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● We recently met the CFO of Tata Teleservices/Tata Docomo (Not
Listed), Mr S G Murali. Following headline tariff increases by GSM
incumbents, Tata Docomo raised tariffs in about six circles (from 1
p/sec base rate to 1.2 p/sec). Remaining circles will follow in a
phased manner.
● The impact of this increase is already visible—with RPM going up
by 1 p/min (~2.5%) since tariffs went up (similar sharp RPM uplift
is seen by MTS, as we understand from our discussions). The
pace of RPM uplift is surprising.
● Larger players, such as Bharti, could see a smaller uplift in RPMs
(~1.2%). This should still be sufficient to surprise markets in the
September quarter results (offsetting seasonal weakness).
● Importantly, management explained that there has been no
noticeable change in usage levels post tariff increase. Thus, the
full benefit of tariff hikes should flow through to margins/earnings.
● We believe that the Indian telecoms sector is going through a
structural change with competition abating quickly and pricing power
improving. We have OUTPERFORM ratings on Idea and Bharti.
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 372.80 500.00 03/11 15.6 10.3 2.6
Idea Cellular IDEA.BO O 95.05 115.00 03/11 26.9 14.1 2.3
Note: O = OUTPERFORM, N = NEUTRAL, U = UNDERPERFORM
Source: Company data, Credit Suisse estimates
We recently met the CFO of Tata Teleservices/Tata Docomo (Not
Listed), Mr S G Murali. Tata Teleservices is the fifth-largest operator
with a ~9% revenue market share.
Impact of tariff hikes already visible
Following the headline tariff increases by incumbent GSM operators in
mid-July, Tata Docomo also raised headline tariffs in six circles by
20% (to 1.2 p/sec). Other circles will follow in a phased manner.
Management explained that there has been no noticeable change in
usage post tariff hikes—indicating that price sensitivity at current price
points are low in the industry.
Importantly, management also explained that the revenue impact is
already showing—with RPM going up by 1 p/min (~2.5%) over the
past three months. We note that these comments on RPM uplift tie in
with comments made by MTS management when we spoke to them
recently—MTS (not listed) has seen RPMs go up by 1.5-2.0 p/min
(4.5-6.0%) in the few circles where tariff increases have taken place.
We believe that a part of the reason for the early uplift in RPMs is the
withdrawal of discounts, which started happening a couple of months
prior to the increase in headline tariffs (i.e., from early Jun-11).
The percentage RPM increase for Bharti could be lower
The pace of RPM increase seen by these players in the industry
surprises us. However, we believe that the extent of RPM increase for
incumbents such as Bharti/Idea could be lower than that experienced
by the smaller operators. This is because while the smaller operators
have increased both on-net and off-net tariffs from 1 p/sec to 1.2 p/sec,
Bharti already had its off-net tariffs at 1.2 p/sec in most circles (only
the on-net tariffs were increased in the July tariff hikes).
Assuming even traffic distribution across on-net and off-net calls
(which should be nearly true in the case of large operators), the RPM
uplift seen by Bharti/Idea should be roughly half of that enjoyed by
smaller operators, or about 1.25% in a single quarter vs Tata’s
number. This pace of uplift should still be sufficient to surprise markets,
in our view (despite the September quarter being seasonally subdued).
Our own assumption currently for the rest of FY3/12 is flat RPMs—i.e.,
full-year RPM assumption same as the Jun-11 quarter, with RPM
increases kicking in only next year.
Because of the above differential in RPM increases, Bharti/Idea’s
premium on pricing to competition could contract leading to: (1) market
share gains for the companies, or (2) room for further tariff hikes.
Changed cost structures mean tariffs will stay high
Management explained that there are strong cost-based reasons why
tariffs will stay up and not come down soon. Since Jun-09 (when
Tata’s per-second billing plans set the ball rolling on price wars):
● Diesel prices are up 33% (we note that energy costs were 6.6% of
sales for Bharti in FY3/11).
● Finance costs are up more than 250 bp.
● Manpower costs have seen strong inflation.
● On the other hand, sector revenues have gone up less than 18%
in this time period (FY09-11).
Thus, the business assumptions of most new networks are quite
different from the time these operations were launched in 2009.
Lending to sector is restarting, albeit slowly
One of the key catalysts to bring back pricing power to the incumbents,
in our view, was the near drying up of funding to the telecoms sector
from local banks, post 3G auctions and in the wake of the 2G
spectrum issue. This resulted in capacity remaining stagnant in the
industry in 2H10 and 1H11 (except for some rollouts by OCF +ve
GSM incumbents).
However, Tata’s management indicated that banks have started
lending to the sector again—although cautiously, and only to telcos
backed by large established promoters. This has also resulted in
capex restarting (including new passive infrastructure being
constructed). However, most of this capacity is being targeted at
building 3G/data capacity, rather than 2G voice, explained
management. We thus do not see this as a cause for worry on voice
tariffs right now, although we would monitor the situation closely.
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