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● Monthly net adds data have never been stock market movers
historically for Indian telcos (and this is still the case). However,
the sharp and sustained falls in net adds recently have raised
some investor concerns, and warrant a careful review.
● We believe that the key reason behind the volatility of reported net
adds is the high churn rates the companies are facing. Indian
companies’ ‘net adds margins’ are among the lowest across the
world.
● In this context, the 46% drop in net adds for Bharti between June
and August could have been driven by: (1) a 6% drop in gross
adds or (2) a seemingly immaterial 50 bp increase in churn from
6.4% to 6.9%.
● We believe that a part of net add falls could get reversed as we
move out of the seasonally weak September quarter. Changing
competitive dynamics and operator strategies could have an
impact on net adds for a longer time. However, we believe that the
underlying growth trajectory remains intact. We retain
OUTPERFORM ratings on Idea and Bharti.
Figure 1: Monthly net adds—Indian telecoms
Net adds (mn) Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug
2010/11
Bharti 2.0 2.0 3.0 3.1 3.1 3.3 3.2 3.2 2.4 2.5 2.1 1.5 1.2
Reliance 2.0 2.0 2.0 3.0 3.3 3.2 3.3 3.5 2.9 2.5 2.1 1.5 1.3
Vodafone 2.3 1.8 2.5 3.1 3.1 3.1 3.6 3.6 2.4 2.4 2.1 1.5 1.1
BSNL/MTNL 2.3 2.3 2.4 3.0 3.0 2.1 1.5 1.5 0.2 0.9 0.9 1.4 0.4
Idea 2.0 1.5 1.8 2.8 3.0 2.5 2.5 2.7 2.5 1.8 1.4 1.0 2.3
Tata Tele 2.1 2.1 1.7 1.8 1.6 1.8 1.6 1.5 1.2 0.4 0.2 -2.7 0.2
Aircel 1.6 1.6 1.0 1.2 1.4 1.7 1.7 1.3 1.1 1.1 0.9 0.6 0.6
Others 3.9 3.7 4.5 4.8 4.1 1.2 2.8 2.7 2.6 1.8 1.7 1.8 0.3
Total 18.2 17.1 19.0 22.9 22.6 19.0 20.2 20.2 15.3 13.4 11.4 6.7 7.5
Note:Aug-11 CDMA subs for BSNL/MTNL assumed same as Jul-11; Source: TRAI,
COAI, AUSPI.
Sharp declines in net-adds
Subscriber net additions in the India telecoms sector have seen sharp
declines in recent months, with industry net adds falling by nearly twothirds
between January and August 2011.
High churn = volatile net adds
Indian operators are experiencing among the highest churn rates
across the world. In our view, this induces a high degree of volatility
into net adds (net adds = gross adds – churn). If we define the ratio of
net adds to gross adds for an operator as ‘net adds margin’, Indian
operators have among the lowest net add margins across global
telcoms. This is analogous to a company with a high cost base and a
low profit margin—small changes in revenues or costs could lead to
wide swings in profits.
With this perspective, we can see that:
● The 46% drop in net adds for Bharti between June and August
2011, could have been driven by either (1) a 6% drop in gross
adds with churn being constant or (2) a seemingly immaterial 50
bp increase in churn from 6.4% to 6.9%, with constant gross adds.
● The 72% increase in net-adds for Idea between June and August
2011 could be driven by (1) a 12% increase in gross adds or (2) a
130 bp drop in churn from 9.7% to 8.4%.
A combination of gross adds and churn could be factors
We believe a combination of factors is at play in India:
1) A fall in gross adds due to changing operator priorities in urban
markets where SIM card penetration is high (~160%)—from
selling SIM cards to growing revenue earning customers (RECs).
2) A fall in gross adds due to seasonal weakness in the September
quarter (see our last year’s note on this topic dated 21
September 2010). Bharti’s net adds fell 25% from June 2010
quarter to September 2010 quarter, only to recover completely by
December 2010 quarter. The higher swing in 2011 could be
explained by the (higher churn and corresponding) lower ‘net
adds margin’ versus the previous year—from 28% in June 2010
to 16.5% in June 2011. This is akin to a fall in profit margins in
our company analogy, leading to greater volatility in profits.
3) An increase in disconnections as operators focus on weeding out
inactive SIM cards (in the wake of TRAI publishing active VLR
subs data every month). We note that 12 out of 14 operators
showed an increase in the percentage of VLR in July 2011—
indicating an industrywide effort.
Factor 2 above is a seasonal issue, and the impact should reverse
from October 2011 onwards. The other two factors are symptomatic of
the changing competitive landscape in the country, and could linger
for a few more months (with a potential positive impact on ARPU—
independent of tariff hikes). However, we believe that these are not
indicative of a sharp fall in the sector’s secular growth.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
● Monthly net adds data have never been stock market movers
historically for Indian telcos (and this is still the case). However,
the sharp and sustained falls in net adds recently have raised
some investor concerns, and warrant a careful review.
● We believe that the key reason behind the volatility of reported net
adds is the high churn rates the companies are facing. Indian
companies’ ‘net adds margins’ are among the lowest across the
world.
● In this context, the 46% drop in net adds for Bharti between June
and August could have been driven by: (1) a 6% drop in gross
adds or (2) a seemingly immaterial 50 bp increase in churn from
6.4% to 6.9%.
● We believe that a part of net add falls could get reversed as we
move out of the seasonally weak September quarter. Changing
competitive dynamics and operator strategies could have an
impact on net adds for a longer time. However, we believe that the
underlying growth trajectory remains intact. We retain
OUTPERFORM ratings on Idea and Bharti.
Figure 1: Monthly net adds—Indian telecoms
Net adds (mn) Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug
2010/11
Bharti 2.0 2.0 3.0 3.1 3.1 3.3 3.2 3.2 2.4 2.5 2.1 1.5 1.2
Reliance 2.0 2.0 2.0 3.0 3.3 3.2 3.3 3.5 2.9 2.5 2.1 1.5 1.3
Vodafone 2.3 1.8 2.5 3.1 3.1 3.1 3.6 3.6 2.4 2.4 2.1 1.5 1.1
BSNL/MTNL 2.3 2.3 2.4 3.0 3.0 2.1 1.5 1.5 0.2 0.9 0.9 1.4 0.4
Idea 2.0 1.5 1.8 2.8 3.0 2.5 2.5 2.7 2.5 1.8 1.4 1.0 2.3
Tata Tele 2.1 2.1 1.7 1.8 1.6 1.8 1.6 1.5 1.2 0.4 0.2 -2.7 0.2
Aircel 1.6 1.6 1.0 1.2 1.4 1.7 1.7 1.3 1.1 1.1 0.9 0.6 0.6
Others 3.9 3.7 4.5 4.8 4.1 1.2 2.8 2.7 2.6 1.8 1.7 1.8 0.3
Total 18.2 17.1 19.0 22.9 22.6 19.0 20.2 20.2 15.3 13.4 11.4 6.7 7.5
Note:Aug-11 CDMA subs for BSNL/MTNL assumed same as Jul-11; Source: TRAI,
COAI, AUSPI.
Sharp declines in net-adds
Subscriber net additions in the India telecoms sector have seen sharp
declines in recent months, with industry net adds falling by nearly twothirds
between January and August 2011.
High churn = volatile net adds
Indian operators are experiencing among the highest churn rates
across the world. In our view, this induces a high degree of volatility
into net adds (net adds = gross adds – churn). If we define the ratio of
net adds to gross adds for an operator as ‘net adds margin’, Indian
operators have among the lowest net add margins across global
telcoms. This is analogous to a company with a high cost base and a
low profit margin—small changes in revenues or costs could lead to
wide swings in profits.
With this perspective, we can see that:
● The 46% drop in net adds for Bharti between June and August
2011, could have been driven by either (1) a 6% drop in gross
adds with churn being constant or (2) a seemingly immaterial 50
bp increase in churn from 6.4% to 6.9%, with constant gross adds.
● The 72% increase in net-adds for Idea between June and August
2011 could be driven by (1) a 12% increase in gross adds or (2) a
130 bp drop in churn from 9.7% to 8.4%.
A combination of gross adds and churn could be factors
We believe a combination of factors is at play in India:
1) A fall in gross adds due to changing operator priorities in urban
markets where SIM card penetration is high (~160%)—from
selling SIM cards to growing revenue earning customers (RECs).
2) A fall in gross adds due to seasonal weakness in the September
quarter (see our last year’s note on this topic dated 21
September 2010). Bharti’s net adds fell 25% from June 2010
quarter to September 2010 quarter, only to recover completely by
December 2010 quarter. The higher swing in 2011 could be
explained by the (higher churn and corresponding) lower ‘net
adds margin’ versus the previous year—from 28% in June 2010
to 16.5% in June 2011. This is akin to a fall in profit margins in
our company analogy, leading to greater volatility in profits.
3) An increase in disconnections as operators focus on weeding out
inactive SIM cards (in the wake of TRAI publishing active VLR
subs data every month). We note that 12 out of 14 operators
showed an increase in the percentage of VLR in July 2011—
indicating an industrywide effort.
Factor 2 above is a seasonal issue, and the impact should reverse
from October 2011 onwards. The other two factors are symptomatic of
the changing competitive landscape in the country, and could linger
for a few more months (with a potential positive impact on ARPU—
independent of tariff hikes). However, we believe that these are not
indicative of a sharp fall in the sector’s secular growth.
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