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Telecom: Connection restored - Views on News from Equitymaster
 
 
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  • Apr 26, 2003

    Telecom: Connection restored

    The Indian telecommunication sector has entered into a new growth phase starting FY04. The lack of level playing field has been one of the key deterrents in accelerating subscriber base growth, both in basic and cellular, in the past. The long-term objective of the National Telecom Policy 1999, to increase penetration level to 15% was itself under threat. But after quite a lot of deliberations, the interconnection regime is largely in place. From now on, players who have invested significant sum towards license fee and infrastructure can focus a lot more on their core operations.

    An efficient interconnection regime is vital for the telecom sector. Just to highlight the imbalance in the erstwhile interconnection regime, cellular operators like Idea Cellular were required to pay a termination charge to basic operators like MTNL if the call terminates at MTNLís end. On the other hand, MTNL was not subjected to the same regulation if the call were to end at say, Idea Cellularís network.

    The disadvantage of such a regime is that there is a lack of level playing field. But the basic operators argued in favor of such a regime based on the premise that the capital expenditure towards setting up a last mile connectivity is higher for basic operators than cellular players and therefore, it is logical to have some benefits. This was valid, albeit to an extent. However, after the recent interconnection agreement, this area of concern has been addressed.

    From now on, cellular operators will receive a termination charge from the likes of MTNL. But this will be lower than what Idea Cellular will have to shell out as interconnection charges to MTNL thus providing some benefit to basic operators. Also, compared to the earlier regime, the private fixed line operators will now start receiving termination charges for all long distance calls. Without getting into further complexities of the new regime, what this means to telecom companies is that there is profit to make in the future. Reducing long distance tariffs for mobile users to match the threat from Wireless in Local Loop (WiLL) service providers and free incoming calls can become a reality. These will not only add to the growth in subscriber base but also increasing usage levels.

    Having looked at the broader trend, consider what is there in offer for listed telecom companies like MTNL, VSNL, Hughes Tele and Bharti in brief.

    First, understanding of the profile of the respective players is important. MTNL is a basic and cellular service provider in Mumbai and Delhi where penetration levels are the highest in the country (4.5 m subscribers). VSNL is primarily a domestic, international long distance and Internet service provider owned by Tataís. Hughes Tele, which is also a Tata company, is a basic and WiLL service provider in Mumbai and Maharashtra (200,000 subscribers). Bharti is more integrated in nature. It provides cellular facility in 15 out of 21 circles in the country and fixed line service in 6 circles. It is also a domestic and an international long distance service provider (owns a submarine landing station in a joint venture with Singtel also). Total subscriber base of Bharti in FY03 was 3.4 m.

    Basic operators would benefit from following factors:

    1. Increase in maximum monthly rentals for basic telephony to Rs 280 (earlier Rs 250), reduction in number of free calls from 60 to 30 for urban users, discounted calls i.e. slabs and fall in pulse duration. These will directly add to the profitability of basic operators. MTNL, which has been facing stiff competition, will have some respite.

    2. Both cellular and basic operators will benefit from the new interconnection regime. Bharti, with an end-to-end presence, is likely to benefit significantly in the long term.

    Overall, the new regulation is likely to spruce up competition, accelerate the pace of consolidation and eventually increase penetration level in the country. Going by Bhartiís fourth quarter performance (posted a profit of Rs 256 m as compared to a loss last year despite expansion in operations), making profits in the telecom sector does not seem a distant dream.

     

     

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