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Telecom: Getting more affordable? - Views on News from Equitymaster
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Telecom: Getting more affordable?
Mar 23, 2007

The latest news of the TRAI reducing the access deficit charge, as paid by private sector telecom service operators, to the PSU telecom major BSNL to fund its subsidised services in rural areas, mush have bought some sigh of relief for the former (private operators). From being earlier calculated on a per call basis, the procedure for calculating ADC was later changed to a revenue sharing system wherein it was calculated as a percentage of AGR (Adjusted Gross Revenue) that is exclusive of revenue of rural subscribers. This was done in order to incentivise penetration of telecom services in the rural markets.

How the cut in ADC has been effected?
As reported, the TRAI has reduced the ADC from Rs 32 bn for 2006-07 to Rs 20 bn for 2007-08, a reduction of approximately 38%. The reduced ADC is likely to be fully passed on to the subscribers, with a view of lowering the telecom tariffs and increasing the usage of telecom services by increasing their affordability. The table below gives a detailed view on the changes in the ADC as proposed by the TRAI.

Stream For 2006 - 07 ADC
(Rs bn)
For 2007 - 08 ADC
(Rs bn)
Revenue share

1.5% of AGR for all telecom service providers after deducting revenue form rural subscriber from access providers' AGR

13

0.75% of AGR for all telecom service providers after deducting revenue form rural subscriber from access providers' AGR

6
International incoming calls Rs. 1.6 per minute 18 Re 1.0 per minute 14
International outgoing calls Rs. 0.8 per minute 3 NIL -
Total ADC   33   20

Impact of reduced ADC
The ADC charges for international outgoing calls have been done away with while those on incoming calls have been reduced by 38%. This means that international calls will now be more affordable and one may also expect to see a surge in the traffic. This is expected to have a positive impact on VSNL and Reliance Communication that carry a large volume of international voice minutes on their networks.

Another ancillary benefit to these companies is that as international calling services get cheaper, the arbitrage available in the grey markets is reduced, which is expected to garner especially well for VSNL that derives most of its revenues from international telephony. According to various estimates, the grey markets account for about 30% to 40% of the incoming long distance traffic into India.

Apart from this, the reduced ADC of 0.75% of AGR will mean lower tariffs in general which will help spread telephony to the cost sensitive semi-urban and rural areas, especially to those locations that have a large number of people migrating out in search of jobs. As is evident from the February subscriber addition figures the fastest growing circle was Circle B that has a 39% share of net adds during the month followed by Circle A, Metros and Circle C with a share of net adds of 31%, 15% and 14% respectively. This also brings to the forefront the untapped potential of these semi-urban and rural markets that can now be targeted with a new vigor on the back of reduced ADC.

ADC going forward
The TRAI has, in its press release, said that ADC is a depleting regime and that it cannot be continued in perpetuity. The regulator had proposed earlier that ADC should be eliminated by the financial year 2008-09 and ideally should be merged with USO (Universal Service Obligation) regime.

What’s in it for telecom companies?
As we have mentioned above, lower ADC, while leading to a further decline in tariffs (assuming the benefits are passed on to subscribers) will aid a faster accretion to subscriber base for telecom service providers. However, if not passed on, it might lead to a slight improvement in profitability of these companies. Whatever be the case, we believe that this move is in the right direction towards reducing the excessive levies that Indian telecom companies pay vis-à-vis their peers in the developing countries. A faster increase in rural teledensity and stronger growth in the overall subscriber base, on the back of increase affordability of telecom services, will maintain the growth momentum for these companies.

However, we believe that investors need to be careful about the valuations, as current stock prices of most telecom companies already factor in medium term growth. Investment in these stocks also includes the risk of execution that these companies face in terms of spreading their wings across the length and breadth of the country in a very aggressive manner.

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