Overview of Indian Telecom Industry

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Indian Telecom Industry

Brief Overview


Macro-economic view of India

 India is one of the fastest growing economies across the globe. The economic size at the end of
fiscal year 2010 is expected to be worth INR 49 trillion (GDP at market prices). India is also the
fourth largest economy in PPP terms after USA, China and Japan.

 India experienced rapid economic growth between 2003 and 2007, registering an average annual
GDP growth rate of 8.8 percent. In fiscal 2009, India weathered the global downturn successfully
and registered a GDP growth of 6.7 percent, which is significantly higher than the performance of
both the OECD countries and emerging Asian economies. This performance was primarily driven
by the services sector, which posted a year-over-year growth of 9.7 percent. For 2010 India is
expected to post a GDP growth of 8.75 percent. By 2020, the economy is expected to quadruple
its current size driven by nominal annual growth of 13 percent.

 Progressive liberalization of government policies, rapidly expanding services sector, FDI growth,
rising global competitiveness and increasing domestic demand have all contributed to a strong
economy. India ranks as the number one FDI destination among non-financial investors.

2


Key features of the Indian economy
 Favorable demographics: Currently the median age in India is 24 years and India currently
possesses a working population of close to 340 million. The young and dynamic working population
of India is one of the biggest factors having a positive impact on the consumption and investment
pattern of the country. For instance, in 2009-10, India became the second fastest automobile
market in the world, registering a growth of 26.4 percent.
 Rising urbanization: Currently, India has 42 cities with a population base greater than one
million. Widely believed to be the centers of economic activity and wealth generation, these cities
are estimated to contribute 60-80 percent of the total output in India. Urbanization adds about
one percent each year, through productivity gains. The benefits from urbanization to the economy
come from the clustering of firms and businesses which allow them to learn from each other and
attract workers. Examples include the clustering of software firms in India’s Silicon Valley
(Bengaluru) or auto component firms in Gurgaon.
 High savings ratio: India has one of the highest national savings ratio of 32.4 percent (2010) as
against 22.9 percent for Japan and 10 percent for USA. Higher domestic savings has resulted in
higher investment, making India less vulnerable to global situations.
 Shift from an agrarian to a services-led economy: Over the years, the Indian economy has
transformed itself from an agriculture-dependent economy to a services-driven economy. The
share of agriculture, which comprised more than half of the GDP in 1950-51, is now gradually
shifting in favor of the services sector, which has currently got a share of 58 percent of GDP. The
growth of the services sector marks a watershed in the evolution of the Indian economy and takes
it closer to the fundamentals of a developed economy.

Indian Telecom Market
Indian Telecom market has continued to show consistent growth during the last one year, with
exciting developments such as:
 Rollout of newer circles by operators
 Successful auction of 3G and BWA spectrum
 Growing push by telecom operators to rollout network in semi-rural areas
 Increased focus on the value added services market
 Highly competitive market with some circles having more than 10 operators
 Competitive intensity in the market contributing to reduction in tariffs

Telecom continues to be one of the fastest growing sectors of the Indian economy, becoming a
strong contributor to India’s overall GDP and is expected to grow further.


Indian Telecom Market – in a Nutshell

 Current subscriber base of 707 million (August 2010) comprises 476 million urban subscribers
and 230 million rural subscribers. Approx revenue of INR 1100 – 1200 Billion.
 High growth rate (addition of 16-18 million subscribers every month, Apr – Sept 2010),
 Low ARPUs (~INR 122 per month in June, 2010) and significant churn rates.
 In the prepaid segment, ARPU declined by 6.2 percent from INR 113 in March, 2010 to INR 106 in
June, 2010.
 Launch of innovative schemes like lifetime prepaid
 Low cost handset bundling which further reduced the entry
 With a large part of the population yet to obtain access to the telecommunication market,
there is immense potential for the sector to grow, especially in non-urban areas, where wireline
and internet services are yet to make significant in-roads.

Source: Telecom Subscription Data as on 31st August 2010’, TRAI, October 2010


Indian Telecom Market – VAS contribution
VAS market is worth INR 110-120 billion, which translates into approximately 10 percent of
wireless industry revenues. The share of VAS in wireless revenue is likely to increase to 12-13
percent by 20118. This growth would be driven by:

 Increased operator focus on VAS due to continuous fall in voice tariffs
 Increasing penetration of feature rich handsets
 Availability of vernacular content and
 Increased user adoption of VAS applications.

Source: Telecom Subscription Data as on 31st August 2010’, TRAI, October 2010


Indian Telecom – Key highlights

 Despite the presence of 15 players in the Indian telecom space, Telecom industry is still
dominated by top 6 players – Bharti, Idea, RCOM, Tata Teleservices, Vodafone and PSU operators –
holding 95% of the revenue market share.

 Tariffs have been stable over the last year with no major headline rate cuts. Industry is not
expecting significant tariff disruption as operators have paid huge sums for 3G spectrum and new
entrants have not benefited from a price war. The business model for new operators is weak as
they gained only 0.8% revenue market share in the year to September 2010.

 Sector is upbeat on 3G in India and estimate a 3G adoption rate of 16% in FY15. Industry estimate
a low risk of irrational pricing in 3G given that operators have invested USD15bn in the spectrum
and will work on a collaborative basis to offer pan-India services as no operator has won a pan-
India spectrum.

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Indian telecom – Key highlights (contd..)

 The government implemented mobile number portability (MNP) on 25 November 2010 in Haryana
with other circles following suit. Potential risks from MNP are:

1. Risk of loss of high-end subscribers, especially the post-paid subscribers,

2. Fall in post-paid tariffs to prepaid levels, thereby impacting operators’ ARPUs. The event is a risk to
price stability given that 7% of the total subscriber base accounts for 20% of sector revenues.

 The wireless segment has witnessed robust subscriber growth of 45% in subscribers to 723.8mn in
November 2010 from 500mn in November 2009, with implies net adds per month of 18.6mn.
However, revenue growth over the last year was only 10%, which implies the addition of marginal
subscribers as well as an increase in dual SIM users over the last year.

 Industry estimates that wireless penetration to reach 72% at the end of 2012 and sector revenues
to increase by 25% to USD40bn by 2012 driven by a pick-up in 3G services. Expectations is sector
ARPU to be INR152 at the end of 2012, marginally below current levels. Also expect the sector
EBITDA to increase by 13%, with sector EBITDA margins dropping to 25% from 28% currently.

8


Regulatory evolution

Source: KPMG


Revenue and Customer market share

35% 32%
30%
25% 21% 21%
Share (%)

20% 17% 17%
11% 12% 13%
15% 11% 11%
8% 8%
10%
5%
0%

Tata Tele
RCOM

Idea
Bharti

Vodafone
BSNL

RMS CMS

Source: Telecom Regulatory Authority of India (TRAI), as of Sept 2010
RMS – Revenue Market Share; CMS – Customer Market Share

10


Robust minutes growth drive sector revenues (Wireless Revenue)

Wireless revenue
6.6 6.4 6%
6.4
6.4
Revenue (USDmn)

4%
6.2

Growth (%)
6.2
5.9 2%
6.0 5.9 5.9 3%
5% 1% 0%
5.8
0% 1%
5.6 -2%
-2%
5.4 -4%
Dec-09
Sep-09

Sep-10
Mar-10
Jun-09

Period Jun-10
Rev enues (In USDbn) Grow th (%)
Source: Telecom Regulatory Authority of India (TRAI)

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Robust minutes growth drive sector revenues (Minutes Growth)

Robust minutes growth
250
200 190 191
Miniutes in bn

173
141 144 153
150
103 105
83 94
100 72 76
50 68 82 85
49 50 58
0 Dec-09
Jun-09

Jun-10
Sep-09

Sep-10
Mar-10
Bharti Vodafone Idea

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Robust minutes growth drive sector revenues (ARPU Stabilizing)

ARPU stabilising
300 0%
250
ARPU (INR)

Change (%)
200 -5%
150
100 -10%
50
0 -15%
Sep-09 Dec-09 Mar-10 Jun-10 Sep-10
Period
Bharti Vodafone Idea Change


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Proportion of active subscribers by Operators

Proportion of Active subs
100% 89% 88%
75%
80% 67%
59% 59%
60% 48% 46% 45% 44%
39% 36%
40% 31%
24%
20%

0%
Bharti IDEA Vodafone RCOM BSNL Aircel Loop MTS Tata Tele Etisalat Videocon MTNL Uninor Stel

Source: TRAI , Sept 2010

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Mobile subscriber base and mobile teledensity across telecom circles

Source: ‘Monthly Telecom Scenario – August 2010’, DoT, October 2010


Circle-wise revenue market share (September 2010)

Circle-wise revenue share
15.0%
Circle-wise RMS (%)

13.0%
11.0% 8.3% 9.4% 8.8%
9.0% 7.3% 7.6% 7.1%
5.7% 6.0%
7.0% 4.5% 4.4% 4.0% 4.6% 4.2% 4.9%
5.0% 3.2% 2.7%
2.0% 1.7% 2.1%
3.0% 0.8% 0.9% 1.1%
1.0%
-1.0%

Rajasthan
Karnataka

Maharashtra
Gujarat

North East
Andhra

Punjab

Kolkata
Tamil Nadu

Kerala

Bihar

Delhi

Mumbai
Himachal
West
Haryana

Madhya

Assam
U.P. (West)
U.P. (East)

Orissa
J&K
Circles


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Circle-wise revenue market share

Circle-wise revenue share
50%
Circle-wise RMS (%)

38.2%
40% 32.9%
30%
18.5%
20% 11.5%
10%
0%
Circles

Circles

Circles

Circles
Metro
A

B

C
Circles
Circle-wise revenue growth
25%
Revenue Growth (%)

18%
20%
15% 11%
9%
10% 5%
5%
0%
Circles

Circles

Circles

Circles
Metro
A

B

C
Source: Telecom Regulatory Authority
of India (TRAI) Sept 2010 Circles 17


Mobile Number Portability (MNP) – An Opportunity & a Challenge
 MNP poses two key risks for the operators: (1) risk of loss of high-end subscribers, especially the
post-paid subscribers, and (2) fall in post-paid tariffs to prepaid levels, thereby impacting
operators’ ARPUs.
 MNP was rolled out in Haryana on November 25, 2010 with other circles to follow suit. As per
industry figures, 30,000- 35,000 customers have requested to change their operator in Haryana,
which is 0.2% of total wireless subs in Haryana and indicates that the initial impact of MNP has
been low.
 MNP is an important event as 7% of active sector subscriber base accounts for 20% industry
revenues, all the better as these same subscribers will be early adopters of 3G services.
 Postpaid revenue per minute are INR0.75/min, which is at a 44% premium to prepaid realized rates
of INR0.52/min. In our view, the differential is due to higher roaming usage (both domestic and
international) and data services (BlackBerry charges)
 If post-paid tariffs were to decline to the pre-paid levels post the launch of MNP, we estimate it
would impact Bharti’s wireless revenues by 3%, Idea revenues by 8% and RCOM’s revenues by 3%.
 Regional operators with poor investments in infrastructure, such as BPL, would be impacted
significantly , PSU operators like BSNL and MTNL could also be vulnerable.
 CDMA subscribers estimated at 110m will also be vulnerable, given more choice in GSM. However,
network quality and investment in GSM handset to be a constraint.

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3G – Business Case
 Risk of irrational pricing will be low in the sector given limited spectrum, huge sums paid out by
the operators to buy 3G spectrum and collaboration among industry players to offer pan-India
services as no single operator has won 3G spectrum.
 We estimate 3G subscribers at 3% of 2G subs by FY12 and, 9% by FY13. We expect 3G revenues to
contribute 12% of 2G revenues and 15% of 2G EBITDA by FY14e. We expect 3G to become PAT
positive only in FY17. We further estimate a payback period of 9 years for the industry and an IRR
of 12% for 3G services.
 We expect the 3G auction and capex-related interest costs to hit the profitability of telecom
operators – Bharti’s 3G related interest cost at USD260mn in FY12 and USD300mn for FY13, RCOM’s
3G related interest cost at USD170mn in FY12 and FY13, and Idea’s 3G related interest cost at
USD124mn in FY12 and USD140mn in FY13.
 If there were no interest costs on 3G, EPS would have been higher by 11% in FY12e and 9% in FY13e
for Bharti, 38% in FY12e and 21% in FY13e for RCOM and 37% for Idea in FY13e on our estimates.
 3G will result in lower network operating costs in the long term as integrated base stations are
available that are compatible with both 2G and 3G networks.

19


Key regulatory issues - License cancellation
 TRAI has recommended cancellation of 69 licenses of new operators for failing to meet rollout
obligations; this is a significant negative for new players. However, this will not be easy given the
various considerations around FDI in the telecom sector and the stakes of various other
governments in these operators. The government has already collected fines totaling INR1,050mn
from companies not meeting their rollout obligations.

 The 69 licenses that are proposed to be cancelled include 15 licenses for Etisalat, 20 for Loop
Telecom, 10 for Videocon, 8 for Uninor, 11 for MTS and 5 for Aircel.

 TRAI draft recommendations suggest rollout obligations should be replaced by rollout obligations
requiring coverage of habitat and linking incremental spectrum allocation with rollout norms.

 Overcapacity has been a key concern for the Indian telecom sector. These developments are
likely to lead to a regime where non-serious players may either seek a license fee refund or
merge with other operators. However, present M&A rules are not encouraging. To sum up, all
this should free up more spectrum in the near to medium term and the emphasis will be more
on the efficient use of spectrum.

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Conclusion
 Indian telecom sector has proved to be an international success story. Nearly all major
international telecom operators have made significant efforts towards making inroads into the
Indian market in order to tap the immense potential offered as well as to leverage on the low cost
outsourcing model which has been pioneered in India.

 The sector has witnessed a commendable growth over the past 2 years. At present there are 15
operators in the market offering the lowest mobile tariffs across the globe. With an overall
subscriber base of 707 million and a teledensity of about 60 percent, the sector continues to
growth from strength to strength.

 With the urban teledensity crossing 100 percent, the market has been showing signs of maturity,
especially in case of the uptake of voice-based services. The urban markets may continue to add
more users; however, usage of multiple SIMs, multiple tariff corrections and swelling competition
continues to exert immense pressure on the operator margins. 3G and BWA are expected to
reinvigorate the maturing urban markets and help the telecom companies to achieve margin
enhancement.

 The aggressive growth observed by mobile services is yet to be replicated in case of broadband
services, where the subscriber base currently stands at 10.08 million as on August 31, 2010.
However, the broadband sector can expect tremendous growth in the future, considering that
there are more than 650 million potential customers waiting to be tapped. The successfully
concluded auction of the BWA and 3G spectrum will enhance the wireless broadband penetration
across the country and help connect the remotest locations across India.

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Overview of Indian Telecom Industry

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