Telecom Sector Analysis Report

18

[Key Points | Financial Year '12 | Prospects | Sector Do's and Dont's]

India's teledensity has improved from under 4% in March 2001 to around 76% by
the end of March 2012. Cellular telephony continues to be the fastest growing segment in the Indian telecom industry. The mobile subscriber base (GSM and CDMA combined) has grown from under 2 m at the end of FY00 to touch 919 m at the end of March 2012 (average annual growth of nearly 64% during this 12 year period). Tariff reduction and decline in handset costs has helped the segment to gain in scale. The cellular segment is playing an important role in the industry by making itself available in the rural and semi urban areas where teledensity is the lowest.

The fixed line segment continues to decline in terms of the subscriber base. It has

declined to 32.17 m subscribers in March 2012 from 34.73 m in March 2011. The decline was mainly due to substitution of landlines with mobile phones.

As far as broadband connections (>=256 kbps) are concerned, India currently has

a subscriber base of 13.8 m. Broadband penetration received a boost from the auction of broadband spectrum. The network providers have stated that they would be looking at boosting the contribution of data to their revenues. This bodes well for the future of broadband services.

Key Points Supply Demand

Intense competition has resulted in prompt service to the subscribers. Given the low tariff environment and relatively low rural and semi urban penetration levels, demand will continue to remain higher in the foreseeable future across all the segments. High capital investments, well-established players who have a nationwide network, license fee, continuously evolving technology and lowest tariffs in the world. Improved competitive scenario and commoditisation of telecom services has led to reduced bargaining power for services providers. A wide variety of choices available to customers both in fixed as well as mobile telephony has resulted in increased bargaining power for the customers. Competition has intensified with the entry of new cellular players in circles. Reduced tariffs have hurt all operators. TOP

Barriers to entry

Bargaining power of suppliers Bargaining power of customers

Competition

Financial Year '12

FY12 saw the continuance of growth for the Indian telecom market, which witnessed a 12%
YoY increase in its subscriber base during the 12-month period. At the end of March 2012, the countrys total telecom subscriber base (fixed plus mobile) stood at about 951 m. The tele density level stood at about 76% by the end of the fiscal.

Data source: Trai, Company Data

Data source: Trai, Company Data

Growth remained robust in the GSM mobile space. GSM added 115 m subscribers during the

year. After a robust 46% YoY increase in subscriptions during FY11, the growth in GSM industry has slowed down to 17% YoY in FY12. The year saw the apex court of the country cancelling the disputed 2G licenses that were issued in 2008. The cancellation caused the exit of Etisalat and Batelco from the sector.

During FY12, India's mobile subscriber base grew by 13% YoY, from 812 m to 919 m, while
the fixed subscriber base declined by about 7%, from 34.73 m to about 32.71 m. TOP Prospects As far as the fixed line business goes, the low penetration levels in the country and the increasing demand for data based services such as the Internet will act as major catalysts in the growth of this segment. However, the growth would be mitigated by increasing substitution of landlines by mobile phone. The PSUs will however continue to retain their dominant position. This is on account of high capital investments required in setting up a nationwide network. As a result, the private sector players will have to rely on key business centers and pockets of high urbanisation for their growth.

Increasing choice and one of the lowest tariffs in the world have made the cellular services in

India an attractive proposition for the average consumer. The penetration levels in urban areas have already crossed 100%. Therefore the main driver for future growth would be the rural areas where tele-density is around 39.22%.

During FY12, a number of things were carried out. The Supreme Court cancelled the 2G

licenses that were issued in 2008 by the erstwhile telecom minister. The Court also directed the regulator to formulate new rules for auctioning the spectrum and cancelled licenses. The regulator, TRAI has come up with regulations which price the 2G spectrum at sky high prices. The operators have vehemently opposed the pricing which they state will strain their stretched balance sheets further.

The cancellation of the licenses and subsequent TRAI's proposals on pricing of the new
spectrum prompted the exit of 2 foreign operators from the country. The other operators too have revisited their investment plans in India. However, the regulator is optimistic that foreign

operators would still participate in the upcoming 2G auction.

The operators continued to operate on thin margins during FY12. Due to intense competition,

tariffs continue to remain low. At the same time rising operating costs will force operating margins to continue remaining depressed during the current fiscal as well. At the same time, operators are likely to see their balance sheets come under pressure as well. Most operators have taken huge loans to fund their 3G spectrum obligations. Now they would have to raise more funds to fund the 2G spectrum licenses. With such low margins and high debt to equity ratios, banks have been skeptical about lending further to the telecom companies. As a result, most of them are exploring other options of raising funds including listing of unlisted subsidiaries.

In a latest move, operators have cut tariffs on the premium 3G services. Most of them have

stated that the decline in tariffs would be offset by increase in volumes which would help boost 3G revenues. Indian consumers are known to be highly sensitive to price decrease and therefore this move to cut prices is expected to drive growth for 3G in the coming years. However, if the operators go for predatory pricing, like they did for 2G, then it would harm the fundamentals of the sector by forcing companies to cut margins further. While tariff increase on the 2G side will have to happen eventually, it remains to be seen if all operators would make this move in the current fiscal or not.