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Telecom: India Vs China 1.0 - Views on News from Equitymaster

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Telecom: India Vs China 1.0
Dec 15, 2006

The Indian telecom sector has been witness to some trailblazing performance in the past. The sector by itself has had a long journey from being under the government regime to being de-regulated and privatised. The opening up of the telecom sector to private players, mainly to mobile operators, has seen it grow by leaps and bounds. However, when it comes to the teledensity levels (telecom penetration across the population), we are still way below the standards attained by our developing peers like China, Thailand and Indonesia. In this article, we pit the Indian telecom market with that of China, comparing these across various parameters to gauge the way forward. Here are some facts as starters.

  • Revenue of the Chinese telecom market is estimated at US$ 73 bn against India’s US$ 20 bn.

  • Number of telephone users stood at 770 m in China (Dec 05), while it was 140 m in India (Mar 06).

  • Total teledensity in China was 57% as at the end of December 2005 compared to India’s 12.8% in March 2006.

  • Indians subscribers, however, talk more than their Chinese counterparts. Minutes of usage for India was 863 against China’s 577.

Let us now compare the two countries on various parameters relevant to the telecom industry.

Subscriber base
China has grown from being the third largest cell market in the world in 1998, to emerging as the largest in the world today. India stands at two ranks behind (the US is the second largest). However, if one were to leave the absolute numbers aside and focus on the rate of growth, then India outscores its peer. Against the 86% compounded annual growth recorded by the Indian mobile industry during the period 1997 to 2006, the Chinese industry has recorded a much lower 44% CAGR, though it has come at a lower base for the former. And if these countries were to maintain their pace of incremental mobile subscriber addition for the years to come, India is poised to outnumber China by 2014.

That was case with respect to the cellular base. However, if one were to compare the fixed line bases in these two countries, China has not only outperformed in absolute terms but has also recoded a superior growth. The Chinese fixed line base currently stands at around 360 m subscribers compared to India’s paltry 47 m.

Teledensity
While India has had a vibrant past when one compares the growth in mobile subscriber base in the urban areas, the country still a long way to go in terms of sprucing up its rural mobile network. Against an urban teledensity of 31%, India’s rural teledensity stands at a lowly 2%, which has had a depression effect on the country’s overall teledensity.

In terms of the rural market, India and China both have near comparable number of villages, and despite of having a comparable percentage of coverage for these villages, there is a huge discrepancy in the rural teledensity of the two nations. This only goes to show that China has, over the years, been successful in providing the telecommunication infrastructure to a larger number of people than what India has been able to do. While we are now rapidly moving in the direction of a higher rural teledensity, any shortfall on this front can lead to non-achievement of the stated targets for the future (like the target of 200 m mobile users by the end of 2007).

Rural teledensity comparison of China and India
  Rural teledensity comparison of China and India
  China (Dec-05) India (Marc-06)
Number of villages 701,031 607,491
Villages with telephone services 680,000 539,572
Coverage 97.0% 89.0%
Teledensity 23.0% 2.0%
Source: TRAI

Minutes of usage (MoU)
Indians, by far, are the most talkative lot in the world, and the telecom companies are capitalising on this front! An Indian spoke far more than what his Chinese counterpart did in the year gone by. On an average, an Indian speaks for half an hour everyday on his/her mobile phone (taking the combined MoUs of GSM and CDMA), where else a Chinese speaks for just 19 minutes. However, considering that the tariffs in India are lower than China, the higher MoUs have not filtered into higher ARPUs (average revenue per user per month) for Indian companies. Domestic service providers are, however, not too concerned of declining ARPUs as volumes (addition to the subscriber base) has more than made up for it.

Scale does matter
The large subscriber base has largely benefited the Chinese companies in terms of their financials. The operating expenditure per subscriber that a Chinese basic services (fixed line) company incurs is less than half of what is spent by their Indian counterparts. This reflects the underutilisation of assets by Indian companies, for want of additional subscribers.

In the case of operating expenditure (OPEX) per subscriber for mobile services is concerned, the difference is not too large between India and China. However, whatever the difference is, it is largely a result of lower number of subscribers in India and the company not yet attaining the benefits of operating leverage. As the subscriber numbers ramp up in India, we believe that there will be a greater parity with China in OPEX terms.

As far as capital employed per subscriber is concerned, while India has spent a lesser amount when compared to China in the mobile space, the former has far outspent the latter when it comes to the fixed line business. Against US$ 153 of capital employed per fixed line in China, Indian companies have spent US$ 370 per subscriber. And the effect is seen in the basic services’ return on capital employed, which is at 8.1% for India versus 13.3% for China.

Profitability and capex comparison
  Profitability and capex comparison
  China (Dec-05) India (Mar-06)
Capital employed - Basic* 153 370
Capital employed - Mobile* 152 147
EBIDTA margin - Basic 50.4% 41.4%
EBIDTA margin - Mobile 49.9% 31.3%
RoCE - Basic 13.3% 8.1%
RoCE - Mobile 21.9% 7.4%
* US$ per subscriber; Source: TRAI

The most critical benefit of scale that China has is in terms of far superior profitability as depicted by operating margins. Against India’ operating margins of 41.3% and 31.3% for fixed and mobile services respectively, the ratios for China stand at 50.5% and 49.9% respectively. However, as we had mentioned in an earlier article, the pace at which Indian companies are ramping up their mobile subscriber base, as also the fact that they are focusing aggressively on value added services, the benefits of operating leverage are likely to filter in going forward.

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