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Telecom Sector Analysis Report 

[Key Points | Financial Year '17 | Prospects | Sector Do's and dont's]

  • Tele-density (defined as the number of telephone connections for every 100 individuals) in India, increased from 17.9% in FY07 to 92.9% in FY18 (till October 2017). India's telephone subscriber base has expanded at a CAGR of 19.2%, reaching 1,194.6 million during FY07–17. Tariff reduction and decline in handset costs has helped the segment to gain in scale. The cellular segment is the dominant segment in the industry by making itself available in the rural areas where the teledensity is far lower (56.9%) than that in urban India (171.1%).
  • The fixed line segment continues to decline in terms of the subscriber base. It has declined to 23.53 m subscribers in October 2017 from 26.9 m subscribers in March 2016.
  • As far as wireless broadband connections are concerned, the Indian wireless broadband industry subscriber base has increased to 243.1 m as of February 2017, an addition of 110.4 m subscribers in one year; reflecting a solid growth of 83.1%. This makes India the world's second-largest internet market after China. Consumption of data services continues to grow at an exponential pace.

How to Research the Telecom Sector (Key Points)

  • Supply
  • Intense competition has resulted in prompt service to the subscribers.
  • Demand
  • Given the low tariff environment and relatively low rural and semi urban penetration levels, demand will continue to remain higher in the foreseeable future across all the segments.
  • Barriers to entry
  • Complex regulations, high capital investments, well-established players who have a nationwide network, license fee, continuously evolving technology and lowest tariffs in the world.
  • Bargaining power of suppliers
  • Improved competitive scenario, mobile number portability (MNP), and commoditisation of telecom services has led to reduced bargaining power for services providers.
  • Bargaining power of customers
  • A wide variety of choices available to customers both in fixed as well as mobile telephony has resulted in increased bargaining power for the customers.
  • Competition
  • Competition will increase as Reliance Jio Infocomm (RJio) has entered the industry in 2016. Reduced tariffs have hurt all incumbent operators. Also, customers' low switching cost and price sensitivity are increasing competition among players.

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Financial Year '17

  • The financial year 2016-17 (FY17) was a period marked with the several challenges emanating from introduction of large scale free services by RJio, creating disruption in the sector and resulted in, for the first time in the history of the sector, a year on year revenue decline. These free services on one hand transformed the sector with data traffic volumes growing significantly, forcing operators to commit significant investments, both in spectrum and networks, in order to remain competitive. However, on other hand, declining revenues and profitability had severely impacted the ability of most of the operators to commit large investments towards long term value creators. This paradoxical scenario of large investment requirement coupled with negative return forced operators to combine their operations or exit from the market, as evident from announcement of various deals among operators.
  • After the fall in mobile subscriber base in FY13 due to the cancellation of spectrum licenses of some of the operators in February 2012, the sector continues to grow in terms of subscriber additions. The industry added about 111.3 m wireless subscribers in FY17. At the end of March 2017, the country's total telecom subscriber base (fixed plus mobile) stood at about 1170.2 m. The tele-density level stood at about 91.1% by the end of the fiscal.
  • During the year, spectrum harmonisation has been completed in all the 22 service areas, making nearly 188 MHz of paired spectrum available to the Government. The benefit for operators due to this harmonisation is that the spectrum they currently hold becomes contiguous and, therefore, more efficient, thereby improving network quality and broadband speeds.
  • In October 2016, DoT concluded the auction process for 700 MHz, 800 MHz, 900 MHz, 1,800 MHz, 2,100 MHz, 2,300 MHz and 2,500 MHz spectrum. Of 1,434.75 MHz (paired) and 920 MHz (unpaired) spectrum was put to auction across bands and service areas, 274.80 MHz of paired spectrum in 800 MHz, 1800 MHz and 2,100 MHz bands and 690 MHz of unpaired spectrum in 2,300 MHz and 2,500 MHz bands was sold for a total consideration of Rs 657,891 million.
  • The prescribed limit on spectrum would be increased from 6.2MHz to 2x8 MHz (paired spectrum) for GSM technology in all areas other than Delhi and Mumbai, where it will be 2x10 MHz (paired spectrum). Telecom players can, however, obtain additional frequency; there will be an auction of spectrum subject to the limits prescribed for the merger of licenses. As of October 2016, telecom operators like Vodafone and Tata Teleservices purchased spectrum worth US$ 1.51 billion and US$ 0.34 billion, respectively, from the government.
  • Further, DoT has released new guidelines for the computation of Spectrum Usage Charges (SUC), according to which the spectrum assigned through the auction of 2016 will be charged @ flat 3%. The weighted average SUC rate will be computed for all spectrum held by an operator (whether assigned administratively or through auctions or through trading) including BWA spectrum acquired in 2010 subject to a minimum of 3% of AGR (excluding revenue from wire line services). In these guidelines, DoT has also fixed the floor amount of the SUC to be paid by the operator. Further, in case there is a reduction in AGR of the service provider, the floor amount of SUC shall be reduced proportionately.

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  • The fixed line business continues to remain muted despite the low penetration levels in the country. The increasing demand for data based services such as the Internet is the major catalyst in the growth of the sector. The scale of the mobile opportunity in India is therefore immense.
  • Increasing choice and one of the lowest tariffs in the world have made the cellular services in India attractive for the average consumer. The teledensity in urban areas is about 171.1%. Therefore, the main driver for future growth would be the rural areas where wireless tele-density is around 56.9%.
  • India's growth momentum is likely to accelerate in FY18, with continued focus on infrastructure creation and manufacturing, and trickle-down impact of past policy reforms. In addition, long-term economic growth will be driven by major factors: low interest rates; benign inflation; favourable demographics (half of the population is below the age of 35); and greater focus on formalisation and digitisation of the economy.

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Related Links for Telecom Sector
Quarterly Results | Sector Quote | Over The Years

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