operators are (1) streamlining the
channel to plug leaks and reduce layers and (2) spending less on
catching eye balls in the storefront.
● Higher tariffs and cost savings should start reflecting in reported
numbers soon, and we remain positive on the sector with
OUTPERFORM on Bharti and Idea. For Bharti, we keep an eye on
USD/INR (possible non-cash losses in case of INR depreciation).
Valuation metrics
Company Ticker Rating Price Year P/E (x) P/B (x)
Local Target T T+1 T+2 T+1
Bharti Airtel BRTI.BO O 399 500 03/11 16.7 11.1 2.8
Idea Cellular IDEA.BO O 99 115 03/11 27.9 14.6 2.4
Reliance Comm RLCM.BO N 86 120 03/10 10.5 6.5 0.4
Note: O = OUTPERFORM, N = NEUTRAL, U = UNDERPERFORM
Source: Company data, Credit Suisse estimates
Tariffs/discounts steady
Our last store survey (read our note on 30 June 2011) showed that
operators had started increasing call rates on discount vouchers
starting early June. This was followed by nationwide headline tariff
increases by leading operators starting mid-July.
We now find that the discount vouchers (which we believe are more
dynamic and indicative of competitive pressures than headline tariffs)
have remained unchanged — except for the tweak by Idea below. We
thus conclude that post headline tariff increases in end-July/early
August, tariff levels have remained steady. We reiterate here that the
Mumbai circle is indicative of competitive pressures in the sector —
being one of the most competitive circles with 12 operators.
Idea — change in discount voucher:
Earlier: STV of Rs22 gave a reduced long distance call rate of Rs1 per
three minutes for one month.
June 2011: Same Rs22 STV now changed to 35p/min for one month.
September 2011: Above replaced by STV Rs37 giving a long distance
rate of 30p/min for one month.
While it may appear that the call rate in this STV has reduced from
35p/min to 30p/min, the higher fixed monthly fee of Rs37 implies that
this change results in savings only for subscribers making at least 300
minutes of long distance calls (which translates to a MoU of over 3,400
minutes/month as per latest TRAI usage data, compared with a MoU of
445 minutes/month reported by market leader Bharti). In other words,
this change has the effect of increasing RPM for the average user.
Commissions steady — but channel structure changing
Probably the only people who prospered in the height of competition
between mid-2009 to early-2011 in the India telecoms sector (apart
from the customers, of course) were the distribution channel partners.
With a spectrum policy that rewarded operators with additional
spectrum for showing higher subscriber numbers, mobile operators
focused on aggressive SIM sales (this spectrum policy is now set to
change). We showed in our Bharti AR analysis (published on 8 August
2011) that the company’s SIM sales went up 2.5x between FY3/09
and FY3/10 — but net adds remained flat. With costs associated with
each SIM sale (channel commissions + SIM card cost), customer
acquisition increased (to nearly 3% of mobile sales for Bharti in our
estimate). Operators accepted this cost in the race for subscribers. In
the process, the distribution channel prospered.
However, things are changing. In our 30 June note we highlighted that
dealer commissions on new SIM card sales have come down from
Rs50 to Rs35 per SIM card. Our checks with stores over the last
couple of days show that while the commission level continues to stay
at Rs35, the retailers are being impacted by other means.
Ever since the channel commissions went down, payments to retailers
from the distributors (middlemen) have slowed, or stopped altogether
for the past two months (in the case of some new operators). One
could suspect that operators may be at strain and thus delaying
payments. However, our further enquiries showed that after noticing
this issue, most leading operators have changed their channel
commission systems and started paying the retailers directly (through
talktime currency delivered electronically), thus bypassing the
middlemen. From this we conclude that the distributors (who
themselves are seeing falling commissions) were squeezing out the
retailers — leading to delayed payments (though operators were
paying distributors on time). Plugging the leaks and reducing layers in
the distribution system could help margins of operators, in any case.
Further, another stream of revenues for shopkeepers is the rental paid
by operators for placing their banners in the stores (a large banner at
the entrance could easily cost the operator Rs3,000-5,000 per month
in a place like Mumbai). Shopkeepers complained that over the past
few months, rental payments for banners from operators have
become irregular, and even stopped completely in case of some new
operators. This simply means that the operators no longer care if their
ads catch the eyes of customers walking into the stores — a
consequence of 150% SIM penetration in urban India (~30% of
population).
In light of these issues, one shopkeeper we met even commented that
he is thinking of closing down his mobile business and starting
something else! We are thus unsurprised by falling subscriber addition
numbers.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
● We have visited a few stores in Mumbai over the past few days to
get an update on the tariff/competitive situation.
● We find that after headline tariff increases by operators in late
July, the tariff situation has remained stable. Even the discount
voucher rates (which are more dynamic and truly indicative of
competitive dynamics) have remained stable, except for minor
tweaks. Thus, operators seem to be studying the impact of July
hikes before making further tariff moves.
● However, we continue to find action on subscriber acquisition
costs. While two months ago, we found that dealer commissions
were down, we now find that operators are (1) streamlining the
channel to plug leaks and reduce layers and (2) spending less on
catching eye balls in the storefront.
● Higher tariffs and cost savings should start reflecting in reported
numbers soon, and we remain positive on the sector with
OUTPERFORM on Bharti and Idea. For Bharti, we keep an eye on
USD/INR (possible non-cash losses in case of INR depreciation).
Valuation metrics
Company Ticker Rating Price Year P/E (x) P/B (x)
Local Target T T+1 T+2 T+1
Bharti Airtel BRTI.BO O 399 500 03/11 16.7 11.1 2.8
Idea Cellular IDEA.BO O 99 115 03/11 27.9 14.6 2.4
Reliance Comm RLCM.BO N 86 120 03/10 10.5 6.5 0.4
Note: O = OUTPERFORM, N = NEUTRAL, U = UNDERPERFORM
Source: Company data, Credit Suisse estimates
Tariffs/discounts steady
Our last store survey (read our note on 30 June 2011) showed that
operators had started increasing call rates on discount vouchers
starting early June. This was followed by nationwide headline tariff
increases by leading operators starting mid-July.
We now find that the discount vouchers (which we believe are more
dynamic and indicative of competitive pressures than headline tariffs)
have remained unchanged — except for the tweak by Idea below. We
thus conclude that post headline tariff increases in end-July/early
August, tariff levels have remained steady. We reiterate here that the
Mumbai circle is indicative of competitive pressures in the sector —
being one of the most competitive circles with 12 operators.
Idea — change in discount voucher:
Earlier: STV of Rs22 gave a reduced long distance call rate of Rs1 per
three minutes for one month.
June 2011: Same Rs22 STV now changed to 35p/min for one month.
September 2011: Above replaced by STV Rs37 giving a long distance
rate of 30p/min for one month.
While it may appear that the call rate in this STV has reduced from
35p/min to 30p/min, the higher fixed monthly fee of Rs37 implies that
this change results in savings only for subscribers making at least 300
minutes of long distance calls (which translates to a MoU of over 3,400
minutes/month as per latest TRAI usage data, compared with a MoU of
445 minutes/month reported by market leader Bharti). In other words,
this change has the effect of increasing RPM for the average user.
Commissions steady — but channel structure changing
Probably the only people who prospered in the height of competition
between mid-2009 to early-2011 in the India telecoms sector (apart
from the customers, of course) were the distribution channel partners.
With a spectrum policy that rewarded operators with additional
spectrum for showing higher subscriber numbers, mobile operators
focused on aggressive SIM sales (this spectrum policy is now set to
change). We showed in our Bharti AR analysis (published on 8 August
2011) that the company’s SIM sales went up 2.5x between FY3/09
and FY3/10 — but net adds remained flat. With costs associated with
each SIM sale (channel commissions + SIM card cost), customer
acquisition increased (to nearly 3% of mobile sales for Bharti in our
estimate). Operators accepted this cost in the race for subscribers. In
the process, the distribution channel prospered.
However, things are changing. In our 30 June note we highlighted that
dealer commissions on new SIM card sales have come down from
Rs50 to Rs35 per SIM card. Our checks with stores over the last
couple of days show that while the commission level continues to stay
at Rs35, the retailers are being impacted by other means.
Ever since the channel commissions went down, payments to retailers
from the distributors (middlemen) have slowed, or stopped altogether
for the past two months (in the case of some new operators). One
could suspect that operators may be at strain and thus delaying
payments. However, our further enquiries showed that after noticing
this issue, most leading operators have changed their channel
commission systems and started paying the retailers directly (through
talktime currency delivered electronically), thus bypassing the
middlemen. From this we conclude that the distributors (who
themselves are seeing falling commissions) were squeezing out the
retailers — leading to delayed payments (though operators were
paying distributors on time). Plugging the leaks and reducing layers in
the distribution system could help margins of operators, in any case.
Further, another stream of revenues for shopkeepers is the rental paid
by operators for placing their banners in the stores (a large banner at
the entrance could easily cost the operator Rs3,000-5,000 per month
in a place like Mumbai). Shopkeepers complained that over the past
few months, rental payments for banners from operators have
become irregular, and even stopped completely in case of some new
operators. This simply means that the operators no longer care if their
ads catch the eyes of customers walking into the stores — a
consequence of 150% SIM penetration in urban India (~30% of
population).
In light of these issues, one shopkeeper we met even commented that
he is thinking of closing down his mobile business and starting
something else! We are thus unsurprised by falling subscriber addition
numbers.
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