Swot of Indian Telecom Industry

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					                                    The Indian Telecom Industry

The telecom network in India is the fifth largest network in the world meeting up with global
standards. Presently, the Indian telecom industry is currently slated to an estimated contribution of
nearly 1% to India’s GDP. The Indian Telecommunications network with 110.01 million connections
is the fifth largest in the world and the second largest among the emerging economies of Asia.
Today, it is the fastest growing market in the world and represents unique opportunities for U.S.
companies in the stagnant global scenario. The total subscriber base, which has grown by 40% in
2005, is expected to reach 250 million in 2007. According to Broadband Policy 2004, Government of
India aims at 9 million broadband connections and 18 million internet connections by 2007. The
wireless subscriber base has jumped from 33.69 million in 2004 to 62.57 million in FY2004-2005. In
the last 3 years, two out of every three new telephone subscribers were wireless subscribers.
Consequently, wireless now accounts for 54.6% of the total telephone subscriber base, as compared
to only 40% in 2003. Wireless subscriber growth is expected to bypass 2.5 million new subscribers
per month by 2007. The wireless technologies currently in use are Global System for Mobile
Communications (GSM) and Code Division Multiple Access (CDMA). There are primarily 9 GSM and 5
CDMA operators providing mobile services in 19 telecom circles and 4 metro cities, covering 2000
towns across the country.

Evolution of the industry -Important Milestones

History of Indian Telecommunications
1851 First operational land lines were laid by the government near Calcutta (seat
     of British power)
1881 Telephone service introduced in India
1883 Merger with the postal system
1923 Formation of Indian Radio Telegraph Company (IRT)
1932 Merger of ETC and IRT into the Indian Radio and Cable Communication
     Company (IRCC)
1947 Nationalization of all foreign telecommunication companies to form the
     Posts, Telephone and Telegraph (PTT), a monopoly run by the
     government's Ministry of Communications
1985 Department of Telecommunications (DOT) established, an exclusive
     provider of domestic and long-distance service that would be its own
     regulator (separate from the postal system)
1986 Conversion of DOT into two wholly government-owned companies: the
     Videsh Sanchar Nigam Limited (VSNL) for international        telecommunications and
Mahanagar Telephone Nigam Limited (MTNL) for service in metropolitan areas.
1997 Telecom Regulatory Authority of India created
1999 Cellular Services are launched in India. New National Telecom Policy is
2000 DoT becomes a corporation, BSNL

Major Players
There are three types of players in telecom services:
• -State owned companies (BSNL and MTNL)
• -Private Indian owned companies (Reliance Infocomm, Tata Teleservices,)
• -Foreign invested companies (Hutchison-Essar, Bharti Tele-Ventures,
Escotel, Idea Cellular, BPL Mobile, Spice Communications.
Company         Million Subs     % share
              (Nov 2003)
BSNL            40.3              58.8
Reliance          6.1               8.9
Bharti            5.7               8.3
MTNL             4.9              7.2
Hutchison          2.9              4.2
Idea Cellular      2.1              3.0
BPL              1.4               2.1
Tata Teleservice 1.3                 1.9
Spice            1.0               1.4
Escotel           0.8               1.1
Fascel            0.8               1.1
Aircel           0.9               1.4
Hexacom           0.2               0.3
Shyam Telelin     0.1                0.2

                                           SWOT Analysis

At 110.01 million connections ' Indian Telecom Industry' is the fifth largest and fastest growing in
the world. The subscriber base has grown by 40% in 2005 and is expected to reach 250 million in
2007. Over the last 3 years, two out of every three new telephone connections were wireless.
Consequently, wireless now accounts for 54.6% of the total telephone subscriber base, as compared
to only 40% in 2003. Wireless subscriber growth is expected to grow at 2.5 million new subscribers
every month in 2007. The ' Indian Telecom Industry ' services is not confined to basic telephone but
it also extends to internet, broadband (both wireless and fixed), cable TV, SMS, IPTV, soft switches
etc .The wireless technologies currently in use ' Indian Telecom Industry ' are Global System for
Mobile Communications (GSM) and Code Division Multiple Access (CDMA). There are primarily 9
GSM and 5 CDMA operators providing mobile services in 19 telecommunication circles and 4 metro
cities, covering more than 2000 towns across the country. And the numbers are still growing for '
Indian Telecom Industry '. ' Telecom Industry in India ' is regulated by 'Telecom Regulatory Authority
of India' (TRAI). It has earned good reputation for transparency and competence. More than nine
million phone connections were added last month, taking the number of phone users in the country
to some 333.84 million. India has one of the fastest growing cellular markets in the world in terms of
number of subscriber additions - 19.35 million in 3 months (April to June 2007) and the Indian
telecom market generated revenues of approximately US$ 20 billion in 2006–07. It registered a
CAGR of approximately 22 per cent from 2002–03 to 2006–07. The CAGR from 2006–07 to 2009–10
is expected to stabilise at 21 per cent. Apart from mobile telephony services, other value-added
services are also gaining importance.

The Indian telecom industry has always attracted foreign investors. In fact, the cumulative FDI
inflow, during the August 1991 to March 2007 period, in the telecommunication sector amounted to
US$ 3,892 million. It is the third largest sector to attract FDI in India in the post-liberalisation era.
Here are some key findings referring to the strengths of Indian Telecom Industry.

           The total number of telephone subscribers has reached 241.02 million
           The overall teledensity has increased to 21.20% in August 2007
           The total wireless subscribers (GSM, CDMA & WLL(F)) base reaches 201.29 million
           The wireline segment subscriber base stood at 39.73 million (decrease of 0.16 million at
           the end of August 2007)
           Total Broadband connections in the country have reached 2.56 million by the end of
           August 2007.


           Slow pace of the reform process .
                     It would be difficult to make in-roads into the semi-rural and rural areas
           because of the lack of infrastructure. The service providers have to incur a
           huge initial fixed cost to make inroads into this market. Achieving break- even under
           these circumstances may prove to be difficult.
                    The sector requires players with huge financial resources due to the above
           mentioned constraint. Upfront entry fees and bank guarantees represent a
           sizeable share of initial investments. While the criteria are important, it tends to support
           the existing big and older players. Financing these requirements require a little more
           liberal approach from the policy side.
           Problem of limited spectrum availability and the issue of interconnection
           charges between the private and state operators.
           Broadband experience is very bad. Tata Indicom took 15 days to get connection in
           Bangalore. As compared to US, Indian net fare is too high.
           The Indian Telecom sector has one the highest levies and duties imposed on it. The total
           regulatory charges are between 17 ~ 26% exclusive of goods and service tax.
           This high incidence of levies and duties means a low return on capital , thus adversely
           impacting availability of funds for network expansion
           The return on capital expenditure for mobile services is very low in India at 7.8%
           Clubbing low tariffs, falling ARPU’s and high levies and duties means lower funds with
           players to reinvest in a constantly funds demanding nature of business .
           No base of suppliers to source components.
           The major challenge being the ability of an operator to adequately scale operations,
           retain talent and to satisfy growing subscriber demands.
           Penetration is a roadblock here and even amongst those in metros and large cities who
           own PCs, only a small minority have Apple’s iTunes
           on their systems. The other catch is slow internet speeds which can frustrate users
           attempting to download iTunes.


The telecoms trends in India will have a great impact on everything from the humble PC, internet,
broadband (both wireless and fixed), cable, handset features, talking SMS, IPTV, soft switches, and
managed services to the local manufacturing and supply chain.
Indian customers are embracing mobile technology in a big way (an average of four million
subscribers added every month for the past six months itself). They prefer wireless services
compared to wire-line services, which is evident from the fact that while the wireless subscriber
base has increased at 75 percent CAGR from 2001 to 2006, the wire-line subscriber base growth rate
is negligible during the same period. In fact, many customers are returning their wire-line phones to
their service providers as mobile provides a more attractive and competitive solution. The main
drivers for this trend are quick service delivery for mobile connections, affordable pricing plans in
the form of pre-paid cards and increased purchasing power among the 18 to 40 years age group as
well as sizeable middle class – a prime market for this service.
Small and medium businesses in India are on track to spend more than $6.4 billion this year on
telecom equipment and services, about seven percent more than they did last year. Small businesses
account for the bulk (about 80 percent) of the telecom spending among Indian SMBs. This is due to
their sheer numbers as SBs account for more than 99 percent of all SMBs in India.
With the rural India growth story unfolding, the telecom sector is likely to see tremendous growth in
India's rural and semi-urban areas in the years to come. According to the Geneva-based
International Telecommunication Union (ITU), factors like India's current mobile telephone
penetration rate of about 20 per cent and market liberalisation policies are likely to offer 'great
potential' for the growth of telecom companies in India. Forthcoming services such as 3G and WiMax
will further augment the growth rate. 3G capabilities present operators with opportunities to
increase revenues from new domains, to strengthen their brand, foster deep-rooted customer
loyalty and improve operational efficiency .In a new trend, global consumer electronics and mobile
phone vendors are going green in India. Major players like Nokia, LG, Samsung and Haier, among
others, are planning to introduce products that will be positioned on an environment-friendly
platform, starting the trend of environment as a brand strategy in the Indian consumer electronics
Further, it is expected that the industry will generate revenues worth US$ 43 billion by 2009-10.Even
though the Indian telecom industry has crossed a subscriber base of 225 million, its teledensity is a
mere 19.9 per cent. Thus, the Indian market provides telecom service providers with a large
untapped potential, given the country’s increasing population and its low teledensity. The
Government has plans to raise teledensity to 40-45 per cent by 2010, thereby offering greater
growth opportunities for service providers. The number of Indians using their mobiles to logon to
the internet has increased from 16 million in 2006 to 38 million in 2007 (both GSM and CDMA).
Players like Bharti and Spice have witnessed ~10% of user base using mobile Internet and even
analysts are of the view that data usage is becoming a very significant source of revenue and will
outpace voice-based VAS services by 2011.

       Increase in competition from different players like virgin group

       The pricing of iPhone 3G sales in India proved to be a real dampener and kept customers
       from queuing up to buy the handset. Bharti and Vodafone have invested good amount to
       advertise their respective bundled schemes of iPhone 3G. But all these has resulted in not
       benefiting the involved players but the grey marketers who have suddenly witnessed surge
       in sales since iPhone 3G launch in India. Reports say with the official iPhone 3G priced at Rs
       31,000, customers are finding it more suitable price wise to purchase the handset from the
       grey market where it is speculated to be offered for Rs 20,000-Rs 22,000.

       The industry needs to add capacity in tunes of 150 million lines to achieve the target of 250
       million subscribers by 2012 . The major portion of these requirements would be catered to
       by importing the required telecom equipment.

       The telecom infrastructure equipment, majority of which is imported annually into the
       country at 5 percent customs duty. Whereas, duties are levied (10 - 30 percent) on inputs
       that go into the manufacturing of this equipment, except ICs at zero percent, making
       domestic production costlier than the imported equipment.

       The hike in VAT on cell phones from 4 to 12.5 percent in the current budget will promote the
       gray market for handsets.

       In the years ahead, cost efficiency will be the primary challenge together with tremendous
       revenue opportunities that exist in the Indian telco market.

       Another significant challenge is going to be how today’s communications provider will
       evolve to become a convergent service provider and offer service bundles to their
       subscribers that might include entertainment, infotainment, content, mobile transaction,
       advertisements and sponsorships on top of the data apart from voice services. The multi-
       dimensional convergence in the marketplace means that operators in India need to adapt
       the infrastructure and organisation for convergence. More and more communication and
       content providers are embracing convergence of all kinds, whether it is network
       convergence, service bundle offers, pre-paid/post-paid convergence, or even system


A recent article in Oct 09 –

The Indian telecom industry has been one of the biggest success stories this decade. What started
off as a niche offering in the early 2000s has become a commodity offering. A mobile phone can be
seen in the hands of 33% of the country and most of the growth is coming from the rural segment.
India adds 15 million new subscribers each month! The total number of mobile phone users in India
exceeds the population of the United States!

Owing to this phenomenal growth, the major telecom players have seen a significant increase in
their value over the last eight years. But it seems like those good days are now behind them.

Even though telecom players are now adding 15 million subscribers per month, the average revenue
per user is declining. Furthermore it has been showing a declining trend for some time now. This is
mostly due to the increase in number of players and competition in the country. What was earlier an
industry dominated by three large players - Bharti Airtel, Vodafone & Reliance Communication - has
now seen the entrance of various foreign players along with domestic partners - Tata with
Docomo(Japan), Unitech with Telenor (Norway), Etisalat (UAE) to name a few. These new players are
playing catch up by under pricing their usage charges. Since the service is now a commodity offering,
incumbents have no choice but to cut usage rates as well - leading to lower ARPUs.

The per-minute call rates in India are already amongst the lowest in the world. Most users are pre-
paid users as opposed to registered users (those who receive a monthly bill). Owing to this pre-paid
domination, users are more inclined to shift from one service provider to another if the tariff plan is
more conducive to them or means lower usage charges. The only constraint in the industry that
prevents free movement of consumers across service providers is the lack of your mobile number's
portability. Meaning one cannot retain their number when switching from one service provider to
The government has announced that come January 2010, it will implement the mobile number
portability scheme, which will allow any user to keep his mobile number while moving across
telecom service providers. Once this rule is in play, analysts expect a major migration from the
established players to the new entrants. A recent survey by the Telecom Regulatory Authority of
India had found that almost 70% of users had stated that the single largest deterrent to them
shifting to another service provider was that they would lose their mobile number.

The incumbents have been averse to reducing tariff charges as ARPUs were already on the decline.
Now that new entrants have come into play and Mobile number portability is about to hit the
market, they have no choice but to cut rates and incur lower ARPUs. Analysts project that revenues
for the major players is likely to fall anywhere between 20-50% over the next financial year.
Bharti Airtel and Vodafone were amongst the first mobile service providers in the country. Those
days Bharti (a listed company) came out with its IPO at a double digit price of about 70 Rs. Today the
stock price is about 800. A 10-fold growth in 6 years. Vodafone also commands a similar valuation
which was confirmed when Vodafone UK bought over Hutch to enter India. The deal value was
pegged at about $20 billion (in sync with Bharti's valuation)

The stock trades at multiples of its EBITDA (Earnings before Interest, Tax, Depreciation and
Amortization) of about 12-13 times forwards earnings. This is way above the global average of 9-11
times. For the past 6 years, these companies could command this premium because mobile
penetration in India was still low, when compared to China's 60% penetration. Going forward, with
earnings most likely to decline, it is unlikely the telecom sector is going to grab any investor interest.
The only silver lining is the launch of 3G services in India from January. By providing value added
services, operators could supplement their top line but with a majority of the users still from rural
India, its unlikely to see value added services contributing in a significant manner to the top line in
the near term.

To summarize - although the end consumer is reaping significant benefits, the telecom service
providers are going to be facing a tough time. The opening of the industry to fair competition is
going to hurt the profitability of the incumbent players. This price war is going to hurt all players in
the Industry and hence, the best days of the Telecom sector in India are over.

ESI’s experience with Global Telecom vertical

Facts and Stats

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