The Indian telecom sector now has over 820 million subscribers. The Indian population, according to Census 2011, is 1.2 billion. If one takes into account the poverty statistics from the official data, the 400 million balance population survives on less than $ 1 a day, and probably has other things to think about that owning a cellphone.
Unless, Sonia Gandhi’s National Advisory Council thinks the Food Security Act is incomplete without giving all below-poverty line families (BPL) a cellphone to order their food from, Indian telecom’s glory days are past because almost everyone who can afford a mobile has one.
Tell-tale signs of this are clearly visible.
• According to the Telecom Regulatory Authority of India (TRAI), the number of new subscribers for April 2011 fell to 15.9 million. In March 2011, telecom operators added over 20m subscribers. “This indicates a saturation in the urban subscriber base,” said a report by brokerage Batlivala & Karani. “The future growth will have to come from rural areas,” the brokerage notes. The scope for a sharp growth in numbers is limited unless the government makes a law that gives a ‘right to mobile’ for every citizen in this country.
• Telecom companies are beginning to feel the pinch on bottomlines. While Bharti Airtel saw net profits 31 percent while Reliance Communications saw a vertical drop of 86 percent. The reasons for the two declines were different: Bharti lost due to the costs of its African acquisition, while Reliance had too much debt on its books. But the underlying story is the same: Indian growth is reaching saturation point, even while the cost of doing business is rising. The 3G (third generation) telecom spectrum auctions has forced most companies to borrow, and this is showing in higher costs.
• It’s becoming more dog-eat-dog – another sign that the market is not big enough for all to prosper. Mobile number portability (MPN), where a subscriber can take his number and shift to a different operator, has seen the big boys of the industry (Vodafone, Airtel and Idea) gaining ground at the cost of the smaller players. The industry is also seeing a shift away from CDMA (code division multiple access) services to GSM (global system of mobile).The losers are Reliance Communications and Tata Teleservices.
Quite clearly, there are no easy pickings in the telecom space anymore. This has resulted in a battle for the ’quality’ subscriber.
Market leaders like Bharti Airtel are foraying into new markets like Africa for growing numbers. While players like Uninor and MTS are offering low tariffs to garner numbers, others are concentrating on retaining subscribers and engaging high value customers.
The battle is now for the subscriber who spends more time on the network using data, roaming or other value added services. Big companies are no longer chasing the subscriber looking for cheap voice call rates. They want a subscribers who can give more revenues per minute (RPM).
What does this mean exactly? If you are a subscriber who wants to use 3G and roaming services, browse the Internet on the mobile, download music and videos, or check cricket scores, you are just the kind of subscriber these companies are after.
Over a period of time, sector experts feel that voice calling will be free and mobile companies would only charge for value-added services like 3G. Noah Seelam/AFP
Already, there are two camps. Incumbents (Bharti, Vodafone and Idea), who have large subscriber bases, and the challengers, who are new entrants or looking to break into the top 3 (RCom, Aircel, Uninor).
The spat between incumbents and new telecom operators continues with both camps pointing out loopholes in the other’s pricing models on the issue of termination charge, according to PTI. Incumbents have been asking for a higher termination charge.
Termination charge is a levy paid by one operator to another on whose network a call ends. Any change in it has an impact on mobile tariffs.
Bharti Airtel, in its comments, has said that Uninor’s pricing model for termination charge is not comparable with the operating model of any operator with a pan-India presence as the volumes used are too low for comparison.
The other battleground is about mobile number portability (MNP).
TRAI estimates reported by the Economic Times suggest that MNP has hurt CDMA service providers like Reliance Communications (RCom) and Tata Teleservices more than GSM providers like Bharti Airtel, Vodafone and Idea. Mobile users have moved to Vodafone, Idea and Bharti from RCom, Tata Teleservices and BSNL. As many as 10m, or just over 1% of the total subscribers, have utilised mobile portability.
The gain from Vodafone, Bharti and Idea has not come easily though. For example, Bharti Airtel reported a decline of 2.4% in revenues per minute (RPM) and 1.6% in the operating profit margin for the quarter to March 2011. This is in comparison to the quarter ended December 2011. In the case of Vodafone, RPM fell 2.6% during the March 2011 quarter.
According to a sector analyst, this has happened largely on the back of the company’s effort to gain subscribers from rivals through MNP since it was launched in January 2011.
Over a period of time, sector experts feel that voice calling will be free and mobile companies will only charge for value-added services like 3G. “3G services will drive the expansion of wireless services in future,” says consulting firm Ernst & Young in a study released late last year for industry inputs to the new telecom policy.
By April 2011, India had 9m subscribers to 3G services launched by various operators. E&Y expects this number to reach 142 m by 2015, accounting for 12% of the total subscriber base.
In the immediate future though, voice charges will continue to fall. This is clear from the announcement on Tuesday by Shyam TeleServices. The company has announced tariff for outgoing calls at half a paisa per second, or 30p per minute. It operates under the ‘MTS’ brand name.
This indicates that challenges on prices will remain. “It is highly unlikely that companies would get any pricing power soon,” the sector analyst added.
Going forward, pundits are talking about a consolidation in the telecom space. This is perhaps the reason why the stock market is giving differential values to companies. Idea Cellular enjoys a forward price-earnings multiple of 26 in comparison to 22 for Bharti Airtel and 13 for RCom. (Forward price-earnings multiple is the share price divided by expected earnings per share in a future year).
However, poor M&A rules in the space stall any potential deal within operators in the same circle. Yet, the market hopes that the government will make consolidation easier. This should reduce competition significantly.
It is well-known in investment banking circles that companies like Bharti Airtel and Vodafone will play consolidators. A couple of foreign players like France Telecom and AT&T could also be interested in entering India through an acquisition.
Players like Idea can play a twin role. They can buy up smaller players and then merge with a larger player to get into the top bracket. Potential targets include Idea Cellular, Aircel, Uninor, Shyam Telecom, Videocon among others.
The other key issue is capital raise.
Reliance Communication, which is sitting on debt worth Rs 32,000 crore, needs to cut it by raising cash. However, finding lenders is getting tougher. Market leader Bharti Airtel recently postponed a $1 billion bond issue.
The stock market clearly differentiates between those who can manage financial and business challenges better.
Over the past one year, Bharti Airtel shares rose 45 percent in value while Idea Cellular rose 38 percent. During the same period, Reliance Communication shares fell 35 percent and state-owned MTNL shares lost 17.6 percent of stock market value. Tata Teleservices, another CDMA operator, witnessed a share price fall of 17.3 percent.
“The market is trying to say that players like Bharti and Idea are better positioned to tackle competitive and technology challenges,” a fund manager at a mutual fund who has tracked the space said.
The financial situation that Reliance Communication is into means that it needs money not only to put the balance sheet in a better shape, but also to take steps to enhance user experience to compete meaningfully with top players like Bharti, Vodafone and Idea. The same holds true for players like Tata Teleservices and privately-owned Aircel.
So, is the telecom story really over? Break-neck growth is certainly over. But, to paraphrase Churchill, this is not the end. Or the beginning of the end. It is only the end of the beginning.
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