an insight report on indian telecom sector for q1fy14

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The Indian Telecom Industry – An analysis

The Indian Telecom Industry

An analysis of the first quarter results (April – June, 2013)

Segment: Service Providers

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Industry Analysis

Contact: Sachin Chadha [email protected] +91 98182 41512

The Indian Telecom Service Provider Industry has witnessed considerable turmoil over the course of the last few quarters. From hyper competition all through 2010 – 2012, to a somewhat hostile licensor / regulator and a government that looked to extract anything permitted under the license conditions (and beyond!). The last quarter (Apr – Jun, FY14) assumes importance as being the first of relative calm after the cancellation of the controversial licenses issued in the year 2008 and their associated termination of services in Feb 2013. A view into this quarter therefore provides a sense of what the industry is capable of delivering in the wake of at least one variable being marginalized (hyper competition) even though by the judiciary and not the market forces. In this report the Cognitel research team analyzed the comparative positions of the Indian operators on certain key parameters to see whether the industry is finally seeing a reversal of sliding fortunes. Additionally, the team thought it relevant to highlight certain parameters in the context of other global operators to create a comparative benchmark of performance against the mature operators. The companies reviewed in the report include only those that make a detailed declaration of their quarterly results. These include Bharti Airtel, Idea Cellular and Reliance Communications (RCOM), which collectively contribute in excess of 50% of the subscriber market share and thus constitute a representative sample. In the case of Bharti Airtel, the team took only the India financials so as to provide a closer comparison with the competitors in India.

Septem

ber 2013

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1. Consolidated Revenue:

Revenue increase among the operators was healthy with Idea Cellular reporting an industry leading 19% growth in y-‐o-‐y revenue followed by Bharti Airtel at 12% while RCOM returned a disappointing growth of 2%. Idea Cellular stole the ‘revenue growth’ show on account of a stellar performance on the parameters that constitute the revenue index such as ‘net subscriber-‐adds’ and ‘average revenue per user’. The company also reported a significant increase in the ‘active subscriber’ base on the network. For Bharti Airtel, while Mobile Services continued to show double-‐digit growth (11%), the high growth areas in percentage terms were the Digital TV Services and the B2B segment. Further, for all the operators the revenue mix is now starting to reflect the changing consumption patterns of the subscribers. While voice continues to dominate the overall service mix with revenues in excess of 80%, the erstwhile SMS services seems to be gradually fading away in the face of alternate IP based messaging platforms such as WhatsApp and WeChat.

Indian operators clearly have a long way to go on their share of the global market revenue. The collective revenue of the Indian Service Providers is pegged at around $40B as per a recent statement by TRAI. This translates into a meager 2.5% of the global service revenue. With almost 16% of the global subscriptions in India the need for the operators to garner a bigger percentage of the revenue pie is immediate. By way of a somewhat basic but striking comparison, Sprint Corporation with 65 million subscribers makes around 2.5X the revenue that Bharti Airtel does (with operations in 20 countries and with a subscriber base of around 250 million!)

Quarterly Revenue

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2. Profitability: The profitability index has been a difficult metric for most of the Indian operators especially over the last few quarters. Idea Cellular was the only operator to beat that trend reporting a consolidated PAT of INR 462 Cr., which was an impressive 97% increase y-‐o-‐y. On the other hand Bharti Airtel saw a decline in PAT to INR 1478 Cr. or an erosion in excess of 6% (This was the 14th consecutive quarter of reducing profits for the company). RCOM fared the worst with a profit erosion of 33%. However, Bharti Airtel still continues to return an industry-‐leading “PAT as a percentage of sales” at almost 9%, which shows the existence of a robust cost management system built over the years. On the same metric, Idea Cellular returned 7% whereas RCOM reported a figure of 2%.

Figures for all the operators above are for Q1FY14

1580

234 162

1478

462

108

Bharti Airtel Idea Cellular Reliance Infocomm

Q1FY13

Q1FY14

Cr INR

Quarterly Profit

0%

5%

10%

15%

PAT as a % of Sales

Proiit %

The Indian industry returns a PAT/Sales, which is almost at par with the leading operators in the US such as ATT and Verizon. This is a great testament to the cost efficiency built up in the execution machinery of the Indian operators, which allows them to return such profit even when the revenue from the average user is among the lowest in the world. These efficiency areas include different parts of the organization and some of the best cost structures are generated in the following areas:

• Network / IT (outsourcing contracts) • Low cost distribution (lesser company

owned outlets, lower retail margins) • Low acquisition cost (no handset subsidy) • High network utilization levels (among the

highest globally) • Focus on prepaid (low bad debts, upfront

collections)

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3. Mobile ARPU:

200 174 129

568

1040

Airtel Idea Reliance APAC Average* Global Average*

Wireless ARPU -‐ Q1FY14

INR / month

Mobile ARPU trends provide both cheer and worry for the industry. The aggressive ‘voice’ pricing plans that the operators pursued over the last few years have barely been able to drive consumption proportionately higher, thus leading to a stagnation or at best a marginal increase in voice ARPU levels. However, with the new trend of voice tariff rationalization (read increase!) being currently pursued by the operators, this metric is expected to get healthier. While RCOM still has the lowest ARPU among the three operators, it registered the best y-‐o-‐y growth (in excess of 30%) to record an ARPU of INR 129 (see figure below). Bharti Airtel leads the race with an ARPU of INR 200. Bharti Airtel saw its data ARPU increase an impressive 59% (y-‐o-‐y basis) whereas Idea Cellular’s increased by 15%. Clearly the contribution of data ARPU to the overall ARPU will continue to increase over the coming quarters in line with the trend in the mature markets.

Probably the metric with the most disparity compared with the mature operators in the US and Europe is ARPU. Over the years, specifically during the years between 2010 – 2012 heavy discounting in tariffs, have left telecom prices battered in India. A simple comparison in cost levels between India and the US indicate a difference in prices of everyday commodities to the tune of 2X – 4X (more in the US). The odd (and rare) service may even be around 10X more expensive in the US. However a simple call rate or data rate comparison shows that the difference in telecom tariffs is to the tune of 20-‐22X more in the US. This indicates, quite simply, to a product being priced at almost unreasonable levels in India.

*Global and APAC Averages are Cognitel estimates

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4. Subscriber Growth: Wireless Subscriber growth has been the subject of much admiration (and in many cases disbelief!). India has been for many years (until 2011) adding around 12-‐15 million subscribers on a month-‐on-‐month basis and with the result the tele-‐density in the country is now hovering around the 75% mark. It continues to be one of the few metrics the government has been able to achieve much ahead of its projections! However, due to the problems associated with a high level of unproductive customers and a new policy that delinks subscribers and spectrum allocation, operators are now wary of purely adding more numbers to an already choked network. Subscriber additions are far more monitored and in certain cases (such as RCOM) large numbers of unproductive subscribers have been churned out of the network. In terms of net subscriber adds in the Apr-‐Jun 2013, Idea Cellular leads the pack with the highest additions to the tune of 3.4million.

The graph below shows how dominant the Indian operators are in the metric with 5 of the top Indian operators making a presence in the top 20 global operators by subscribers. This has been the result of sustained subscriber growth through the period between 2005-‐2011.

Subscriber adds in Q1FY14

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5. Data Users: Data services in general and IP-‐based messaging and voice platforms have been gaining acceptance and popularity in all markets across the world including India. Further, with the smartphone segment growing rapidly and with India emerging as the third largest market for data users in the world (the largest being China, followed by the US), the Indian operators are likely to look to data as the revenue enhancer for the next few years. Additionally, most of the operators have a renewed focus towards 3G given the southward movement in prices of devices over the last few quarters. This focus is leading, among other things, to a greater usage of the 3G networks and while the revenue increase is not linear to the data usage, it provides for the moment the much-‐required cheer the industry desperately needs. The table below provides a view of the number of mobile Internet subscribers with each operator.

Total Data Subscribers (Millions)

Further, with 3G subscribers growing rapidly in the country and the ARPU from 3G services being close to double that of 2/2.5G users, it is clearly a business segment operators will look to increasingly harness.

Million

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Conclusion The results were a mixed bag but the team felt that there were far more positive take-‐aways. That leaves us with the sentiment that the Industry is clearly forging a recovery and the situation should continue to improve unless some unforeseen regulatory intervention upsets the gathered momentum. By and large most operators are now reporting a slew of metrics that augur well for the coming quarters

Increased ARPU Tighter control on the ‘Operating’ Expenses Higher voice ‘realization per minute’ High percentage of ‘Active Subs’ in the network

While Bharti Airtel has a major challenge with declining PAT, it showed a confidence-‐boosting increase in Mobility EBITDA levels, an increase in Mobile ARPU and a return to +ve EBITDA for the digital business. However considerable reductions in CapEx spend in the quarter (India Capex was down 49% y-‐o-‐y) displays a somewhat muted view of the year. Idea Cellular, which has been the dark horse in the last few quarters, reported yet another strong performance with the highest revenue growth, the highest number of subscriber adds and the highest growth in PAT. However, Idea Cellular would be worried about the reduction in data ARPU (q-‐o-‐q basis), which is clearly not the trend for the industry nor a healthy sign for the future. RCOM showed a healthy net add in subscribers, an industry leading “realization per voice minute” (contrary to expectation!) and manages to retain its lead with the highest total 3G subscribers among all the operators. However, with absolutely no network expansion (new sites) in the last quarter, clearly the operator is not displaying much aggression for the coming quarters. Lastly, while service innovation is not a quarterly index for measurement of performance, it definitely serves the purpose of showing the operator’s mindset. Operators globally are getting active in their tussle for consumer mindshare with the new age companies (“OTT” players), either by collaborating or competing depending upon market conditions and individual strategy. However, it was surprising to note an exclusion of any mention around such activity from the reports of both Idea Cellular and RCOM. Airtel on the other hand lists several new initiatives taken over the quarter some of which are in the space of collaborating / competing with the OTT companies.

an insight report on indian telecom sector for q1fy14

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