Sunday, March 30, 2008

Revisiting the Indian Telecom Sector

Fastest-expanding telecom market in the world
India is the fastest-expanding telecom market in the world (Exhibit 2)
with more than 8m subscriber additions per month. India had 238m
mobile subscribers as of January and we expect it to overtake the US in
terms of mobile subscribers by mid-2008. A low overall telephone
density (or teledensity) of 25% coupled with a huge population base of
1.1b should provide sufficient growth opportunities for the telecom sector
in India. India’s teledensity improved to 25% from 4% within a short span
of four years due to favourable demographics, consistent regulatory
changes and the low cost of service.

Triggers for Indian telecom industry
The next wave of network expansion, infrastructure sharing, sufficient
allocable spectrum, favourable policy changes, rising demand for global
connectivity and new technologies such as 3G, WiMax, DTH and IPTV
should drive the future growth of the Indian telecom industry. We expect
a record number of mobile subscriber additions in excess of 100m in
FY09 and the total subscriber base to cross 500m by 2010.
Leaders will continue to forge the way
We expect established service providers such as Bharti Airtel, Reliance
Communications and Idea Cellular to lead the Indian telecom growth
story. New entrants will struggle to find a niche. We expect consolidation
in the next two to three years, with industry revenue growth of 33% and
earnings growth of 25% in FY09.
Sector valuations
Indian telecom companies are currently trading at an FY09E P/E multiple
of 18x lower than their historical trading multiple of 25x. We expect the
core businesses to trade at 20x FY09E P/E with incremental contribution
from the demerger of tower assets. Bharti is our top pick among the
Indian telecom operators with an expected ROE of 35% in FY09. Bharti
should continue to lead the Indian telecom sector in returns because of
its superior margins and higher asset turnover.We expect the wireless subscriber
base in India to double to 500m by end-FY11.FY09 should have record subscriber
net additions of more than 100m.The majority of growth should come from the
A and B circles with additional
contribution from the C circles. Regions in India have been classified as A, B, C
and metro circles for telephony licences with metros having the most potential in
terms of penetration followed by the A, B and C circles, respectively, in that order.
However, in terms of population, metro, A, B and C circles account for 5%, 31%,
44% and 20% of India’s population. The metros are aligned with the bigger cities
like Mumbai, Delhi, Chennai and Kolkata, while the A, B and C circles are mostly
aligned with the states in the country. There are 23 telecom circles in India, which
comprise five A circles, eight B circles, six C circles and four metro circles.

Average revenue per user (ARPU) and average revenue per minute/message
(ARPM) should fall as a result of increased competition and the removal of
regulatory overheads such as Access Deficit Charge (ADC) and a reduction in
spectrum and licence fees. We expect ARPU and minutes of usage (MOU) to increase,
following a period ofdecline for the next three to four years, due to a higher
contribution from mobile
value-added services (VAS) and improvement in usage patterns of newer
The telecom industry will require about 300,000 telecom towers by FY11 to
support the increased subscriber base of 500m, which will be met by aggressivepassive
infrastructure deployment by independent tower companies.
Fixed lines should show relatively slower growth as the decline of fixed lines is
balanced by increased broadband penetration.

Lowest cost of ownership of telecom services
The tariff regulations imposed by the Telecom Regulatory Authority of India (TRAI),
coupled with competition and volume growth, have helped Indian telecom tariffs
remain the lowest in the world at about USD0.02 per minute. The low tariffs have in
turn enabled greater adoption of wireless services in the country.
An ARPM and MOU comparison of Indian telecom operators with global operators
reveals that Indian wireless operators have the least revenue per minute of USD0.02.
The operators are making up for this low ARPM through economies of scale generated
through high utilisation of networks. Even at USD0.02 per minute, the leading
operators are making EBITDA margins in excess of 40%.

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