Industry ANALYSIS: telecom sector in india

Program & Batch:PGDM 2014-2016

Term:IV TERM

Course Name:Strategic Management

Name of the faculty:Deeepak Pandit

Topic/ Title :Industry Analysis Telecom Sector

Original or Revised Write-up:ORIGINAL

Group Number:2

Contact No. and email of Group Coordinator:8860842431, inderjitvirdi89@gmail.com

Group Members:Sl.Roll No.Name

11401-02051Inderjit Singh Virdi

21401-01004Adhiraj Karmakar

31401-03036Ashesh Raghav

41401-02141Vishrut Joshi

51401-01113Prateek Chellani

61401-01125Rakesh Boddu

71401-01040Bhairavi Gupta

Table of ContentsINTRODUCTION3Current Scenario3RECENT HAPPENINGS IN THE TELECOM INDUSTRY4AUCTION OF SPECTRUM4FULL SCALE MNP IMPLEMENTATION4Telecom EQUIPMENTS Imports Grew 20 Percent in 20145INDUSTRY ANALYSIS6PEST ANALYSIS6POLITICAL6ECONOMIC6SOCIAL6TECHNOLOGICAL7Porters Five Forces Analysis8Threat of new entrants- Low8Power of suppliers- Low8Power of buyers- High9Threat of substitutes- Moderate10Threat from competition- High10SWOT Analysis12Strengths:12Weakness:12Opportunities:12THREATS:13Financial Analysis13CONCLUSIONS14

INTRODUCTIONOne of the most rapidly growing industries in the world, the Indian Telecom industry, it has been recognized as one of the major factors of the rapid economic development of India. A favorable environment has been provided to the service providers by the Telecom Regulatory Authority of India (TRAI). This has been also beneficial to the consumers of telecom services with increased accessibility and lower tariffs. In fact Indian tariff rates are one of the lowest in the world. A friendly business environment is essential for the development of the industry which the government recognizes will eventually contribute to the welfare of the economy.M2M (machine-to-machine) growth is expected in 2016-17 on the back of better 3G & 4G implementation. The liberation of government policies and regulatory framework has assisted in the rapid growth in the telecom industry by providing the telecom equipment manufacturers easy market entry. India is also set to become the worlds fourth largest smartphone market by 2017, offering huge opportunities to the telecom sector. Current ScenarioAs per the latest report from TRAI, telecom subscriber base of the country currently stands at an all-time high of 970 Million at the end of December 2014. Whereas the teledensity has reached 77.98. The mobile subscriber base stands at 94.9 Milllion.Bharti Airtel is the market leader with 217.2 Million subscribers, followed by Vodafone at 178.6 Million, IDEA at 150.2 Million, Reliance at 106 Million, BSNL 81 Million, Aircel 78.6 Million, TATA at 66.1 Million, Uninor at 43.6 Million.

RECENT HAPPENINGS IN THE TELECOM INDUSTRYAUCTION OF SPECTRUMThe ongoing spectrum auction for the CDMA frequency of 800Mhz, GSM bands of 900MHz, 1,800MHz and 2,100MHz have reached values upwards of Rs.94,000 Crores. Telecom companies continue to bid aggressively, albeit for the 900 Mhz band in specific telecom zones where they must retain airwaves to keep their present services functional. FULL SCALE MNP IMPLEMENTATIONWith an amendment on telecom regulation, mobile subscribers from May 3 will be able to port their numbers across the nation while switching their service providers.Telecom EQUIPMENTS Imports Grew 20 Percent in 2014India's telecom equipment imports grew by over 20 % to Rs. 74,116 crores in 2014-15. This also included mobile handsets. The government has been taking steps to promote domestic manufacturing and R&D of telecom equipment through its flagship Make in India campaign.Imposition of 10 % basic custom duty on specified telecom products outside the ITA, FDI allowance of 100% in manufacturing of telecom products under the automatic route, and education cess on imported electronic goods are some measures which the government has taken.HDPE, used in the manufacturing of optical fibre cables, has been exempted from custom duty in the 2015-16 Budget.

INDUSTRY ANALYSISPEST ANALYSISPOLITICALReforms in the telecom sector have been fast tracked by the government. The defense ministrys demands for a defense band and a defense interest zone (DIZ) has been addressed by the DoT. This will also benefit carriers as it will free up 3G telecom spectrum.Also full scale MNP will be implemented from May 3, which will benefit the customers when they change states without changing their numbers.An exit policy that provides a route for telecom companies to exit the market without losing the value of their assets is being proposed. This will improve the ease of doing business in India.A proposal to set up a billion dollar government sponsored fund to manufacture telecom equipment under the Make in India initiative is also being contemplated. It will promote startups for the innovation of telecom equipment in India and infuse them with equity.ECONOMICThe government has increased the FDI limit in the telecom sector to 74 percent, which saw inflows of $2.76 B in the April-December period of the current fiscal year. The sector is alone responsible for 10% FDI inflows in the country.The current spectrum auction which have already seen bids worth over 94,000 Crores have spread the service providers thin and a revision of tariff rates is expected.The implementation of GST in the current calendar year is expected to increase the Service Tax from current 12.5% which is expected to be transferred to the customers.Elsewhere, Vodafone is to invest $3 B in next 2 Years in network infrastructure which shows that the network providers are finding the current economic climate conducive for investments. India is the fastest growing major economy in the world at 7.5%SOCIALThe rural segment continues to remain a largely untapped demographic in India with the current rural tele-density at only 44%. This demographic provides huge opportunities for the industry.Also with a change in lifestyle towards a more on the go way of life, data services are an area where network providers are now concentrating on.The Indian telecom sector is also expected to create 4 Million jobs in the next five years. TECHNOLOGICALImplementation of 4G on a high scale will coincide with the firms looking to leverage their services in the enterprise markets where higher margins lie.Digital India / Smart Cities projects initiated by the government require huge investments in telecom infrastructure and provide huge opportunities for the industry to expandThere are serious threats from the internet to the telecom industry with free calls over the internet now becoming a growing phenomenon. Also apps like Whatsapp, Viber etc. have killed the SMS market.A website like internet.org promoted by Mark Zuckerberg of Facebook which provides free access to internet exemplifies the growing threats to the industry.

Porters Five Forces AnalysisThreat of new entrants- LowThe Indian telecom sector is a very capital intensive industry. Thus this means that for a new player to enter to enter the market, it needs to have sufficient financial backing and the finances are not always readily available. Thus the threat of new entrants in the Indian telecom sector is quite low. There are few major players who dominate the market proceedings and will continue to do so in the near future. The barriers to entry in the Indian market are very high and this is not just about the availability of ample cash supply but other restrictions like stringent government procedures. It is very difficult to get regulatory approval and licensing and also operators find it difficult to get a consistent radio spectrum lent to them. The threat of entry is further reduced by the fact that the market is slowly reaching its maturity stage where a number of players are vouching for the same market share, the ARPU i.e. the average revenue per user is also declining and this leaves the telecom only very moderately attractive to the new entrants who will not be looking to invest very high amounts for profit margins which are less than desirable. Another major obstacle for the new entrant in the industry is the access to Optical fibre network. In India the longest network provider is laid down by BSNL and other big players like Bharti Airtel have also invested heavily for their own network line to be set up but their reach in the rural areas is still very limited. Thus for a new entrant laying down a new network line is very difficult and cost ineffective.Retaliation by the big players is also a barrier which the new entrant faces. The existing players in an effort to become more competitive and shrug off any competition tend to bundle up their various services and using emergent technologies to get an upper hand on the new player thus pushing the player out of the market.

Power of suppliers- LowThe supplier bargaining power has a direct impact on the profitability of a company as well as the overall profitability of the industry. As the settled market players indulge in a price war the suppliers are also chosen which care by the companies so that the supplier does not charge a premium to the market for service and the overall cost of the end product is kept under control. It is because of this care that is paid into the decision of hiring the supplier by the various companies that the overall bargaining power the supplier is not high.

OPERATORTOWER SERVICE

BhartiBIL/ITL

RelianceRITL

VodafoneITL

BSNLMTNL, BSNL and Others

IdeaITL

TataViom

Also with a matured market and so many players to be entertained, there are a number of suppliers which provide similar services and the company has many options to choose hence diminishing the impact of the supplier. A large number of the SIM cards produced by the companies are made in India and the companies do not just depend on a single supplier for all the services to prevent any delays. The buyers are willing to switch from supplier to another hence not allowing any supplier to dictate terms in the market.The information of the buyer in the market is very high and the ability of the supplier to forward integrate is quite less considering the number of suppliers available in the market.

Power of buyers- HighThere are many options available in the market to the buyer providing variations in the product and selling them at cheaper prices thus the bargaining power of the buyer is leveraged. The buyers also have the option to switch over as there is no cost involved and many established companies like Reliance and Airtel provide the same services at the same price and thus providing the buyer to switch over from one brand to the other.Airtel-----------PrepaidRelience-----------PrepaidIdea-----------Prepaid

MRP(Rs.)DATA USAGEVALIDITYMRP(Rs.)DATA USAGEVALIDITYMRP(Rs.)DATA USAGEVALIDITY

2501 GB30 DAYS2551 GB30 DAYS2501 GB30 DAYS

4502 GB30 DAYS4492 GB30 DAYS4502 GB30 DAYS

1 RS./MIN300-PLAN (STD)30 DAYS1 RS./MIN (STD)330-PLAN30 DAYS1 RS./MIN (STD)330-PLAN30DAYS

A huge market size and low consumption per user gives the buyer more power over the companies. Another factor which gives more power to the customer is the improvement in the information the buyer today has about various [products and services. Companies today spend a lot on advertising and marketing and the more exposure the customer has to the product the more aware he gets about its superiority or inferiority from its peers.The sale of a service is now more and more dependent on the word of mouth spread by the customers who have already used the service. Thus the buyer is further powered in the market.

Threat of substitutes- ModerateProducts from other sectors rather than the telecom sector pose the threat of being substitutes to the services of telecom sector. Cable TV operators are now also fighting for the same market share. The cable operators have their own lines of network and also use different fiber networks to provide internet to the users cheaper than most of the telecom companies. Many energy companies are now using rail lines and pipelines as assets to lay their high utility internet network to provide internet service to people where it is inaccessible. Internet is becoming a substitute to the SIM cards as a medium of low rate voice call. As internet is not easily available in many places, voice quality remains an issue thus it weakens the effect of it being a substitute.Companies like Google and Skype have also included voice calls in their services hence these services will also compete directly with those provided by the Telecom sector.Although the free availability of internet in India is still a farfetched idea and the lack of its accessibility in many places has kept the threat from these substitutes to a moderately low level.

Threat from competition- HighThere are more than 15 major players in the Telecom market and companies like Airtel, Idea, Vodafone and reliance have almost 75% of the entire market share.

Market LeaderAIRTEL

Market ChallengerVODAFONE, IDEA, RELIANCE

Market FollowerBSNL, TATA

The telecom sector in India is fast attaining maturity and many companies are fighting it out for profitability in the same segment.

The services they provide are directly in competition with each other and every company is trying to dismantle the other from attaining a better market share.

Revenue Market shareConsumer Market shareARPU

AIRTEL29.1%19.8%114.2

Reliance8.2 %16.7%45.2

IDEA15%12.3%114.9

Most of the customers of Reliance are low end customers and hence it has a lower ARPU.Telecom sector is growing and evolving very rapidly and as the market matures further there is more consolidation expected. The government is also trying to form policies which will favor the telecom operators and the vast improvement in infrastructure has resulted in better services, thus the competition for providing cheaper and better services has grown. With a big part of rural India untapped, the rivalry between the companies to increase their market share will increase.

SWOT AnalysisStrengths: There is a huge customer potential in this sector. The rural tele density of the country is as low as 21% and with the improving infrastructure companies would have their eyes set capturing the huge opportunity the rural market provides. The wireless usage medium has shown an impressive growth in the past decade and it is expected to keep growing at a rapid pace with development taking place in and around the country. Seeing the rapid growth in this sector and opportunities arising the government has also allowed Foreign Direct Investment in Telecom sector upwards from 74 to 100%. With the arrivals of foreign Players, technology and currency the sector can boom for the coming years. The sector is one where if the player is settled and has achieved economies of scale there can be a very return on investment which can be obtained. Another factor which makes this sector more promising is the liberalization efforts of the government. Many years back this sector was completely in control of the government but slowly that has chafed and today most of the big players including the market leader is a private owned enterprise and this has brought in more capital and better services in the sector. India being a highly populated country the density per tower is very high which means that the overall capital expenditure per head comes to be very low which is another benefitting factor for the sector.

Weakness: Compared to the developed nations India lacks a lot when it comes down to the infrastructure. Poor transmission leads to a lot of failed calls and poor service. Though there has been significant improvement but the quality is still not up to the mark. The call drop out ratio in the country is still very high. Although we have had significant technological advancements but we still remain behind in terms of adapting new technology. We were amongst the last countries to get to use the 3G service. The telecom market of India is extremely competitive and this tends to keep new investors away from investing in this sector because of the lack of opportunity. With as many as 12 to 15 operators it is hard to find ground in the market and propel. The telecom sector is one which is strongly regulated by the government and it is very difficult to attain regulatory license to start business in this sector. The huge initial investment required to enter this sector is also a drawback.

Opportunities: The biggest opportunity in the sector lies in improving the quality of services. The number of users are increasing each day and by improving on the service higher profitability can be attained. A number of new Value added services can be offered. Many new technologies like mobile TV, streaming are already in use. Newer innovations in the sector will be entertained. With 3G being widely accepted and used by customers across the country, companies should be focused on providing ever better service like 4G at the lowest of costs to improve upon their share of the market and maintain longevity. Companies are also leveraging into other segments with the use of these resources. Some examples are- Reliance BIG TV, Tata Sky, Airtel Digital TV.THREATS: Some telecommunication policies adopted in the country are not very productive to the companies. The declining ARPU in the market in a cause of worry. The partiality from the government in some cases do not help the cause of the private owned companies. For ex- usage of 3G service in a PSU before auctioning it to the private sector. This also increases friction in the industry.

Financial Analysis

COMPANYMARKET CAP (CR.)EPSPE RATIOP/BOOK52 WEEK HIGH52 WEEK LOWCURRENT MARKET PRIZE

AIRTEL137,330.6828.6112.012.3289.8419.9343.55

IDEA53,660.256.8821.683.19129.2177.3149.15

RELIANCE15,655.682.5824.380.4862.45156.962.9

TATA11,884.5022.3618.614.83275474.3415.95

MTNL1603.35115.910.220.3214.0139.125.45

The telecom sector is an attractive industry to target for the retail investors with a healthy P/E ratio of 12.90.The table lists some of the listed companies who have a considerable market share in the stock market and compares their performance.Although the P/E ratio of most of the companies in the sector is pretty good, the P/Book ratio tells a different story. In the above table, out of the 5 listed companies as many as 3 are theoretically overvalued and hence not good investment targets. These companies have a P/Book ratio of more than 1 and hence overvalued.

CONCLUSIONSAs the ongoing auctions conclude and most probably cross the 2010s record Rs.106,000 crore bids, it would be just to conclude that the telecom industry in India is booming as investors see it as an attractive investment opportunity . With the Indian economy opening up to more and more foreign investments the sector is set to grow at rapid pace.

References A Brief Report on Telecom Sector In India, ASA & Associates LLP, Jan 2015 http://www.business-standard.com/article/government-press-release/make-in-india-telecom-conclave-115021201332_1.html http://www.business-standard.com/article/companies/enjoy-full-mnp-across-india-from-may-3-2015-115022501118_1.html http://economictimes.indiatimes.com/industry/telecom/spectrum-auction-modi-governments-approach-is-out-of-sync-with-digital-india-plan/articleshow/46487813.cms http://www.moneycontrol.com/news/economy/union-budget-2015-fm-stressesdigital-india-no-major-reformstelecom_1315714.html http://gadgets.ndtv.com/telecom/news/telecom-equipment-imports-grow-20-percent-in-fy2014-668472 http://trak.in/tags/business/2015/03/06/vodafone-airtel-telenor-slam-facebook-internet-org-project/ http://articles.economictimes.indiatimes.com/2015-02-28/news/59612972_1_telecom-sector-telecom-industry-service-tax-rate http://www.ibef.org/industry/telecommunications.aspx http://articles.economictimes.indiatimes.com/2015-03-03/news/59725111_1_procurement-bill-government-contracts-digital-india http://www.cdot.in/tsic.pdf http://www.dnaindia.com/scitech/report-now-97-crore-indians-use-mobile-phones-2059266 http://economictimes.indiatimes.com/news/economy/foreign-trade/fdi-in-services-sector-up-44-per-cent-during-april-december/articleshow/46490768.cms http://trak.in/tags/business/2014/11/18/indian-telecom-industry-jobs-growth/