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India Mobile Sector
P ricing Power is a strong tailwind
Key takeaways from our India mobile eco-system trip
We recently met with mobile operators, policy makers, equipment vendors, tower
companies and distributors as a part of our bi-annual India mobile eco-system trip.
We discussed three main issues - Pricing, Policy and Data potential.
Pricing Power is emerging - Scope for higher tariffs exists
Voice prices in India mobile has started to inch up with Bharti, Idea and Vodafone
increasing headline tariffs. Our discussions with sector participants reinforce our
view that India mobile market can sustain higher voice tariffs. We were
encouraged by operators' observation that they did not see any evidence of negative
elasticity. If Inflation continues to stay high, we believe Indian mobile operators
are likely to further increase prices.
Regulation & Data Potential
On regulation, we expect NTP 2011 to drag on to first half of 2012 as the issues are
complex. Incumbent operators have low expectations on immediate regulatory
progress. We conclude that mobile data presents a medium term growth driver for
the sector. More affordable smart phones (sub$ 100) and more spectrum allocation
are needed for data market to thrive
Bharti is our top pick
Given Idea's strong out-performance, we now consider Bharti as our top pick. We
also like Idea & Rcom (in that order). We believe that Bharti and Idea will
continue to out-perform the broad Indian stock market. We are O/W telcos in our
India model portfolio.
Meetings with sector participants
Year to date, Indian mobile sector has outperformed the broader market after
being a significant underperformer in 2010. Over the past week, we met with
various sector participants to understand what has changed on the ground and
what lies ahead. We met with
— Mobile operators (incumbents & new entrants)
— Equipment Vendors
— Tower Companies
— Department of Telecom
— Retailers and distributors
What did we discuss in our meetings?
Tariffs – Have troughed; more tariff correction possible
With the ease in competitive intensity, Indian mobile sector has witnessed
tariff hikes from all major operators. Every operator is now focussing on
improving profitability and has taken tariff corrections in the service areas
where they are strong.
The revenue per minute (RPM) can improve by Rs0.03p/min over the next
12 months once the tariff hike has precipitated to entire customer base.
Though 2Q is a seasonally weak quarter, no operator has seen any significant
drop in usage due to tariff hike. There is no negative price elasticity of
demand at present in the sector.
On the possibility of another tariff hike in the near term, the response has
been mixed. While some operators foresee another round tariff hike in the
next 3-6 months, other operators will adopt a wait and watch attitude before
increasing tariffs further.
However, all major operators believe that tariffs are likely to go up further if
the operators’ cost structure gets impacted by regulatory charges, inflation
etc.
3G – Affordable 3G smart phones hold the key
The response of 3G has been muted so far as
— Introductory 3G data pricing was too high and was more of a reaction to
very high 3G license fees paid
— Penetration of 3G enabled handsets is quite low
— 3G networks are still being rolled out – Not ubiquitous 3G presence even
in big cities.
Though most operators have lowered their 3G tariffs, the real uptick in 3G
usage will not happen until prices of 3G smart phones come under Rs5,000
(~US$100). Based on our discussion with industry experts, we believe it will
take another 12-18 months before sub US$100 smart phones are available in
India.
Large scale handset subsidy is unlikely to happen in India as there is no
credit enforcement culture.
3G tariffs are in an experimental stage currently and not much should be read
into 3G tariff changes. Operators will try to induce subscribers to experience
3G services with local limited time teaser promotions so that they get used to
the 3G network.
3G is likely to succeed in India as a business when India has 150-200m 3G
subs who use 1GB of data monthly.
Wireless margins are likely to improve as the contribution of data to total
revenue increases since the incremental cost for data delivery is quite low.
Regulation – NTP 2011 likely to be finalized next year
Given the current regulatory uncertainty, regulation continues to be one of the
most discussed topics in the Indian mobile sector. Key regulatory issues of
interest were i) 2G spectrum allocation and pricing, ii) pricing of excess 2G
spectrum, iii) M&A guidelines and iv) re-farming of 900MHz of spectrum.
Below are the views of the sector participants on these issues:
2G spectrum allocation and pricing – Incumbent mobile operators feel that
market based pricing of 2G spectrum going forward is the norm. However
they believe that 3G spectrum prices are not sustainable and the government
may realize lower values from auction of 2G spectrum given incumbents are
not in immediate need of spectrum (post 3G).
Pricing of excess 2G spectrum - All incumbent operators are of the view
that TRAI formula for pricing of excess 2G spectrum is incorrect and
incongruent with current market dynamics. If the pricing of excess spectrum
is too high, few operators may look at returning the excess spectrum in some
service areas.
Re-farming of 900MHz of spectrum - This is one of the most contentious
issues for the incumbent operators and almost all of them are of the opinion
that it is ‘illegal’ and ‘impractical’. If re-farming of 900 Mhz spectrum is
implemented, it could possibly result in litigation that could extend for
several years.
M&A guidelines - Though there has been pseudo consolidation in the sector
with new operators not expanding their services, industry is looking at DoT
to come out with clear policy that will facilitate real consolidation in the
sector. Industry is of the view that DoT will have to provide graceful exit
options to new operators as there is no business case.
Few other key takeaways on regulatory front
The draft national telecom policy (NTP 2011) is being given final shape and
is likely to be put out in public domain within the next 2 months. However,
the final policy is unlikely to be announced in CY2011 as the government is
currently deliberating various frameworks of the policy.
DoT is likely to issue final guidelines on TRAI’s May 2010
recommendations on spectrum and licensing within the next 2-3 months.
Telecom commission has already taken a preliminary view on these
recommendations. It will soon refer some of the recommendations back to
TRAI where there are some disagreements. TRAI will need to reply within
15 days after receiving communication from telecom commission.
The core issues pertaining to 2G investigation relates to the process
undertaken for granting licenses. Two key areas of violations are 1) nonfulfilment
of eligibility criteria; and 2) delay in rolling out networks. DoT
has issued notices to some operators in this regard.
Other industry take-aways
The industry is focusing on profit and free cash flow now as compared to
subscriber growth earlier. The recent tariff hike should be viewed from that
perspective only.
Rural penetration is around 23-24% and provides an untapped opportunity
for the industry to grow. Government initiatives to enhance rural penetration
are a step in the right direction; however, they should not lead to sustainable
losses in the long term.
Company specific take-aways
Bharti Airtel
License renewal fee is likely to minimal impact for Bharti as renewal date of
licenses is spread over 2014-2023 and renewal fee impact on any particular
year is expected to be negligible. In addition, new licenses are expected to be
for 10 years hence renewal fee is expected to be lesser.
Bharti has completed ground work in Africa to align its mobile business
fundamentals with the Indian business model. The company has renegotiated
capex contracts and managed services contracts in addition to
outsourcing IT and BPO. The transfer of towers to separate company, Africa
Tower Corporation, is expected to be complete by March 12.
In Africa, there is no pressure to bring down tariffs at the moment. Also, the
management believes that any cost savings will be passed on to the consumer.
The key risks in Africa include inflation and possibility of adverse currency
movement. The company expects to adjust tariffs based on how these risks
pan out.
There is talent crunch in Africa and the company is using more IT to
overcome this problem. In addition the company has started efforts to train
local people.
Africa and India debt are at very competitive rates. 1QFY12 was impacted
by exchange fluctuation and apart from that interest cost is likely to go down
as the company starts repaying debt with free cash flows.
Idea Cellular
Though MNP has been a non-event for the sector, Idea has emerged as the
net beneficiary from the same. Idea's performance in MNP is the reflection of
its brand strength, network quality and execution capabilities.
Idea will continue the strategy of focusing on 13 established service areas
where it dominates while in remaining new service areas it will continue to
be focused on minimizing losses.
Idea is currently generating operating cash flow of US$800m while it is
investing US$900-950m in the business. Idea expects to bridge this gap in
the next couple of years. It is currently comfortable with the amount of
leverage in its balance sheet.
Reliance Communications
60-65% of RCom's CDMA traffic is on-net. The company may look at
raising the on-net CDMA tariff before considering any further price hike in
GSM.
RCom is more focused on realizing the data potential in India. It is targeting
to increase the contribution of non-voice revenue to 35-40% (vs. 20%
currently) in the next 2-3 years. To this end, the company is concentrating on
1) data centric advertising strategy; 2) expanding 3G/EVDO coverage; 3)
improving network quality.
In service areas (3G dark strategy) where RCom does not have 3G licenses it
is focusing on EVDO technology to promote data usage. It has the largest
coverage EVDO network in India.
RCom is targeting revenue market share of 15-16% and EBITDA market
share of 18% in the long term.
Statement of Risk
Changes in the competitive and regulatory landscape and technology advances
could have an impact on our estimates and valuations for the operators. We
believe irrational competition among existing operators presents the biggest risk
to our forecasts, ratings, and price targets.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Mobile Sector
P ricing Power is a strong tailwind
Key takeaways from our India mobile eco-system trip
We recently met with mobile operators, policy makers, equipment vendors, tower
companies and distributors as a part of our bi-annual India mobile eco-system trip.
We discussed three main issues - Pricing, Policy and Data potential.
Pricing Power is emerging - Scope for higher tariffs exists
Voice prices in India mobile has started to inch up with Bharti, Idea and Vodafone
increasing headline tariffs. Our discussions with sector participants reinforce our
view that India mobile market can sustain higher voice tariffs. We were
encouraged by operators' observation that they did not see any evidence of negative
elasticity. If Inflation continues to stay high, we believe Indian mobile operators
are likely to further increase prices.
Regulation & Data Potential
On regulation, we expect NTP 2011 to drag on to first half of 2012 as the issues are
complex. Incumbent operators have low expectations on immediate regulatory
progress. We conclude that mobile data presents a medium term growth driver for
the sector. More affordable smart phones (sub$ 100) and more spectrum allocation
are needed for data market to thrive
Bharti is our top pick
Given Idea's strong out-performance, we now consider Bharti as our top pick. We
also like Idea & Rcom (in that order). We believe that Bharti and Idea will
continue to out-perform the broad Indian stock market. We are O/W telcos in our
India model portfolio.
Meetings with sector participants
Year to date, Indian mobile sector has outperformed the broader market after
being a significant underperformer in 2010. Over the past week, we met with
various sector participants to understand what has changed on the ground and
what lies ahead. We met with
— Mobile operators (incumbents & new entrants)
— Equipment Vendors
— Tower Companies
— Department of Telecom
— Retailers and distributors
What did we discuss in our meetings?
Tariffs – Have troughed; more tariff correction possible
With the ease in competitive intensity, Indian mobile sector has witnessed
tariff hikes from all major operators. Every operator is now focussing on
improving profitability and has taken tariff corrections in the service areas
where they are strong.
The revenue per minute (RPM) can improve by Rs0.03p/min over the next
12 months once the tariff hike has precipitated to entire customer base.
Though 2Q is a seasonally weak quarter, no operator has seen any significant
drop in usage due to tariff hike. There is no negative price elasticity of
demand at present in the sector.
On the possibility of another tariff hike in the near term, the response has
been mixed. While some operators foresee another round tariff hike in the
next 3-6 months, other operators will adopt a wait and watch attitude before
increasing tariffs further.
However, all major operators believe that tariffs are likely to go up further if
the operators’ cost structure gets impacted by regulatory charges, inflation
etc.
3G – Affordable 3G smart phones hold the key
The response of 3G has been muted so far as
— Introductory 3G data pricing was too high and was more of a reaction to
very high 3G license fees paid
— Penetration of 3G enabled handsets is quite low
— 3G networks are still being rolled out – Not ubiquitous 3G presence even
in big cities.
Though most operators have lowered their 3G tariffs, the real uptick in 3G
usage will not happen until prices of 3G smart phones come under Rs5,000
(~US$100). Based on our discussion with industry experts, we believe it will
take another 12-18 months before sub US$100 smart phones are available in
India.
Large scale handset subsidy is unlikely to happen in India as there is no
credit enforcement culture.
3G tariffs are in an experimental stage currently and not much should be read
into 3G tariff changes. Operators will try to induce subscribers to experience
3G services with local limited time teaser promotions so that they get used to
the 3G network.
3G is likely to succeed in India as a business when India has 150-200m 3G
subs who use 1GB of data monthly.
Wireless margins are likely to improve as the contribution of data to total
revenue increases since the incremental cost for data delivery is quite low.
Regulation – NTP 2011 likely to be finalized next year
Given the current regulatory uncertainty, regulation continues to be one of the
most discussed topics in the Indian mobile sector. Key regulatory issues of
interest were i) 2G spectrum allocation and pricing, ii) pricing of excess 2G
spectrum, iii) M&A guidelines and iv) re-farming of 900MHz of spectrum.
Below are the views of the sector participants on these issues:
2G spectrum allocation and pricing – Incumbent mobile operators feel that
market based pricing of 2G spectrum going forward is the norm. However
they believe that 3G spectrum prices are not sustainable and the government
may realize lower values from auction of 2G spectrum given incumbents are
not in immediate need of spectrum (post 3G).
Pricing of excess 2G spectrum - All incumbent operators are of the view
that TRAI formula for pricing of excess 2G spectrum is incorrect and
incongruent with current market dynamics. If the pricing of excess spectrum
is too high, few operators may look at returning the excess spectrum in some
service areas.
Re-farming of 900MHz of spectrum - This is one of the most contentious
issues for the incumbent operators and almost all of them are of the opinion
that it is ‘illegal’ and ‘impractical’. If re-farming of 900 Mhz spectrum is
implemented, it could possibly result in litigation that could extend for
several years.
M&A guidelines - Though there has been pseudo consolidation in the sector
with new operators not expanding their services, industry is looking at DoT
to come out with clear policy that will facilitate real consolidation in the
sector. Industry is of the view that DoT will have to provide graceful exit
options to new operators as there is no business case.
Few other key takeaways on regulatory front
The draft national telecom policy (NTP 2011) is being given final shape and
is likely to be put out in public domain within the next 2 months. However,
the final policy is unlikely to be announced in CY2011 as the government is
currently deliberating various frameworks of the policy.
DoT is likely to issue final guidelines on TRAI’s May 2010
recommendations on spectrum and licensing within the next 2-3 months.
Telecom commission has already taken a preliminary view on these
recommendations. It will soon refer some of the recommendations back to
TRAI where there are some disagreements. TRAI will need to reply within
15 days after receiving communication from telecom commission.
The core issues pertaining to 2G investigation relates to the process
undertaken for granting licenses. Two key areas of violations are 1) nonfulfilment
of eligibility criteria; and 2) delay in rolling out networks. DoT
has issued notices to some operators in this regard.
Other industry take-aways
The industry is focusing on profit and free cash flow now as compared to
subscriber growth earlier. The recent tariff hike should be viewed from that
perspective only.
Rural penetration is around 23-24% and provides an untapped opportunity
for the industry to grow. Government initiatives to enhance rural penetration
are a step in the right direction; however, they should not lead to sustainable
losses in the long term.
Company specific take-aways
Bharti Airtel
License renewal fee is likely to minimal impact for Bharti as renewal date of
licenses is spread over 2014-2023 and renewal fee impact on any particular
year is expected to be negligible. In addition, new licenses are expected to be
for 10 years hence renewal fee is expected to be lesser.
Bharti has completed ground work in Africa to align its mobile business
fundamentals with the Indian business model. The company has renegotiated
capex contracts and managed services contracts in addition to
outsourcing IT and BPO. The transfer of towers to separate company, Africa
Tower Corporation, is expected to be complete by March 12.
In Africa, there is no pressure to bring down tariffs at the moment. Also, the
management believes that any cost savings will be passed on to the consumer.
The key risks in Africa include inflation and possibility of adverse currency
movement. The company expects to adjust tariffs based on how these risks
pan out.
There is talent crunch in Africa and the company is using more IT to
overcome this problem. In addition the company has started efforts to train
local people.
Africa and India debt are at very competitive rates. 1QFY12 was impacted
by exchange fluctuation and apart from that interest cost is likely to go down
as the company starts repaying debt with free cash flows.
Idea Cellular
Though MNP has been a non-event for the sector, Idea has emerged as the
net beneficiary from the same. Idea's performance in MNP is the reflection of
its brand strength, network quality and execution capabilities.
Idea will continue the strategy of focusing on 13 established service areas
where it dominates while in remaining new service areas it will continue to
be focused on minimizing losses.
Idea is currently generating operating cash flow of US$800m while it is
investing US$900-950m in the business. Idea expects to bridge this gap in
the next couple of years. It is currently comfortable with the amount of
leverage in its balance sheet.
Reliance Communications
60-65% of RCom's CDMA traffic is on-net. The company may look at
raising the on-net CDMA tariff before considering any further price hike in
GSM.
RCom is more focused on realizing the data potential in India. It is targeting
to increase the contribution of non-voice revenue to 35-40% (vs. 20%
currently) in the next 2-3 years. To this end, the company is concentrating on
1) data centric advertising strategy; 2) expanding 3G/EVDO coverage; 3)
improving network quality.
In service areas (3G dark strategy) where RCom does not have 3G licenses it
is focusing on EVDO technology to promote data usage. It has the largest
coverage EVDO network in India.
RCom is targeting revenue market share of 15-16% and EBITDA market
share of 18% in the long term.
Statement of Risk
Changes in the competitive and regulatory landscape and technology advances
could have an impact on our estimates and valuations for the operators. We
believe irrational competition among existing operators presents the biggest risk
to our forecasts, ratings, and price targets.
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