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Telecom: Growth tonic! - Views on News from Equitymaster
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  • Oct 4, 2006

    Telecom: Growth tonic!

    While mobile subscriber base statistics as at the end of September 2006 are not yet available, one can safely assume that the numbers will be strong, considering the momentum that has been seen in subscriber addition in the past few months. If the past two months are any indicators, when the country added a net of 5.4 m and 5.9 m wireless subscribers (inclusive of GSM and CDMA), the future seems bright as well. This is considering the 'ever-increasing' affordability of telecom services due to declining tariffs and handset costs.

    While the growth momentum that is witnessed in the sector raises no doubts on the effectiveness of the regulator's (TRAI) policies and implementations, there still are certain barriers in the way of the Indian telecom industry to grow at a far rapid clip in the future. In fact, these barriers come in the way of limiting scope for the industry to invest, expand and grow into the rural areas, which is still a highly under-penetrated and under-served segment.

    We believe that the three major barriers that can restrain a stronger growth of the Indian telecom industry in the future are:

    1. High levels of industry specific taxes levied through license fees, spectrum charges and import duties on telecom equipments and handsets - taxes currently account for more than 20% of the industry cost base.

    2. Cross subsidy of Rs 60 bn per year in the form of interconnect and access deficit charges from the mobile to the fixed operators, mainly BSNL (as a way of reimbursing the subsidised telecom services provided by fixed operators in rural areas) - this cross subsidy is being reduced, though in a very gradual manner.

    3. Inadequate free cash flows resulting from high levels of competition and churn, which raise sales and marketing costs and also costs of acquiring and retaining talent. As reported by Telecom Regulatory Authority of India (TRAI), the Indian telecom industry generates relatively little cash - with EBIDTA margins at an average of 23% compared with international norms of 40% to 50% - some part of this cash crunch can be solved by promoting infrastructure sharing among telecom service providers to facilitate expansion of mobile networks in rural areas.

    Also, as TRAI notices, there is one more problem facing the Indian telecom industry. More than 50% of the revenue generated by the industry is exported in payments to terminal and network equipment suppliers. If the government wants to maximise the economic benefits from the industry, it should consider steps to establish an indigenous terminal and network equipment and component supply industry, as has happened in China.

    If these issues are taken care of in a more proactive manner, there won't be a hitch for the industry in reaching the 200 m (mobile) subscriber base by the end of 2007, i.e., 15 months from here on (implying a monthly addition of 5.1 m subscribers). In fact, this is indeed the tonic that the industry needs to speed ahead on a faster growth path going forward.



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