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Telecom: Itís ringing! - Views on News from Equitymaster
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  • Dec 30, 2004

    Telecom: Itís ringing!

    2004 has been a momentous year for the Indian telecom sector. Explosive growth rate in the mobile telephony segment was almost counterbalanced by rapidly falling profitability due to regulatory pressures and pressure on tariffs. Increasing consolidation activity was also prominent throughout the year. The growth in the industry was clearly reflected in the way major telecom players performed on the stock markets. Against the Sensex gains of 14%, the telecom index grew by an almost double 27% during 2004.

    What was different in 2004 as compared to 2003?
    The most important event of the year for the domestic telecom industry was the introduction of unified licensing regime (ULR). The main aim of this regime was to simply the licensing procedure and granting a unified license that enables services providers to provide all kinds of telecom services covering various geographical areas using any technology. Another big event in relation to the sector was the raising of FDI limits from 49% to 74%.

    The strong growth witnessed in the cellular industry in 2004 was a result of combination of the following key factors Ė

    1. Declining tariffs due to intensifying competition amongst existing players,

    2. Aggressive pricing strategy adopted by service providers, and

    3. Lowering of duties on handsets and equipments.

    The sector outperformer: Bharti Tele
    The growth in the industry was clearly reflected in the way major telecom players performed on the stock markets. Against the Sensex gains of 14%, the telecom index grew by an almost double 27% during 2004. The table below shows that Bharti Tele led the pack with a YoY gain of 99%. Strong performance of the stock, especially during the second-half of the year, mirrored the robust financial performance of the company. This growth was aided by a continued strong addition to the subscriber base. At the end of September 2004, Bharti had a base of 8.7m mobile subscribers, which was 20% of the Indian cellular (GSM+CDMA) market. This rapid addition to the base more than compensated for the pressure on ARPUs (average revenue per user) as the company improved upon its operating margins and profitability.

    Telecom: Key gainers in 2004
      26-Dec-03 27-Dec-04 % Change
    BHARTI TELE 106 212 99.0%
    VSNL 155 234 50.4%
    TATA TESERV (MAH) 23 34 47.2%
    MTNL 135 157 16.8%
    ITI LTD 25 28 13.1%

    The laggard: HFCL
    Apart from the gainers as mentioned above, there were just a couple of losers from the telecom sector in 2004 Ė HFCL (17%) and Krone Communications (21%).

    What to expect in 2005?
    In 2005, leading players are expected to make large-scale investments in technology and infrastructure (network expansion). This would be in line with their initiatives of tapping a wider customer base. A hike in the FDI limit has also increased the attractiveness of the sector for foreign telecom majors and consequently, there could be a large flow of capital into the sector. This will go a long way in improving the growth prospects of this sector. However, while the overall sector may paint a rosy picture, the story may be drastically different for individual players as they continue to grapple with falling ARPUs, regulatory pressures and defaulting customers. The ride for the telecom players may continue to be topsy-turvy in 2005. Also, since valuations of leading players seem stretched from the medium term perspective, stock prices might witness some volatility.



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    Aug 24, 2017 02:43 PM