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Excerpts from the recent telecom conference - Views on News from Equitymaster
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Excerpts from the recent telecom conference
Dec 29, 2004

We recently attended a conference organised by the leading credit rating and research agency, Crisil. The theme was – analysis of and forecast on trends in India’s telecom services industry over the next five years. Here are some key excerpts of the discussion. Telecom: It’s ringing moolah!

The Indian telecom services sector has recorded strong growth in the past five years and is likely to continue with this momentum in the next five as well. From a marginal 2.8% tele-density at the end of FY00, we have reached almost 8% by September 2004. By FY09, the telecom subscriber base in India is likely to reach 212 m, or a CAGR of around 23% since FY04 (76 m). Cellular services are likely to be the growth driver for the sector, with the subscriber base expected to grow from 33 m in FY04 to 155 m in FY09, a CAGR of 36%. Fixed subscriber base, on the other hand, is expected to grow by a meager 6% CAGR during this period and this growth will be largely driven by demand from the corporate sector.

This strong growth in the mobile telephony segment is likely to be driven by –

  1. Increase in coverage by operators,

  2. Strengthening of marketing and distribution networks, and

  3. Increasing affordability of mobile services due to rising income levels and declining tariffs.

Another factor that is likely to aid the faster growth of mobile telephony is greater penetration into rural areas.

On China Vs India

One important fact that came out of the discussion was that while China has a large addressable market as compared to India, the penetration of this addressable market is almost similar. The large size of addressable market in China is a result of key factors like higher per capita income. Also, since population in China is more concentrated as compared to India, cost for operators is lower.

Investments for growth

Cellular players are expected to make large-scale investments in technology and infrastructure (network expansion) in the next five years. As per forecasts, investments to the tune of Rs 650 bn to Rs 700 bn are likely to be made through FY09 into the cellular business. This would be almost double the amount that came in the past five years (Rs 350 bn). Overall, out of the Rs 1,000 bn of planned investments in the next five years in the telecom sector, almost Rs 700 bn are likely to be funded through internal accruals with the remaining coming through external financing.

Investments planned…
(Rs bn) 1999-04 2004-09E
Mobile 350 683
Fixed wireless 450 109
Wireline - 108
Others 150 108
Total 950 1,008

Challenges to growth

The discussion outlined certain key challenges that might impede this growth of the Indian telecom (read cellular) sector. Some of these were increasing competition among existing players, spectrum allocation and changes to the regulatory structure. A major fallout of intensifying competition has already been seen in the form of declining ARPUs (average revenue per user). Declining tariffs and addition of new subscribers with relatively low usage has resulted into the blended ARPU of cellular service providers to decline at a CAGR of around 23% over the last four years, to Rs 469 per month. This is further expected to fall at a CAGR of 10% by FY09, to Rs 296 per month.

Our view

Despite the abovementioned challenges, the Indian telecom sector is likely to grow strongly in the future. A rising middle class offers a great opportunity for the sector. While we remain optimistic about the long-term growth prospects of the sector, investors need to keep in mind some aspects:

  1. Telecom is a highly asset-intensive sector. Given the cutthroat competition in the sector, the incremental customer acquisition cost is likely to be higher, though it enables telecom majors to utilise existing capacities better.

  2. Though subscriber additions are likely to be robust, investors would be better off if they monitor aspects like profit per subscriber and revenue per subscriber.

  3. Valuations of telecom stocks, despite higher volume growth, need to be aligned towards the quality of growth.

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