An Insight report on Indian Telecom Sector for Q1FY14

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The Indian Telecom industry has been truly exciting and engaging in the last few years and is now entering a phase of consolidation after many years of exponential growth and hyper competition. Having …

The Indian Telecom industry has been truly exciting and engaging in the last few years and is now entering a phase of consolidation after many years of exponential growth and hyper competition. Having said that, there is still a lot of growth to be created in the new business segment of mobile data and its numerous applications!

Cognitel is pleased to present the first of a series of research reports that are intended to provide a perspective on the key current developments and the expected trends that this Industry is likely to confront.

The attached report "Telecom Sector Update" is an analysis of the First Quarter (Q1FY14) results of the Service Providers that were declared last month. While this report is a comparative analysis of the financial results of the listed Indian Telcos, it also seeks to draw out relevant benchmarks with the global industry on some key attributes.

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  • 1.     1     The  Indian  Telecom  Industry  –  An  analysis             The  Indian  Telecom  Industry     An  analysis  of  the  first  quarter  results   (April  –  June,  2013)     Segment:  Service  Providers      
  • 2.     2     The  Indian  Telecom  Industry  –  An  analysis                                                                 Industry  Analysis       Contact:   Sachin  Chadha   sachin.chadha@cognitel.com   +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.           September  2013  
  • 3.     3     The  Indian  Telecom  Industry  –  An  analysis       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  
  • 4.     4     The  Indian  Telecom  Industry  –  An  analysis       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)  
  • 5.     5     The  Indian  Telecom  Industry  –  An  analysis       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  
  • 6.     6     The  Indian  Telecom  Industry  –  An  analysis                 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  
  • 7.     7     The  Indian  Telecom  Industry  –  An  analysis       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  
  • 8.     8     The  Indian  Telecom  Industry  –  An  analysis       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.