Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Telecom: The Goliath cometh! - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Dec 27, 2005

    Telecom: The Goliath cometh!

    The year 2005 has been another year of reckoning for the telecom sector. Explosive growth rate in the mobile telephony segment was almost counterbalanced by sedate growth of the fixed line and broadband businesses. Pressure on tariffs continued and this aided the improvement in teledensity. The year also witnessed increasing gap between the urban and the rural teledensity. At the close of the year, while urban teledensity stands at around 33%, rural teledensity is a meagre 2%. India currently has a telecom subscriber base of 120 m, including 71.5 m mobile subscribers and 48.5 m fixed line subscribers.

    In 2005, growth in the telecom industry was clearly reflected in the way major telecom players performed on the stock markets. Against the Sensex gains of 46%, the telecom index grew by an almost double 87% during the year 2005. Robust growth was especially witnessed in the cellular industry. This was on the back of declining tariffs due to intensifying competition amongst existing players, aggressive pricing strategy adopted by service providers, and lowering of duties on handsets and equipments.

    The year was also marked couple of large scale consolidation deals. In one of them, the Tata and AV Birla groups bought out 16.5% each of their joint venture partner Cingular Wireless' 33% stake in Idea Cellular for Rs 13 bn (US$ 300 m). Notably, Idea is India's fifth largest mobile services provider with a subscriber base of 5.7 m. In another deal, the Ruias managed Essar acquired BPL mobile unit, the sixth largest player in India, for a consideration of Rs 44 bn. We believe that more deals of this nature will help in the much-awaited consolidation of the Indian telecom market, with a few players trying to catch the attention of the mobile users around the country in times of rapidly falling ARPUs.

    Our 2005 assumptions Vs reality
    In putting through our 2005 outlook for the telecom sector at the end of 2004, we indicated that leading players were expected to make large-scale investments in technology and infrastructure (network expansion). Our assumptions were based on the fact that these players would have continued with their initiatives of tapping a wider customer base across the length and breadth of the country. What has really happened is not much different from this. We have seen some large-scale investments from leading players like Bharti Tele, Reliance Infocomm and VSNL.

    We had also indicated of the possible changes in capital inflow and foreign capital infusion to the sector on the back of hike in the FDI limit. This was vindicated by one of the largest deals in the Indian telecom industry when Vodafone, the largest telecom services player in the world, picked up a 10% stake in Bharti Tele, India's leading GSM services provider. Vodafone paid a consideration of US$ 1.5 bn. We believe that further opening up of the sector to competition (both foreign and domestic) shall go a long way in improving growth prospects and increasing teledensity at a faster rate.

    As expected, regulatory issues also took centrestage during the year. The rapid growth of the sector was mired with controversies between the TRAI, the telecommunication ministry and Department of Telecommunications. Crucial issues like spectrum allocation and calculation of ADC (access deficit charges), which is paid to the state owned BSNL by private operators, also remained in the limelight. Another regulatory aspect that made the rounds was the government's proposal of a uniform tariff structure (One India) for calls across the country. Although the outcome of this later issue is still awaited, we believe that this could be one of the first moves the regulator will make in 2006.

    We, however, went wrong on one aspect. While we believed at the end of 2004 that valuations of leading players were stretched from the medium term perspective, and that stock prices might witness volatility, it happened otherwise. A flush of liquidity, which saw the meteoric rise of the Indian stock markets, also affected the buoyancy in telecom stocks.

    The sector outperformer: VSNL
    The growth in the industry was clearly reflected in the way major telecom players performed on the stock markets. Against the Sensex gains of 46%, the telecom index grew by over 82% during 2005. The table below shows that, among the leading players, international long distance (ILD) and bandwidth major, VSNL stole the show with almost 91% gains. Strong performance of the stock, especially during the first-half of the year, mirrored the growth initiatives taken by the management to derisk the business model from the ailing ILD business. The company had, in early FY05, acquired Tyco Global Network, an undersea cable network that spans a length of 60,000 kms and connects the North American, European and Asian continents and Teleglobe, which is a leading provider of voice data, IP and mobile signaling services. While Tyco came in for a consideration of US$ 130 m, Teleglobe had cost the company a sum of US$ 239 m. The management has indicated that the integration of these acquisitions is in progress and the company expects to consolidate these by March 2006. The management has also estimated both these entities to achieve cash break-even by the end of FY07. Benefits of such efforts are unlikely to make a meaningful contribution in the next two years.

    Telecom: Key gainers in 2005
    23-Dec-04 23-Dec-05 % Change
    ITI LTD 28 74 162.2%
    KRONE COMM. 114 226 98.5%
    VSNL 220 420 90.7%
    BHARTI TELE 195 357 82.9%
    HFCL 12 19 68.3%

    The laggard: MTNL
    Apart from the gainers as mentioned above, there was just one stock from the telecom sector that declined in 2005 – MTNL (down 8%). The pressure on the company's basic services (90% of total revenues) has been the reason for the company's and consequently, the stock's poor performance. This was perpetuated by factors like stiff competition from private sector players, an increased move towards cellular telephony and the denial of access deficit charge. But for the strong growth in cellular business, the pressure on the stock would have been greater. Overall, MTNL is fast losing customers to its rivals and needs to get its act together. However, taking into consideration competition from the private sector players like Bharti Tele and Reliance Infocomm, this looks increasingly difficult for the company.

    What to expect in 2006?
    According to estimates by COAI (the cellular association), mobile subscriber base is expected to form 80% of the 250 m phone connections (including fixed line) by the end of FY08. From the FY05 levels of 41 m, this implies a compounded growth in addition of nearly 70% per annum. While reduction in tariffs and cost of handsets has supplemented the growth of the Indian telecom sector, we believe that future growth is likely to be aided by companies' entry into the large and relatively untapped rural market. Also, in a high growth and intensely competitive model that the Indian telecom sector is, ARPUs are likely to fall further in 2006. Service providers will continue to focus on offering new innovative value added services and applications which are useful and also affordable since further growth will be hard to achieve unless service providers penetrate deeper into the hugely untapped rural market.

    A parting note…
    Even with tremendous growth in the information technology sector, overall ICT (Information and Communication Technologies, which includes Internet, broadband and telecom services) usage and penetration in the country has still lagged behind international averages. TRAI has noted that at the current levels, Indians are expected to pay 60 times more than subscribers in Korea for the same throughput, which translates to 1,200 times more when considering affordability measures based on GDP per capita comparison.

    We believe that the success in other countries in making telecom services as the basic platform, on which economic and commercial growth is achieved, can also be replicated in India, particularly for rural areas. For this development to occur, appropriate regulatory environment and policies need to be established so that the discrepancy in pricing, penetration and type and quality of telecom services between India and other countries can be eliminated. We hope to see this in 2006 and beyond, because once this happens, Indian citizens and investors in the Indian telecom story shall all feel greatly empowered.

    To read our thoughts on year 2005 and our view for 2006, click here - Reflections 2005.



    Equitymaster requests your view! Post a comment on "Telecom: The Goliath cometh!". Click here!


    More Views on News

    Bharti Airtel: A Good Quarterly Performance (Quarterly Results Update - Detailed)

    May 6, 2016

    Bharti Airtel has reported a8.4% YoY growth in the topline and an increase of 2.8% YoY in the bottomline for the quarter ended March 2016.

    Bharti Infratel: Ends the Year Positively (Quarterly Results Update - Detailed)

    Apr 27, 2016

    Bharti Infratel has reported a 7.3% YoY growth in the topline and an increase of 18.7% YoY in the bottomline for the quarter ended March 2016.

    Bharti Infratel: A Good Quarter (Quarterly Results Update - Detailed)

    Apr 8, 2016

    Bharti Infratel has reported a 4.9% YoY growth in the topline and an increase of 11.5% YoY in the bottomline for the quarter ended December 2015.

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    Proxy Plays: A Smart Way to Bet on 'Off Limits' Companies(The 5 Minute Wrapup)

    Aug 4, 2017

    The small-cap space is full of small players that are clear proxies to great growth stories and Indian megatrends.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 17, 2017 (Close)