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Hello, did you say 'slowdown'? - Views on News from Equitymaster
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  • Mar 20, 2009

    Hello, did you say 'slowdown'?

    Unlike most of the consumption stories doing rounds in India and which show huge potential in the untapped rural markets, home to two-thirds of the country's one billion-plus population, the increasing penetration of mobile telecom services is being acted out in reality. In rural India, carrying a US$ 20 mobile phone can be something of a status symbol. This is clearly indicative of the much-larger drama unfolding in the Indian telecom market, once considered a backwater and now the fastest growing in the world. Or what would justify the fact that while the entire world and its industries are facing widespread slowdown in demand as consumers cut back on spending, the momentum that has built up in the Indian telecommunication market shows no signs of fading out.

    As reported in leading business dailies, the sector added 13 m new subscribers during the month of February 2009. While this was lower as compared to the 15 m additions that were recorded in January, it was still higher than the average addition of around 10 m seen over the past few months. The count of Indian telecom subscribers now stands at 413 m, including both landline and mobile subscribers. The latter now forms over 90% of the country's total telecom base and remains the lead growth driver.

    However, amidst all these strong numbers that the sector is adding month after month, the question still remains - how sustainable is this growth. This is given that Indian mobile telecom companies have a limited pool of people to sell its services to considering that almost 25% of India's population still remains below the poverty line and almost an equal number (consisting of children and old age people) do not use mobile services to a large extent. In that case, we remain with a pool of almost 500-600 m people who are the target market for the companies at a given point of time. And considering that the subscriber base has already reached almost 75-80% of this pool, sustainability of such growth remains a question.

    Secondly, a large part of the current boom in monthly additions has been a result of cheap call rates offered by companies that have recently entered the market in a big way. Reliance Communications is a case in point. The company that has a monopoly over the CDMA mobile services market that has not grown at a very rapid pace, has recently become very aggressive in the GSM mobile segment. And, given its ultra-cheap subscription rates, it has been able to garner a significant market share of the new additions. For instance, in February, Reliance added around 3 m new mobile customers, a number that was almost 25% of the total additions. Then there are companies that continue to lower call rates to lure in new customers or to poach from other players.

    Overall, given the competitive intensity, while subscribers are in for good times ahead as call rates and handset costs will continue to decline, how such a scenario impacts companies' profitability remains to be seen. Market leaders have already termed new and aggressive entrants', like Reliance's (in the GSM space) pricing policies as a 'self destruction mechanism' considering their non-sustainability.



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