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India Telecommunications

PRAXIS BUSINESS SCHOOL

A report Submitted to Prof. Srinivas Govindrajan On 10-02-2010
BY Manoj Mani Iyer

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EXECUTIVE SUMMARY
As per the latest update on India’s telecommunications market assesses the impact of several recent developments on country’s mobile telephony sectors, Recent developments, which include impressive rates of subscriber growth, increased competition and ongoing investments in the expansion of network infrastructures, are also reflected in our newly updated forecasts. The most notable forecast changes have occurred in the mobile segment. India’s mobile subscriber base grew by 12.9% in the first three months of 2009. The stronger than expected growth has led us to revise our growth expectations for the rest of the year. We now predict that the market will expand by 49.8%, enabling the penetration rate to rise to almost 44% at the end of 2009. We now expect the mobile customer growth rate in 2009 to surpass that of 2008, which saw the market expand by 48.5%. One of the main reasons for our strong growth expectations is the intense competition that has emerged between India’s mobile network operators. In addition to market leaders Bharti Airtel, Reliance, Vodafone and BSNL, operators such as Idea Cellular and Tata Teleservices are steadily increasing their share of the market. Several new entrants are expected to challenge the position of these market leaders over the next few months. Among them are the Indian mobile businesses of major international operators such as Bahrain’s Batelco, Norway’s Telenor and Russia’s Sistema. Although we have raised our growth expectations for India’s mobile market as a whole, we have lowered our estimate for the number of 3G customers at the end of 2008. The new estimate reflects evidence of weak growth from India’s two state operators, BSNL and MTNL which soft launched their 3G services in late 2008. By June 2009, MTNL reportedly had around 1,000 3G customers, much less than originally anticipated. Our new 3G forecast also reflects the continued delays that have characterised the process to issue next generation mobile licences. In June 2009, it was announced that the Indian government had settled on a price for 3G licences. However, in mid-July, the Indian government revealed that it had convened a group of ministers to further look into both pricing and spectrum availability for 3G services. Then there are other factors like Spectrum recommendations, Mobile number portability which were in news. Despite the fact that its scores have changed in a number of ratings categories, India remains in eighth place in our latest set of Business Environment Rankings for Asia. Although India’s telecoms market score has dropped slightly, it nevertheless continues to have the second highest telecoms market rating in the region. A lower score for regulatory independence reflects the ongoing delays that have affected the 3G licensing process. However, the lower score in this category has been counterbalanced by a higher score for Country Risk; the higher score is largely a reflection of our more upbeat view of India’s economic growth prospects.
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Table of Contents
1 SWOT ANALYSIS............................................................................................................................... 4 1.1 2 Indian Mobile SWOT ................................................................................................................. 4

India ................................................................................................................................................ 5 2.1 Asia Telecom Business Environment Rankings ........................................................................... 6

3 4 5 6 7

Mobile Industry Forecast Scenario.................................................................................................... 7 ARPU ............................................................................................................................................... 9 Market Data Analysis – Mobile ...................................................................................................... 10 Indian Mobile (GSM/CDMA) Market, Mar 09 ................................................................................. 11 Mobile Operator Data.................................................................................................................... 12 7.1 7.2 7.3 7.4 Bharti Airtel ............................................................................................................................ 12 Reliance .................................................................................................................................. 13 BSNL ....................................................................................................................................... 14 Vodafone Essar (until Aug 2007, Hutchison Essar ..................................................................... 15

8 9 10

Industry Developments .................................................................................................................. 16 Selected Operators Financial Indicators .......................................................................................... 18 Company Snapshots ................................................................................................................... 19

10.1 BSNL ....................................................................................................................................... 19 10.2 MTNL ...................................................................................................................................... 20 10.3 Bharti Airtel ............................................................................................................................ 21 10.4 Vodafone Essar ....................................................................................................................... 22 10.5 Reliance Communications ....................................................................................................... 23 11 12 Appendix .................................................................................................................................... 24 Bibliography............................................................................................................................... 25

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1 SWOT ANALYSIS
1.1 Indian Mobile Industry SWOT

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2 India
Despite the fact that its scores have changed in a number of ratings categories, India remains in eighth place in the Business Environment Rankings for Asia. Although India’s telecoms market score has dropped slightly, it nevertheless continues to have the second highest telecoms market rating in the region, with only Japan scoring higher. The other changes that have contributed to a slightly weaker overall rating for India include a lower score for regulatory independence and higher score for country risk. Despite our generally upbeat view of the potential in India’s broadband market, a number of challenges remain. One of these challenges is how to ensure the continued profitability of the mobile sector with its strong dependence on prepaid users and the ongoing decline that has affected ARPU levels. The launch of next generation mobile data services has potential to help slow the decline of ARPU levels. However, India’s 3G licensing process has been subject to continued delays. Although the government has already issued licences to state-owned operators BSNL and MTNL, recent figures from MTNL suggest that customer growth has been much weaker than anticipated.

India is now one of the biggest recipients of foreign direct investment (FDI) among emerging markets, having attracted US$36.7bn of inflows in 2008, according to the United Nations Conference on Trade and Development (UNCTAD) – a 60% increase from the previous year. A cheap but skilled English-speaking labour force can do the jobs of Western workers for a fraction of the wages paid in North America or Europe. Despite pockets of excellence, such as the IT sector, overall literacy rates in India remain far lower than in Asian and other key emerging market nations. India's infrastructure is notoriously inadequate. A 500km road journey can take as much as 24 hours, owing to poor road conditions, congestion and toll booths. The competitiveness of local firms is undermined by reams of official red tape, from foreign investment restrictions to inflexible labour laws. Intellectual property rights are poorly protected in India. India is one of nine countries on the 'priority watch list' for 2008 compiled by the Office of the US Trade Representative.

India could enhance the competitiveness of local industry through further liberalisation and deregulation Ongoing infrastructure projects ranging from roads, railways and airports should provide opportunities for foreign investors for many years to come Indian Prime Minister Manmohan Singh is eager to reform the banking sector in order to increase the availability of long-term financing, particularly for large infrastructure projects. China still remains a major competitor for FDI flows into India. India has excessive bureaucracy and poor infrastructure in comparison with China. The November 2008 Mumbai terror attacks demonstrated that security issues will increasingly be in investors' considerations.

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2.1 Asia Telecom Business Environment Rankings

Scores out of 100, with 100 highest. The Telecoms BE Rating is the principal rating. It is comprised of two sub-ratings 'Limits of Potential Returns' and 'Risks to Realisation of Returns', which have a 70% and 30% weighting, respectively. In turn, the 'Limits' Rating is comprised of Telecoms Market and Country Structure, which have a 65% and 35% weighting and are based upon ARPU/subscriber numbers and growth of the mobile telecoms industry (Market) and the broader economic/socio-demographic environment (Country). The 'Risks' rating is comprised of Market Risks and Country Risk which have an equal weighting, respectively, and are based on a subjective evaluation of industry regulatory issues (Market) and the industry's broader Country Risk exposure (Country), which is based on BMI's proprietary Country Risk Ratings. The ratings structure is aligned across the 14 industries for which BMI provides Business Environment Ratings methodology, and is designed to enable clients to consider each rating individually or as a composite, with the choice depending on their exposure to the industry in each particular state. For a list of the data/indicators used, please consult the appendix at the back of the report. Source: BMI

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3 Mobile Industry Forecast Scenario

 The above table gives a status of where the mobile industry is heading and what lies in the future.  The no. of mobile phone subscribers have increased from 149,000 in 2006 to an estimated 1,378,910 in 2013 in (‘000).  Althought the 3G is introduced it has not seen the phenomenal growth which was predicted but he signs are encouraging enough to pursue with the technology as there is an estimated market share of 2.2 % for 3G in the entire mobile market which is currently around 0.4%.

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The growth of India’s mobile market over the next few years will be driven by several factors, not least the ongoing network investments by the country’s numerous mobile operators. Consumer demand is expected to remain strong, with low tariffs and low penetration rates (especially in rural parts of India) helping to propel new customer growth. India’s vast population provides a substantial market for operators to continue attracting large numbers of new customers throughout our forecast period and beyond. Another important factor that will drive customer growth going forward is the intense competition that has emerged between a sizable number of mobile network operators. Recent quarters have seen Bharti Airtel, Reliance, Vodafone and BSNL being joined in the ‘big league’ by Idea Cellular and Tata Teleservices. However, these big six are expected to face increasing competition from several new entrants that are backed by major international operators such as Bahrain’s Batelco, Norway’s Telenor and Russia’s Sistema.

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4 ARPU
Telecom Sector – Mobile ARPU – Historical Data & Forecasts (INR)

ARPU forecast for India is based on historical data published by the TRAI, the Indian telecoms regulator. The TRAI publishes separate data for GSM and CDMA services, and we have therefore developed a separate ARPU forecast for each of the two services. According to the TRAI, India’s GSM operators had an average blended ARPU of INR220 in 2008, down by 15.7% from the previous year. Much of this decline can be attributed to the rapid expansion of India’s prepaid market; the majority of GSM operators have been reporting much faster growth in the number of prepaid customers relative to postpaid subscribers. This has put downward pressures on ARPU levels, which have now been falling for some time. The latest TRAI data shows that blended ARPU for India’s GSM operators fell by 6.5% in the first three months of 2009 to reach INR205. BMI predicts, for the year as whole, the blended ARPU for GSM services will fall by almost 17% to reach INR182.8. We believe the rate of decline would be faster, if it were not for the steady advance of mobile data services within the sector. Although we have downwardly revised our forecast for the number of 3G customers in India, general demand for mobile data services has been developing at a healthy pace. This trend will help to mitigate the longer term decline in blended ARPU. By the end of our five-year growth forecast in 2013, we envisage mobile ARPU for GSM services falling to around INR137. In 2013, the rate of decline is predicted to fall to just 0.3%.

The long-term impact of rising data service usage on mobile ARPU levels will also affect ARPU based on CDMA services. According to the regulator, this fell by almost 39% in 2008 to reach INR111 at the end of the year. The latest data shows that, in the first three months of 2009, the blended ARPU rate for CDMA services fell by 10.8% to reach INR99. BMI believes that blended ARPU for CDMA services has potential to fall by around 30% in 2009 to reach INR78. We predict that the rate of CDMA ARPU decline will slow down significantly in the latter years of our forecast, reflecting the impact of new data service uptake. By the end of 2013, we envisage mobile ARPU for CDMA services falling to below INR44.
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Averaging at INR165.5 in 2008, the blended ARPU rate for all of India’s mobile operators is expected to fall by over 45% over the next five years, to around INR90 in 2013.

5 Market Data Analysis – Mobile
According to the most recent figures published by India’s telecoms regulator, the Telecom Regulatory Authority of India (TRAI), the country’s mobile subscriber base grew by 12.9% q-o-q to reach 391.76mn in Q109. The addition of 44.867mn in the quarter enabled the mobile penetration rate to rise to 33.3% Growth in the first quarter of 2009 was stronger than in any quarter in 2008. The relatively low mobile penetration rate reflects the fact that much of rural India has yet to benefit from the spread of mobile telephony. It is important to remember that two-thirds of India’s population reside outside the urban centres. Nevertheless, India’s mobile operators are in the process of extending their infrastructures to rural parts of the country. This is expected to push up penetration rates significantly over the next few years. The five largest mobile operators accounted for over 83% of the total subscriber base at the end of March 2009. Although it continued to lead the market, with 24% of the mobile customer base, Bharti Airtel saw the slowest growth in the first three months of 2009. During the quarter, Bharti’s subscriber base increased by 9% q-o-q to surpass 93.3mn. Despite being the slowest growth rate recorded for Bharti, the operator continued to beat its own record in terms of net additions; Bharti gained 8.27mn new customer in the quarter, up from 8.17mn new customers in the final quarter of 2008.

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6 Indian Mobile (GSM/CDMA) Market, Mar 09

After the four mobile market leaders, there are two Indian mobile operators with a market share of between 9% and 10%. With almost 39.9mn subscribers at the end of Q109, Idea Cellular maintained its lead over Tata Teleservices. By the end of the quarter, Idea had a market share of 9.9%, compared with 9% for Tata. It should be noted that Idea’s mobile customer total for the end of March 2009 does not include the 4mn customers that were served by Spice Communications, and which are in the process of being acquired by Idea. For the quarter ending July 31 2009, Idea reported a better than expected increase in consolidated net profit. Idea posted a consolidated net profit of INR2.97bn (US$60.9mn), up 12.9% against the same period a year earlier. Also in July, Idea announced that it has been granted licences to operate in the West Bengal and Jammu & Kashmir (J&K) circles. In early July, Idea launched commercial GSM-based services in Chennai. The launch followed on from a launch in Tamil Nadu in May 2009. Idea plans to complete its pan-India GSM wireless roll-out by the end of 2009.

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7 Mobile Operator Data
7.1 Bharti Airtel

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7.2 Reliance

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7.3 BSNL

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7.4 Vodafone Essar (until Aug 2007, Hutchison Essar

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8 Industry Developments

Indian government to limit number of Mobile Operators
In July 2009, it was reported that India’s Department of Telecommunications (DoT) had called on the Telecom Regulatory Authority of India (TRAI) to limit the number of operators licensed to offer mobile voice services. With more than 20 applications pending for telecoms licences, the DoT has asked the TRAI to review a previous decision not to restrict the amount of operators allowed in any one circle. In its message to the TRAI, the DoT said: ‘The number of pending applications in every circle ranges from 13- 19 and consideration of these will push the demand for spectrum in a substantial manner.’ The DoT’s decision to press the matter is believed to have been prompted by a recent Delhi High Court ruling. The court overturned a DoT decision from January 2008 that set 25 September 2007 as the cut-off date for granting new telecoms licences; the original deadline was October 1 2007. As a result of the court verdict, approximately 20 companies are reported to be considering legal action against the DoT after they were denied licences, having submitted applications before the original deadline but after the altered cut-off date. While the DoT has never offered a formal explanation for changing the date, several companies that missed out on concessions alleged that the decision was made so that only certain India based companies would bag licences.

Lock-In Period For New Entrant Equity Sales
Also in July 2009, it was reported that the DoT would prohibit new entrants to India’s telecoms sectors from selling equity shares for a three-year period. ‘There shall be a lock-in period for sale of equity of a person whose share capital is 10% or more in the UAS (unified access service) licensee company,’ the regulator is reported as stating. Under the new legislation, additional equity shares can be issued through private placements or public issues, but only if companies do not pay out dividends. It is understood that the new rules on new entrant equity sales will not affect operators that issued fresh share capital to strategic domestic investors and foreign telecoms companies. New players such as Swan Telecom and Unitech Wireless claim that deals with Etisalat and Telenor, respectively, were conducted as issues of fresh equity. However, it is understood that the new rules may apply to operators including Vodafone Essar, Idea Cellular and Aircel, which were given additional licences to operate in new service areas at the beginning of 2008. Under the proposals, operators may be allowed to sell holdings during the three-year period, subject to prior approval from the government and on fulfilment of roll-out obligations.

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Bids To Be invited For Fixed-Line And Satellite Broadband Exchanges
In July 2009, India’s DoT was said to have invited bids from both private and state-owned operators to roll out around 28,000 fixed-line broadband exchanges and 6,000 satellite broadband sites as part of efforts to increase broadband penetration across the country, particularly in rural regions. According to the Economic Times the project will be funded from the Universal Service Obligation Fund (USOF), which at present is understood to have around INR200bn (US$4.1bn) in unutilised funds. The successful bidders will be required to share their infrastructure with other operators, and the subsidy granted by the USOF will be allocated in a phased manner, with the final value determined by the degree to which infrastructure is shared.

Mobile Number Portability
In July 2009, it was reported that nationwide MNP could still be introduced before the end of 2009. According to the Economic Times, MNP is currently due to be implemented in Delhi, Mumbai, Maharashtra and Gujarat, Calcutta, Tamil Nadu, Chennai, Andhra Pradesh and Karnataka by September 2009. The remainder of the country is due to gain access to the service by March 2010. However it is as yet not been implemented. India’s TRAI is understood to have begun a review of the charges for MNP, calling on industry players to submit their views on possible fee structures. Syniverse Technologies and MNP Interconnection, the two companies chosen to implement MNP by the DoT, are understood to have suggested a fee of between INR75 and INR200 (US$1.55-US$4.13) for the service. One concern that has been raised about the introduction of the service is that consumers may not have much interest in porting their number; Syniverse and MNP Interconnection have both told the TRAI that they expect less than 3% of the country’s wireless subscribers to utilise the service by the end of 2010.

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9 Selected Operators Financial Indicators

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10 Company Snapshots
10.1 BSNL

Company Overview
BSNL was established in October 2000 when the Department of Telecommunications incorporated its network operations outside of Delhi and Mumbai. A state-owned operator, BSNL has a mobile network serving more than 52.1mn customers (as of March 2009), making it India’s fourth largest GSM operator. The company also served 29.35mn fixed-line subscribers at the end of March 2009, giving a market share of 75.4%. BSNL is also India’s largest ISP, with over 6.69mn internet subscribers, 3mn of which use broadband services (figures correct as of December 2008). The state-owned company operates in 21 of India’s 23 regional circles, but does not provide services in New Delhi or Mumbai, where sister company MTNL operates.

Company Performance

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10.2 MTNL

Company Overview
MTNL was established by the Indian government in 1986 to serve the country’s key metropolitan areas of Delhi and Mumbai. The company provides fixed-line, internet and mobile services, commanding a 9.2% share of the fixed-line market, but only a 1.3% share of the entire mobile market (figures correct as of March 2009). The company launched its GSM system in both cities in 2001 and, as of March 2009, had over 4.4mn subscribers. Approximately 70% of the operator’s mobile subscribers are prepaid customers, a relatively low ratio for the Indian market. MTNL also operates approximately 3.573mn fixed lines and serves 2.60mn broadband internet customers in the Delhi region.

Company Performance

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10.3 Bharti Airtel

Company Overview
Bharti Airtel is India’s largest mobile operator, with over 93.9mn subscribers at the end of March 2009. Present in all 23 of India’s circles, Bharti hopes to double this figure over the next three years. At the end of March 2009, the operator also had 2.28mn fixed-line customers, representing a 5.8% share of the market. Bharti also had 1mn internet subscribers at the end of December 2008, of which 754,000 were broadband subscribers. This gave Bharti a broadband market share of 13.7%. Bharti Airtel is divided into three business units – mobile services, broadband and telephone services, and enterprise services. The operator’s enterprise unit is divided into carriers and corporate business units. The carrier unit offers data and voice wholesale services, while the corporate business units supply data and telecommunications needs for corporates and SMEs.

Company Performance

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10.4 Vodafone Essar

Company Overview
By the end of 2008, and just over one year after Vodafone had taken majority control of the operator, Vodafone Essar had over 60.9mn subscribers, having captured over 21mn net additions over the previous year. Of Vodafone’s total customer base, 92% were prepaid subscribers (as of the end of 2008). By the end of March 2009, Vodafone Essar had 68.769mn mobile customers in India. With a 17.6% share of the Indian mobile market, Vodafone is ahead of state-owned BSNL and is only just behind second-placed conglomerate Reliance.

Company Performance
Financial Data
Annual Revenue (2003): HKD4.50bn Annual Revenue (2004): HKD7.10bn Annual Revenue (2005): HKD9.90bn Annual Revenues (2006):HKD15.45bn Annual Revenues (FY07): GBP1.80bn EBITDA (FY07): GBP598mn Net Profit (FY07): GBP35mn

Operational Indicators
No. of Mobile Subscribers (2007): 39.90mn No. of Mobile Subscribers (2008): 60.933mn No. of Mobile Subscribers (March 2009) 68.769mn No. of Mobile Subscribers (June 2009): 76.450mn

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10.5 Reliance Communications

Company Overview
India’s Reliance Group operates throughout the country and across the spectrum of wireless, wireline and long-distance voice, data, video and internet communications services. Reliance also has an international presence via its submarine cable network infrastructure, which connects 40 countries from the US to Europe, the Middle East, India, South East Asia and Japan. The operator is split into three business units, namely Wireless, Global and Broadband. Reliance offers wireless services through its CDMA (20 circles) and GSM networks (eight circles). In 2009, the carrier also announced the launch of a pan-India GSM network. Reliance’s Global Unit offers national and international long-distance calling services, mainly on a wholesale basis. The operator has some retail services with a significant ILD business in the UK, Canada, the US, Australia and New Zealand. Reliance is also a significant broadband operator, offering enterprise voice, data, video and internet services. It has over 1mn access lines.

Company Performance

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11 Appendix

Telecoms Industry Glossary

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12 Bibliography
www.rcom.co.in www.relianceinfo.com www.vodafone.in www.airtel.in www.bsnl.co.in www.mtnl.net.in www.businessmonitor.com www.wikipedia.org

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