Telecom Sector India

India – Telecom Sector WhiteMonk Research & Analysis 3114/A, 18th Cross, K R Road, Stage 2, Banashankari, Bangalore, Karnataka, India, 560070 + 9 180 26770220 +919731681111 11/25/2009

Industry Research Report November 2009

Table of Contents Executive Summary.......................................................................................................................................3 SWOT Analysis...............................................................................................................................................4 Telecom Sector Trend Analysis ..................................................................................................................... 4 Wireless Market............................................................................................................................................ 4 Revenue Analysis (Wireless) .........................................................................................................................6 Wire line Services.......................................................................................................................................... 6 Internet Services ........................................................................................................................................... 8 Revenue Analysis (Internet).......................................................................................................................... 9 3G Network................................................................................................................................................... 9 Indian Telecom Industry (Key Data Analysis)................................................................................................ 9 Industry Segment Analysis........................................................................................................................9 Top Ten Firms operating in Telecom Sector (Market cap wise) ............................................................... 9 Conclusion................................................................................................................................................... 10 Disclosures and Disclaimer .........................................................................................................................11 Confidentiality.........................................................................................................................................11 Analyst Certification................................................................................................................................11 Legal Disclaimer ...................................................................................................................................... 11

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Indian Telecom Sector: Excellent growth story but price war will hamper bottom line growth

Executive Summary The Indian telecom sector is characterized by stiff competition among 10 national level players and two government owned firms, falling APRU, innovative tariff plans and shrinking profits. This month two more firms (Russian and Norway based firms) entered in Indian market which will further drive down the tariffs and consequently corporate profits as well. In spite of a difficult pricing environment, we believe Indian telecom sector is attractive. The key reason is vast population of India of over 1 Billion which makes it as one of the biggest telecom market in the world. After USA and China, India is third biggest telecom market in the world. Indian mobile subscriber base grew by 9.07% in second quarter of 2009 reaching to total 427.29M subscribers. Bharthi Airtel is a clear market leader with 23% of market share, Reliance and Vodafone are gaining market share on a continuous basis and has 19% and 18% market share respectively. TATA has recently launched new service in GSM space and lower tariff plan (per second plan) in a bid to win additional market share but still it is lagging behind with 8% market share. (Table 1)

Table1: June 2009 Data (Source: TRAI) Gross revenue by the end of June-09 quarter stood at US$8.5B, due to falling revenue per subscriber overall gross revenue went down by 3.3%. India is second largest market for cellular services but still teledensity stands at just 32% representing a huge revenue potential for all the telecom operators

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SWOT Analysis

Strengths

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Weaknesses

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  Opportunities    Threats

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INDIA TELECOM SECTOR Strong mobile growth(around 10%) , with latest technology being offered at faster pace An attractive business environment witnessed by number of foreign players entering Indian market A vast untapped rural population which needs telecom services at their fingertips Wireless business segment is growing faster than wire line and more demand is coming for pre-paid services The falling SIM card, lower tariff plan led to lower APRU Delayed implementation of key policies because of dispute among TRAI, telecom ministry All of the providers are keen to provide more content which provides great opportunity for content providers Regulator has recommended that foreign player can participate without any local partner The government will cut the license fee by 33% for those operators which has over 95% residential coverage 3 G spectrum charges are more and which will have negative impact on demand for licenses Due to price war , APRU is falling and further deterioration will lead to significant decline in top line growth Capacity constraint may hamper the expected growth in Mobile segment MNP will become reality in 2010, it will add further pressure to operator to retain the existing customer

Telecom Sector Trend Analysis Based on Technology, In India, whole telecom sector can be sliced in four key components. These four components are Wire line, Wireless (CDMA, GSM), Internet and 3G.Out of twelve players; TATA, Reliance and SSTL offer CDMA and rest is operating in GSM space. GSM market share stands at total 75% and thus clearly emerged as a preferred way of communication in India. TATA has recently entered in GSM space through TATA Docomo brand. Reliance is also expected follow it soon by launching its own GSM services.

Wireless Market There are total 12 operators operating in wireless (CDMA and GSM) space across India. Total subscriber base grew from 287M in June 2008 to 427M in June 2009, representing 47.7% increase in market. Teledensity also improved positively, it was 24.95 in June 2008 and now stands at 36.6 in June 2009. At present GSM market is growing at 9.53% whereas CDMA market is growing at 7.79%. WM services forecast that Indian telecom market would grow at 9.59% and would cross 900M subscriber by 2011. (Table 2)

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Table 2: Mobile Market Segment (Source data: TRAI)

The growth forecasted in Table 2 would be driven by several factors including low penetration rate, lower tariff plan, increased competition and higher investments in network infrastructure by telecom firms. Considering volume and growth, Vodafone and Airecel grew fastest in wireless space at 11.2% and 18% respectively. Bharthi has highest number of subscriber at 102.37M followed by Vodafone and BSNL at 76.45M and 49.10M.In CDMA space, Reliance is clear market leader with 55% market share. (Table 3)

Table 3: Market Segment Analysis (Source: TRAI)

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Revenue Analysis (Wireless) Due to stiff competition and in a bid to retain existing customers, Telecom player has slashed down tariff significantly. Now most of the firms are offering “per second billing “which will further put pressure on margins. There is good growth in subscriber base (around 10.5%) but overall revenue per subscriber is falling. In last quarter, APRU fell down by 10%. We do not expect any change in the pricing situation going forward.

*All data are per month per subscriber *MOU: Minutes of usage

APRU for CDMA provider also fell down by over 7%. In spite of modest increase in subscriber base, tariffs is going down in a bid to match prices offered by GSM players for various services. Over all there is a positive growth in SMS segment but it is because most of the key CDMA players are offering free SMS services to their customers.

Wire line Services Indian wire line market and its potential revenue opportunity are not attractive in comparison to wireless segment. Total wire line subscriber base declined from 37.96M in March 08 to 37.53M at the end of June 09. (Table 4)

Table 4: Fixed Line Subscriber growth (Source: TRAI)

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The growth in fixed line remains stable and is expected to remain that way. Over the time, Indian consumer has shown strong preference towards wireless services over wire line services. BSNL is leader in this segment with 77% market share followed by MTNL with 9.41% market share. We forecast a very modest decline in fixed line usage going forward. The total number of fixed line per thousands will decline from 37.5M in Jun 09 to 36.27M in 2012.The key player in this segment and market share are detailed in Table 5

Table 5: Key Market Player in Fixed Line Segment

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Internet Services By June 2009, there were total 14M subscriber for data services which includes both Broadband (speed > 256K) and internet (speed < 256K) growing at rate of 3.8%. The number of broadband services stands at 6.62M and internet stands at 7.4M. We forecast a gradual improvement in subscriber numbers and increased preference for Broadband over internet by 2012, total subscriber base would be 15.75M, 51% would be of Broadband and 49% of Internet services. (Table 6)

Table 6: Internet Subscriber Forecast (2009-2012)

At present we have 34 ISP are offering their services all over India , out of 34, top ten commands over 95% of market share. BSNL is clear leader in this segment with 54.09% market share followed by MTNL and Airtel with 15.53% and 8.15% of market share respectively. In June 2009 quarter, Reliance has increased its subscriber base at fastest level and its growth rate is highest at 10.94% among all ISP. (Table 7)

Table 7: Key Indian ISP (2009)

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Revenue Analysis (Internet) . The revenue flow was 454.09CR from leased line, 138.5CR from Dialup subscribers, 1221.06CR from broad band subscribers, 10.2Cr from Internet services, 0.87 from IPTV and 214.3CR from other services. The APRU in June 2009 quarter for dialup internet usage increased by 2.97% in comparison with March09 quarter. Overall revenue growth was positive and stood at 1.92%.

3G Network Due to uncertainty over available spectrum for 3G, Indian government has again missed the deadline for 3G auction invitation. The auction process is expected to happen by second week of January 2010. State has already allotted spectrum to state owned player BSNL and MTNL. BSNL and MTNL have launched 3G services in Mumbai and Delhi by about nine month back but exorbitant tariff plan is hurting subscriber growth. Lack of spectrum is an old issue and now government is trying to get required spectrum from Defense Ministry. The real picture of 3G situation will emerge only by second week of January 2010.

Indian Telecom Industry (Key Data Analysis)

Industry Segment Analysis

Top Ten Firms operating in Telecom Sector (Market cap wise)

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Conclusion We believe telecom market will enjoy good growth rate owing to lower teledensity, stiff competition and lower tariffs. So far subscriber growth has been impressive and stood at 427M (Wireless) in June-09 quarter. We believe that it will cross 900M by 2012 and thus represents a huge revenue potential for existing players. In spite of good growth, there are not much differentiator exists among current players, additionally; switching cost for a consumer is almost zero (by virtue of MNP). Lower tariff has already impacted profit growth of key telecom firms and resulted in negative growth in APRU. We believe that soon Indian telecom industry will enter in to consolidation phase which should result in lower number of players in the market. But before that happens, Indian consumer will continue using its buying power to choose service provider and enjoy excellent services at lowest possible tariff plan.

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