September 21, 2011

Highlights

Power Generation Growth Healthy

Private Sector Underperforms Private IPPs

Coal: A Favourite Whipping Boy?

September 21, 2011

Is Coal Really The Problem Behind Power Shortage? Or, Is It Something Else?

Power generation in India has been growing at a healthy pace during the current financial year 2011-12. In fact, among the core infra-

structure industries, electricity generation has been the fastest growing sector, second only to steel production.

During the five months ended August 2011, electricity generation rose by a healthy 9.3% corresponding to growth rate of 4.5%

achieved during the same period last year. Generation has been higher than target set for the period.

While the overall generation was above target, it was

thermal power output which fell below the required

limit. However, this was more than compensated by

higher growth in hydro and nuclear power generation.

Nuclear generation achieved a remarkable growth

rate of over 50% over last year due to improved

availability of nuclear fuel and commissioning of

new unit at Kaiga (refer Table 1).

During the current year, good monsoon rains replen-

ished the water reservoirs in the country which re-

sulted in healthy 22.3% growth in hydel output. The

storage position of the 31 major reservoirs which is

monitored in CEA, showed that these reservoirs had

8.9% higher energy content at full reservoir level

during the same period last year (refer Chart 1).

So is the power problem only a coal problem?

As per the detailed report by the Central Electricity Authority, generation from the coal-based plants grew at a slower pace due to delay

in stabilisation of new units, coal shortages and availability of poor/wet coal, low system demand/reserve shutdown of some thermal

units and transmission constraints.

A closer look at the loss in generation on account of a coal problem reveals that nearly 89% of the coal demand was materialised and

2,481 million kWh loss of power generation was reported. This loss accounts for 0.7% of the total generation during April-August

2011.

Table 1: Power Generation Statistics in India (million kWh)

Chart 1

September 21, 2011

In fact, more than coal availability, loss of generation was higher on account of delay in stabilisation of some new thermal units during

the said period. Nearly 4,850 million kWh was lost due to non-stabilisation of new units.

Another factor that was attributed by the ministry for lower coal generation was lower demand. The monthly report stated that: “Since

the demand of power was primarily met by the increased generation from hydro and nuclear power plants, the energy demand from

thermal power plants reduced .” Now, if the demand has been lower then why blame low coal availability?

Without trying to justify the continuing problem of low coal availability, it might be worthwhile to examine other probable reasons.

Indian power entities face one major problem: regularisation of tariffs. While there are no latest statistics to show movement in tariff

across states and utilities, it is well-known that power tariffs are cross-subsidised in India. Commercial and industrial users pay higher

rates compared to domestic and agricultural users. In fact, in some states, power is given free for the purpose of agriculture.

The electricity utilities are allowed under law to raise the variable compo-

nent of tariff on account of higher fuel cost. But, these increases need to get

an approval from the Electricity Regulatory Commissions set up in each

state. Since power can become a politically sensitive issue at times, in-

crease in tariffs come with a lag.

It is the state-owned utilities which face the biggest brunt. This is because

it is these utilities that provide power to the end consumers through their

distribution networks. A number of the State Electricity Boards make

losses. In fact, the losses of SEBs are pegged at `1.5 lakh crore compared

to `50,000 crore a few years ago.

An article in The Economic Times dated August 26,

2011 stated that: “Several financial institutions have

decided to stop disbursing short-term loans to power

distributors in five states where the losses of utilities

have exceeded `5,000 crore each, raising fears of pro-

longed blackouts and weaker electricity demand. The

affected states are Tamil Nadu, Haryana, Rajasthan,

Uttar Pradesh and Punjab.”

Now, this will make it tougher for the utilities to meet

their working capital requirement. Non-approval of ex-

penses by state regulators on account of non-

achievement of efficiency targets and lack of capital

investments by utilities due to poor financial health has

become a vicious cycle.

While the issue of the SEBs is spoken about commonly, a look at the Table 2 also throws up a surprising decline of 7.1% in generation

by private entities (which excludes independent power plants). It must be noted that private IPPs can charge rates as per the prevailing

market price through the exchange or otherwise. However, private sector entities cannot do so. Hence, it is worth pondering whether it

is the inability to raise tariffs as and when costs move up, which is driving the decline in power generation by private sector plants.

Coal availability might still be a problem, but it is worth asking whether coal alone should be made the villain for the low growth rate

of power generation in India.

———————————————————————

Table 2: Coal Based Generation During April-August 2011

Actual % YoY

Growth PLF (%)

Central Sector 90,550 1.7 82.02

Private Sector 10,263 -7.1 77.96

Private IPPs 22,958 77.5 78.25

State Sector 1,09,288 7.7 66.78

Total Coal Based 2,33,060 8.6 73.59

September 21, 2011

Roads & Highways MORTH urges Govt to delink environment and forest clearances: The ministry of road transport and highways (MORTH) has sug-

gested the government to de-link environment and forest clearances in a bid to fast track highways project. The ministry says that it

takes about 12-15 months to seek environment clearance, another 1-2 years to get forest clearance and over three years for wildlife

clearance. (Indian Express, September 12, 2011)

PRU Analysis

Development of the road infrastructure in India continues to face hurdles. It nearly takes around 3 years to get statutory clearances,

while the time taken to complete a road project is set at three years.

Before April 2011, a project would get forest clearance simultaneously at the time of environmental clearance. However, since April,

environment clearance will be received only if forest clearance is given, thereby elongating the timeline of the project.

To expand the national highways network, the ministry had plans to convert 10,000 km of state highways into national highways. How-

ever, due to paucity of funds, this plan is set to hit a pause button. Currently, the government has an annual fund allocation of `4,000

crore for maintenance of highways other than those under the National Highways Development Programme. This amount is already ear

-marked for various roads. In order to take over other state roads under its ambit, additional funds of `3,500 crore would be required,

which seems unlikely.

While several cash-strapped state governments are keen to pass on the road network to the Centre, it must be noted that the Centre first

makes surveys on the highways transferred to it by states and then decides on roads on which the work must begin. This may result in

deterioration of roads as not all the roads transferred are worked upon at the same time.

States may also keen to transfer roads to the centre as two main factors are adversely affecting cost of construction and maintenance of

roads. Infrastructure Development Finance Corporation has conducted a study through which they tried to ascertain the link between

inflation, interest rates and IRRs of toll-based road projects. The study results reveal that in spite of interest rates rising by 200 basis

points, IRR for the sample NHAI project improved by close to 60 basis points, led by toll rate hikes. If the toll rates were not increased,

then the 200 basis points hike in interest rate would reduce IRR of the project by 25 basis points.

PRU View

The two-stage process of granting clearances to new projects needs to be streamlined if the target of constructing and awarding more

than 7,000 km of roads every year is to be met. In fact, the latest statistics represent a dull picture. While road construction grew at a

pace of 4.6 km per day during the June 2011 quarter, it slowed to 2.9 km a day during the monsoon months of July and August. To add

to it, inflation and higher interest rates are further restricting the growth of fresh projects.

Consolidation Era For Edible Oil Industry?

Are multinationals taking over the edible oil industry?: Nasdaq-listed Archer Daniels Midland Company (ADM) acquired two oil-

seeds processing facilities earlier this month from Geepee Agri Pvt Ltd at Kota, Rajasthan and Akola, Maharashtra. (The Hindu Busi-

ness Line, September 18, 2011)

PRU Analysis

The Indian edible oil industry is traditionally highly fragmented with the presence of a large number of participants in the organised

and unorganised sectors, resulting in severe competition and inherently wafer thin profitability margins. However, over the past many

years, favorable policy developments like 100% foreign direct investment (FDI) and reduction in customs duty has prompted multina-

September 21, 2011

tional companies like Cargill, Wilmar, Archer Daniels Midland (ADM) and Louis Dreyfus to enter the edible oil industry. India, being

an oil deficit country and the ever rising demand has made the country an attractive proposition for investment. There seems to be a

phase of consolidation for the industry that may eventually lead to better profitability for the larger players.

The MNCs had initially partnered with local refineries in India and utilised their existing supply chain network to keep their costs down

and understand the market dynamics better and retain existing customers. However, now it seems that the MNCs are evincing greater

interest in acquiring Indian brands or manufacturing facilities in a bid to go solo and take advantage of their global footprint.

We have also witnessed a couple of instances where an MNC, after partnering with an Indian company to enter the country, eventually

acquired the company. Cargill Inc, the global giant, had acquired its initial joint venture partner, Prakash Foods, in 2005 and has been

on an acquisition spree since then. Some of the other acquisitions include Rath edible oil brand from Agro Tech Foods Ltd (subsidiary

of ConAgra Foods Inc.), premium sunflower brand Sweekar from Marico and castor oil refining capacity from Gujarat Ambuja Exports

Ltd.

ADM has also been following in the footsteps of Cargill. After acquiring the entire stake of the initial Indian JV partner, Tinna Oils,

which has its soyabean and sunflower processing units in Maharashtra & Karnataka, it also bought out the processing facilities of Mad-

hur Agro in Nagpur and more recently has acquired two oilseeds processing facilities from Geepee Agri Pvt Ltd having facilities at

multiple locations.

Another global giant, Bunge, had acquired Dalda from Hindustan Unilever in 2003 and is now keen on making another acquisitions to

expand its footprints in India.

The Indian companies are also looking forward to selling their businesses by either selling a stake in the company or offload less profit-

able ventures/brands. For example, Amrit Banaspati Company (ABC), better known for its vanaspati and edible oil brands like Gagan,

Ginni and Marigold, has been in talks for selling off its brands or offloading a substantial stake in the company. Ruchi Soya sold its

stake to Chennai’s Siva group while KS Oils has been in the news recently for a possible takeover.

PRU View

Much of the shake-out may be due the low profitability associated with the fragmented nature of the industry. The share of the branded

oils segment is low but has been on a rising trend over the years due to the rising income levels, uptrend in urbanisation and increasing

quality consciousness of Indian consumers. Many Indian companies, which have realised that brand building is a capital-intensive exer-

cise, are putting their brands and processing units on sale. Even the larger players are looking to sell certain parts of their business that

have low profitability to improve upon their margins.

MNCs are eager to increase their exposure in the Indian markets as it is the second largest consumer of edible oils in the world and a

larger presence would benefit them directly in terms of economies of scale, such as marginally lower cost of production and access to

cheaper working capital credit. While it may still be early to say that a consolidation era has started, its quite evident that the industry in

moving in that direction.

Maruti’s Market Share Shrinks

Maruti conflict escalates as govt pulls out of talks: With the confrontation between workers in Manesar and the Maruti Suzuki man-

agement intensifying, the labour department of Haryana on Monday distanced itself from the negotiations, saying it would not be in-

volved in the talks any further. (Business Standard, September 20, 2011)

PRU Analysis

After a strike in June this year at Maruti Suzuki’s (Maruti) plant in Manesar that lasted for about two weeks, the company is in the

midst of another strike that started on August 29, 2011, after Maruti’s management asked all workers to sign a good conduct bond after

September 21, 2011

finding instances of the assembled cars not passing the quality standards. The management and the worker’s union have not entered

into any fruitful discussions till now that could have led to the calling off of the strike. Even the involvement of the labor department of

Haryana did not help the cause as the department officials refused to take any further part in the negotiations between the two parties.

PRU View

With the current strike threatening to enter the labour court, there seems to be no resolution to the differences between the Maruti’s

workers and the management. The two strikes in total has lasted for around five weeks and is still counting. This has resulted in a sig-

nificant decline in Maruti’s production with popular models like Swift, Swift Desire and SX4 being impacted the most. Lower produc-

tion of popular variants has led to a decline in Maruti’s total sales and market share in the current financial year (Chart 2). For FY11,

Maruti had a market share of 42.6% which has drastically declined to 36.9% for the period April-August, FY12 (April-August). The

equity market has also battered the stock price of Maruti in the wake of incessant strikes and the continuing economic slowdown. Ma-

ruti’s stock price has declined by 15% since April 2011 (Chart 3).

The decline in Maruti’s share has proved to be a boon for other car manufacturers like Hyundai, Mahindra & Mahindra, Toyota and

Volkswagen which have gained market share during the current year with attractive world class models being introduced by most of

these companies in recent times. It will be interesting to see if Maruti can fight back and regain its lost market share and continue with

its supremacy after production returns to normalcy.

Palm Oil Export Duty Cut By Indonesia

Indonesia cuts export duty on refined palm oil to promote value-addition: The Indonesian Government changed the existing uni-

form export tax rate of 25% for crude and refined palm oils and built an export tax differential between the two oils by announcing a

duty cut to take effect from October 1. (The Hindu Business Line, September 15, 2011)

PRU Analysis

In order to promote export of palm oil, the Indonesian government has decided to reduce the export duty on palm oil. Moreover, the

government is looking to encourage export of processed palm oil and, therefore, the export duty cut in refined products such as pal-

molein has been far more than the duty cut in crude palm oil.

The export duty for crude palm oil has been reduced from 25% to 22.5% whereas the export duty for refined products has been almost

halved from 25% to 13% with effect from October 1, 2011. This move by the Indonesian government is to ensure that the benefit from

value addition accrues to the local firms as the country attempts to export more of refined products.

September 21, 2011

PRU View

India imports over half of its edible oil requirements with the

bulk of the imports being met by Indonesia (around 55%), Ma-

laysia (around 15%) and Argentina (around 15%). India pri-

marily imports crude palm oil, processes it and then sell the

value added product in the market. Of the total edible oil im-

ports by India, crude palm oil accounts for 65-70% whereas

palmolein imports (refined product) accounts for around 12-

15%.

As a result, the huge export duty cut in the refined products

announced by the Indonesian government may not affect the

edible oil importing pattern in the country and the import bill

associated with it.

The prices in the domestic market have not fallen during the

past 45 days whereas the international prices for both, crude

palm oil and palmolein, have fallen and the fall in palmolein

prices has been much sharper than the fall in crude palm oil

prices (Chart 4).

Copper Price Slips To Nine Month Low

Copper Hits 9-Month Low As Euro Worries Mount : Copper prices slid to a 9-1/2-month low on Monday after investors cut expo-

sure to risky assets in the wake of growing jitters about failure by policy makers to contain the euro zone debt crisis as the threat of a

Greek debt default intensified. (Reuters, September 19, 2011)

PRU Analysis

In a recent move, copper prices on the London Metal Exchange (LME) hit $8,323 a tonne on September 19, 2011, a decline of 10%

compared to the prices in beginning of the month. This also was the lowest price in past nine and half months. (Refer Chart5)

The price decline is attributable to two main factors:

Copper prices slumped on worries of further demand weakening in the European region. No concrete measures have so far been

taken on the bail-out programme for Greece. This has worsened concerns over the global economic uncertainty. It can be men-

tioned here that International Monetary Fund (IMF) and European Union (EU) had suspended their review of next round of pay-

ments to Greece after discovering lapses in the Greece budget. There are concerns of a debt contagion in the euro zone and its im-

plications on economic growth in the region.

The latest IMF outlook has cut its forecast for global growth to 4% for CY11. Just three months ago it had projected a growth of

4.3% for 2011 and 4.5% for 2012.

The copper prices have been finding support on LME on

back of supply constraints. The concerns over copper sup-

ply have been due to combination of factors like falling

ore grades, labour problems and project delays. Refined

copper production is likely to witness decline in produc-

tion due to tight global copper concentrate market. Ac-

cording to forecasts made by the International Copper

Table 3: Forecasts till 2012 By International Copper

Study Group (Million tonne)

2011 2012

Production 19.72 20.68

Consumption 20.1 20.96

Deficit .37 .27

September 21, 2011

Study Group (ICSG), refined copper consumption in next two years will surpass production, resulting in a deficit.

It can be mentioned here that thousands of workers at Freeport-McMoRan Copper & Gold Inc's gold and copper mines in eastern Indo-

nesia and Peru had gone on strike since first week of July. Recently, production has restarted at the world's third-biggest copper mine

after partial end to the strike. This has eased supply concerns to a certain extent.

It can be mentioned here that, China, the biggest consumer accounting for about 40% of the world total consumption, has witnessed

softening of demand for copper. Refined copper consumption for first five months of this year has declined by 9% compared to corre-

sponding period last year. Refined copper imports over the first eight months of 2011 fell by 27% year-on-year, to an estimated 1.49

million tonne.

There is a risk of an economic slowdown in China because of monetary tightening measures which might dampen demand further in

the future. The Purchasing Manager Index (PMI) for China has been witnessing a decline since March 2011 (August rebounded

slightly), indicating an overall slowdown in the manufacturing sector. IMF has trimmed growth outlook of China from 9.5% to 9% for

CY2012. There are also possibilities of a drop in investment growth in infrastructure and the property sector.

China has announced plans to spend CNY292.5 billion ($45 billion) on power grids in the next five years, mainly on rural network up-

grades. The power sector accounting for about 48% of domestic copper consumption is expected to drive demand in the long run.

Hence, we at PRU, expect prices to fall in the short run from the current levels due to overall demand slow down in China and negative

sentiments. However, in the long run, prices will bounce back amid expectations of global supply constraints and demand from China.

Cotton Prices Up In The Domestic Market

Cotton prices up 26-28%: Delayed arrival of cotton in the domestic market due to rain, coupled with random export enquiry, has led

to a sharp increase in cotton prices in one-and-a-half months. This has resulted in windfall gains of 26-28 per cent for traders who pur-

chased the crop in July/August, when the price was hovering between Rs 30,000 and Rs 32,000 per candy (356kg) for MECH 1 variety

(long staple), as against the current price of Rs 38,000-41,000 per candy. (Business Standard, September 16, 2011)

PRU Analysis

In a recent development, cotton prices in the domestic market witnessed a sharp increase of around 26-28% from its bottom price for

the first time since March this year to hit `38,200 per candy(356 kg) for the popular Shankar-6: Kadi category. (Refer chart 7)

0

0.1

0.2

0.3

0.4

0.5

0.6

0

2000

4000

6000

8000

10000

12000Chart 5: Copper Price And Inventory Movement On LME

Inventory(Million Tonne) Copper Price on LME($/tonne)

Source: Bloomberg

September 21, 2011

This can be attributed to several factors:

Delay in arrival of cotton due to late monsoon in

many cotton growing regions. The cotton year in

India runs from September to October. Due to late

arrival of monsoon in many states, including

Suarashtra region of Gujarat, the cotton plantation

period was delayed. It can be mentioned here that

Gujarat is the leading producer of cotton in India

with production accounting for about 33% of the

total production.

Government had lifted export restriction on cotton

earlier in beginning of August and permitted ship-

ment under Open General License (OGL) for the

last two months of the current season (2010-11).

This has eased the huge inventory pile-up to some ex-

tent and pushed prices up. It can be mentioned here that

under OGL for this season around 8 lakh bales of cotton

have already been registered, deadline for which is Sep-

tember 30, 2011.

On September 14, 2011 Director General of Foreign

Trade (DGFT) again extended it to one more season

with more relaxed criteria and conditions unlike previ-

ous season. Earlier, exporters had to provide bank guar-

antee for registration of export contract. Further to ex-

port cotton, the trader has to register the contract with

the DGFT and execute the shipment within 30 days.

OGL will be valid for the coming season starting from

October this year till September, 2012.

Note: Under OGL, instead of going through the process of acquiring license for export of identical goods repeatedly, exporters can ex-

port continuously for fixed period when qualified for certain requirement.

Prices had declined by almost 50% to hit `31,000 per candy or `90 per kg in August from a peak of `62,500 per candy in March due to

domestic demand softening and export restrictions. Global prices also have fallen drastically from the peaks due to demand weakening

and on the back of an increase in acreage in major cotton producing areas, like USA, China, Pakistan and India.

According to the latest estimate of the United States Department of Agriculture (USDA), global output for 2011-12 stands at 122.71

million bales, up from 114.59 million bales in 2010-11, a 7% jump. However, Texas, USA’s largest cotton producing state, has suffered

a drought which has reduced the expected crop. The crop in Pakistan has also been damaged due to floods. Hence, global output esti-

mate might be revised downwards in future. But, its difficult to forecast the impact on global price under the current circumstances.

In October last year, the Government capped cotton exports at 55 lakh bales in order to protect the domestic textile industry from spiral-

ing raw material (cotton) prices. An additional 10 lakh bales were permitted for exports in June after prices corrected sharply (Refer

Chart 8). According to the Cotton Advisory Board, cotton production for the current season is likely to be 35.5 million bales compared

to 32.5 million last year.

Source: CMIE

30

50

70

90

250

300

2006-07 2007-08 2008-09 2009-10 2010-11*

Chart7: Cotton Production And Exports( Lakh bales)

Production Exports(RHS)

September 21, 2011

Steel Companies Find Iron Ore Auction Too Expensive

Ore auction too costly for steel companies: Companies say the reserve price for Karnataka iron ore e-auction, allowed by the Su-

preme Court, is too high. Steel makers’ relief at the Supreme Court’s order of e-auctioning 1.5 million tonnes of iron ore stocks with

mines in Karnataka was short-lived, vanishing with the first batch of 400,000 tonnes that got auctioned on Wednesday. Steel makers are

crying foul over fixation of the base price and allege exploitation of buyers who were desperately in need of raw material. (Business

Standard, September 17, 2011)

PRU Analysis

In a recent development, Metal Scrap Trade Corporation Ltd (MSTC), a Union government enterprise, carried out e-auctioning of the

0.4 million tonnes of iron ore stock from Bellary, Chitradurga and Tumkur districts of Karnataka .Currently, there is an inventory of 25

million tonnes which will be sold through e-auctioning of 1.5 million tonnes per month.

It can be mentioned here that in the last week of July, Supreme Court had ordered suspension of all mining activities in Karnataka’s

Bellary district following the Lokayukt report which found large scale illegal mining in the state. The order affected about 100 iron ore

mines accounting for about 80% of the mines in the state. This blanket ban was further extended to Tumkur and Chitradurga districts on

grounds of environmental degradation in the last week of August.

Following the ban, steel manufactures as well as small sponge and pig iron units in the state and the neighboring regions have been

facing a shortage of iron ore. Currently, iron ore mining in the state is restricted to only to public sector National Mines Development

Corporation, which produces about 1 million tonne per month, which is inadequate for the entire requirement.

However, in the recent e-auction, steel companies found the reserve price of iron ores to be arbitrary and not in line with prevalent do-

mestic market prices. The base price for 63 grade lump (63% iron content) was set at `3,700 per tonne, against the market price of

`3,500 per tonne. The auctioned iron ore recently were of high quality and mostly contained 63 per cent iron content. The auction price

went up to `5,800 per tonne at the auction, which was higher by 50% from the reserve price.

The reserve price for ore fines with low iron content was fixed at `2,700 per tonne at the auction. In a recently held auction of low-

grade iron ore by NMDC, through the government’s canalising agency Metal Scrap Trading Corporation, it was sold at `1,410 per

tonne, which was comparatively 75% lower.

According to JSW Steel, the arbitrary fixation of reserve price for low-grade iron ore has deterred steel companies from bidding. Over-

all, the auctions witnessed a rise of 13.5 % on the reserve price and the 63-grade lumps registered a significant rise of 53 % on the re-

serve price.

Also, steel makers have to bear additional cost on account of royalty and forest development tax to be paid on the final price to the

state government. On the final price arrived at the auctions, companies need to pay 10% royalty and 12% forest development tax

(FDT) to the state government. This additional 22 % makes the iron ore expensive for the steel companies. Normally, the ore bought in

the open market also comes without this additional 22% tax to the steel companies, as miners usually pay royalty and FDT.

Steel company’s profit margins are getting squeezed due to spike in raw material costs. Incremental hike in iron ore prices will result in

further eroding of bottom line in future.

Merger Of PSU Telecos: Does It Really Matter?? DoT plans alliance between BSNL, MTNL, C-DoT, ITI and TCIL: The telecom department is for the first time planning a grand

alliance between service providers, BSNL and MTNL, along with research body C-DoT, gear maker India Telephone Industries (ITI)

and Telecommunication Consultants of India Ltd (TCIL) to ring in operational synergies among these telecom PSUs. (The Economic

Times, September 19, 2011)

September 21, 2011

PRU Analysis

The latest statistics reveal that the number of telephone subscribers in India increased by merely 0.7% to to 892.6 million at the end of

July, 2011. These subscribers include both fixed-line as well as mobile telephony subscribers.

Private operators hold 88.3% of the wireless market share whereas BSNL and MTNL, two PSU operators, hold only 11.7% market

share. The graphical presentation of the market shares of all service providers at the end of July 2011 is given in chart 9.

Wireline subscriber base continued its downward trend. It declined from 34.3 million in June 2011 to 34.2 million at the end of July

2011. Combined wireline market share of BSNL and MTNL stands at 82%.

The number of fixed lined subscribers dipped by 1.1% in July 2011 compared to the earlier month. Net subscriber additions have also

been slower in July compared to the year-ago period.

While the subscriber base is rising at a fast pace, active subscriber base in India stood at 70.65%. Of the service providers, Videocon

recorded the least active subscriber base of 33.8%, while 93.3% of Idea subscribers were active. BSNL and MTNL registered a weak

active subscriber base of 53% and 36%, respectively.

BSNL and MTNL, which were giants of the Indian telecom industry at one

time, have been losing ground to the private telecom companies. Their mar-

ket share in the overall telecom space declined with the ascent of mobile

telephony. Their sales have been recording a decline over the years and so

have their profits.

PRU View

In such a scenario, we wonder if the proposal to merge the telecom companies would really matter. Although MTNL has 5.47 million

subscribers, only 36.2% are active connections. MTNL’s cellular services generated revenues of `649 crore in 2010-11, a fall compared

to `705 crore that it generated in FY10.

The mainstream revenue for MTNL comes from fixedline and broadband services, that too because of the advantage of being a legacy

player. While poor financial health of the telecom companies like ITI and TCIL is one cause of concern, the other major hurdle would

be dealing with the gigantic employee force of these organisations. Also, the autonomy in decision making at these organisations is

weak, thereby making the merger tough.

Chart 9: Market Share of Telecom Subscribers

Table4: Indian Telecom Subscriber Statistics (in lakh)

Wireline Wireless

Net Additions during July 2011

-1.1 66.7

Outstanding Subscribers Base as on July 31, 2011

341.8 8583.7

Source: TRAI

Table 5: % of Active Subscribers in the month of July 2011

Aircel 54.54 Reliance 62.53

Bharti 89.86 S Tel 43.44

BSNL (Excluding CDMA)

53.04 Sistema 51.02

Etisalat 34.39 Tata 48.74

HFCL 39.18 Uninor 61.26

Idea 93.31 Videocon 33.84

Loop 42.74 Vodafone 81.52

MTNL 36.16 Total 70.65

September 21, 2011

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