The Hindu Business Line : Fully charged for the competition

The past year has been fast-paced for mobile services companies. India overtook China as the world’s fastest growing telecom market. Monthly subscriber additions rose to a mind-boggling 6-7 million. And this is we are set to grow further for more as BSNL, after a long delay, has announced a multi-billion dollar capex and has also been allocated 2G spectrum recently.Vodafone (earlier Hutch), which is looking to the Indian market to drive global growth, will also step on the gas to expand market share.

What follows is an analysis of the top three listed mobile players over the past year and a look at the business prospects of some smaller players.

Subscriber Base and Revenue growth

The mobile subscriber base has expanded at a furious pace the past year, with all listed players reaping the growth benefits. Bharti Airtel now has a subscriber base 5.1 crore, an 81 per cent increase over September 2006. RCom’s subscriber base rose by 40 per cent to 3.6 crore in the same period. Idea Cellular, listed last March, saw its subscriber base expand by 80 per cent to 1.87 crore.

Bharti’s overall market share grew to 23.4 per cent, and Idea’s to 15.6 per cent but RCom’s market share has declined over the year to stand at 17.7 per cent.

Prepaid services have led the charge in contributing to the heady growth rates in subscriber numbers. Prepaid subscribers account for nearly 90 per cent of the total subscriber base of all three operators. For GSM players like Bharti and Idea, the ‘life-time’ recharge scheme has been a major growth driver, thanks to their being offered at prices as low as Rs 495! Innovative schemes at very low denominations and lowered tariff rates by both CDMA and GSM players have brought in a new wave of subscribers.

Not surprisingly, the scorching pace of subscriber additions has led to a healthy growth in revenues and gross margins for these operators. Bharti’s revenues have grown by 65.5 per cent while operating profits (EBIDTA) has grown by 80 per cent in the aggregate four quarters ended September 30, 2007 compared to the four quarters ended Sep. 30, 2006. Idea has grown its revenues by 66 per cent and EBIDTA by 58 per cent, while the corresponding figures for RCom are 40.7 per cent and 56.6 per cent respectively during the same period.

ARPU and key metrics

This burgeoning subscriber base, with low tariffs has also meant that the average revenue per user (ARPU) has fallen across the board. Bharti’s mobile ARPU has fallen 16 per cent to Rs 366 over the past year. Idea’s ARPU has fallen 14 per cent, while RCom has retained its ARPU at a flat Rs 361. The falling ARPU is an indication that new subscribers are generating lower revenues for operators. This trend may gather pace as players compete to add market share by tapping into the ‘bottom of the pyramid’.

While ARPUs have declined, minutes of usage on the network have grown by about 4-6 per cent over the year, which may bring in volume growth for these companies. But increasing minutes of use also require operators to invest in improvement of network infrastructure.

Value added services (VAS) as a percentage of revenue has remained flat for all the three players. VAS is a relatively high-margin business and is dominated mainly by text messages (SMS) for all operators, with ring-tones, caller ring-back tones and other services being minor contributors to these revenues. But as operators increasingly focus on promoting VAS, subscriptions to such services may help stem the fall in ARPU.

The launch of 3G services is a critical factor here. Listed operators who do win spectrum for 3G services will be able to launch a host of enhanced data and entertainment services, in addition to high-quality voice services, which could substantially bolster realisations. Most operators already have a 3G-ready network, and this may result in a faster time to market. Though 3G services have considerable potential, their reception in a market such as India, where voice- driven services predominate, remains to be seen.

Diversification, other growth drivers

Listed players are seeking other growth drivers in the form of non-voice services, geographic diversification and new businesses. Bharti, has a significant non-voice business, with enterprise services businesses including broadband, telephone and carrier services, increasing their contribution (29 per cent) to overall revenues. In addition, the company has announced the launch of IPTV services soon.

Bharti’s global connectivity endeavour has got a boost with the company being awarded the facility-based operator licence in Singapore. This licence will enable a point of presence in Singapore and provide a geographic platform for voice, data and roaming connectivity to over 90 countries. This move, along with the recent mobile services foray into Sri Lanka and applications for licences in West Asia, reinforces the fact that Bharti is looking keenly at overseas markets to augment its domestic success.

RCom’s non-voice business is also fairly substantial. The company’s recent buyout of Yipes Communication through FLAG Telecom signals its clear intent to become an international player in data communications as well. FLAG gives the company global connectivity through its huge undersea cable network.

RCom has also joined the IPTV (Internet protocol television) bandwagon with the announcement of a $500 million deal with Microsoft, for launching this service. In addition, its countrywide rollout of GSM services is also awaited.

Idea Cellular, among the large listed players, remains a pure play mobile services company, with a presence in 11 circles. But allocation of 2G spectrum to commence operations in Mumbai and Bihar will help Idea expand its subscriber and revenue base. As and when the recent government recommendations on number portability become operational, Idea may benefit from a possible churn in the Mumbai circle.

Additionally, the company is building its own NLD and ILD networks, which will help it rake in significant roaming revenues. Given the above factors, despite policy challenges and intensifying competition, the outlook for all the three companies appears positive for the medium term. The key challenges may relate to retaining customers after number portability becomes operational countrywide.

With a long queue building up for telecom licences, the possible entry of new foreign players into the Indian markets is also a factor to be watched. However, the leading players appear to have the financial and technical wherewithal to take them on. It is the smaller players who may feel the heat.

Coping with the possibility of rigorous subscriber-linked criteria in allocation of 2G spectrum is currently a bone of contention for GSM and CDMA players. A rapidly growing subscriber base and spectrum crunch would mean that operators may have to invest in building more cell sites and deploying spectrum-efficient technologies. This may involve additional cash outflow. The matter is sub judice and a hearing on 2G spectrum release is scheduled for next month.

Tower Business

Bharti, RCom and Idea have all announced the de-merger of their tower infrastructure business into separate companies. This may unlock some value as infrastructure sharing and multi-tenancy improves in the country.

In the US, specialised players run the tower infrastructure business of most operators. Some, such as American Towers and Quipo, have also entered the domestic fray. By the rush of players it appears that this space has a lot of potential, but one needs to wait and watch trends in tenancy, and the emerging competition in this space, before the valuation that can be assigned to these entities becomes clear.

Smaller Players

In the midst of all the action surrounding the top players, the smaller players appear to be left behind. MTNL, Tata Teleservices Maharashtra, Spice Communications and HFCL Infotel are the smaller listed players who have a presence in mobile telephony. All of these players operate in two circles only. Except MTNL, the other three are yet to turn profitable despite several years of operations. Their pace of subscriber additions is also not very strong in relation to larger players.

Spice, a recently listed stock, has been subject to speculation that the promoters of the company may offload some stake early next year. With a limited area of operations and pricing pressures arising from competition, it is the prospect of consolidation rather than fundamentals that may be the driver of stock price trends in these cases. However, with no concrete announcements by the larger players on this issue, expectations of consolidation remain in the realms of speculation.

MTNL appears better placed as it has a broader portfolio of wireless, wireline and broadband services. It has also launched IPTV services in Mumbai, but its penetration levels are uncertain. It has also been allocated 2G spectrum, which will allow it to expand subscriber base. It also operates in the high ARPU circles of Mumbai and Delhi.

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