Per minute to per second
The launch of a per second (60 paise per minute) billing by Tata DoCoMo in June as part of its nationwide rollout of its GSM network has forced another new entrant to the GSM market, Reliance Communications (Rcom) to also throw its hat into the ring. India’s second largest wireless telephony player launched ‘Simply Reliance’ plan which will charge customers 50 paise per call. Earlier, most players charged calls on a rupee per minute basis.
The price war is not restricted to the two players. All the wireless telephony service providers have launched a per second or competitive rate billing in some form across circles. While telecom services launch offers are nothing new (Rcom had offered a 90-day free talk-time facility on its GSM launch earlier this year), this is the first time that a major player has joined the fray in response to a competitor’s offer resulting in a price war that is pushing existing low fares further down. The reason, both the dual technology players Tata DoCoMo and Reliance Communications have introduced their plans, is to improve their significantly underutilised network capacity.
The impact on volumes…
Tata DoCoMo has had spectacular success in grabbing customers ever since its launch in June. For July and August the company added 28 lakh and 34 lakh new subscribers. For August, the latest month for which subscriber numbers are available, its net additions were the highest in the sector. Its market share, too, has jumped from 8.7 per cent in June to 9.4 per cent in August at the cost of all other players. The total telecom base in the country has now reached 49.4 crore with wireless subscribers at 45.6 crore, up a healthy 3.4 per cent month-on-month.
| GROWING, AT A COST | |||
| FY10E, in Rs crore | Bharti | Rcom | Idea |
| Net Sales | 42,271 | 25,688 | 12,847 |
| *% change | -1.4 | -4.5 | -1.2 |
| Operating Profit | 16,826 | 10,008 | 3,555 |
| *% change | -2.3 | -6.8 | -3.9 |
| OPM (%) | 40.0 | 39.0 | 27.7 |
| Estimate change (bps) | 70 | 90 | 70 |
| Net profit | 9,319 | 2,986 | 1,086 |
| *% change | -1.2 | -18.0 | -11.6 |
| P/E | 14.3 | 16.5 | 21.2 |
| *Change in estimates is after the fare wars Source:Analyst reports | |||
On the back of robust growth at the rate of 1.5 crore subscribers every month for the sector, all the three major listed entities, Bharti, Rcom and Idea are expected to grow their subscriber numbers by 30 per cent y-o-y to 12.6 crore, 9.9 crore and 6 crore, respectively for 2009-10. Ratings agency, Fitch Ratings believes that the sector will grow at an annual rate of 25-30 per cent over the next three fiscals. While there is scope for growth with national tele-density at 42 per cent, future volumes (2010-11 and beyond) will depend on the semi-urban and rural geographies (urban penetration is pegged at 85 per cent) where penetration is low and the pace of 3G adoption by urban consumers.
…and profitability
With the latest round of fare cuts, revenues per minute (RPM) are likely to come down to about 45 paise from 58 paise in the June quarter, a fall of 28.8 per cent. Average revenues per user (ARPU), another profitability metric, is also likely to fall by 10-15 per cent believes Fitch. Considering that the operating cost per minute (CPM) for leading players is around 39 paise, there is little scope for further reduction in tariffs. Religare Hichens Harrison’s analyst, Himanshu Shah, in his report says that the existing tariffs while covering operating cost will leave little room for recovery of capex.
While companies can do little about revenue-based cost outgo such as licence fee, access charges and commissions, network costs (which account for about a third of the operating cost) remains the only component where companies can look to reduce costs. But, cost savings depend on the increase in usage. With use of multiple SIM cards by customers, the higher minutes of usage (MoUs) resulting from attractive offers is likely to get divided amongst players instead of adding substantially to the MoUs of a single player. However, it is unlikely that single-technology (GSM) players will be aggressive on the pricing front as unlike their dual technology players there is little scope for expansion in their spectrum-constrained networks. But, if they join the price war and this continues for a sustained period, expect operating profit margins for the two leading players to come down to 35-38 per cent levels from 40 per cent currently.
Two other events---3G auction and MNP --could also impact the fortunes of this sector going ahead. With the base price for 3G licences across India fixed at Rs 3,500 crore and the process likely to be completed by December this year, expect financials of the players to come under stress. Also, the process could see the competition intensifying further, if a new player is able to win the 3G license.
| NO SHORT-TERM GAINS | |||
| in Rs per share | Bharti | Rcom | Idea |
| Core business | 313 | 202 | 40 |
| Tower business | 60 | 25 | 19 |
| Total | 373 | 227 | 59 |
| CMP | 327.0 | 234.0 | 63.3 |
| Difference (%) | 14.06 | -3.08 | -7.28 |
| The figures are sum of parts estimates as projected by analysts | |||
The implementation of the MNP, which will allow a subscriber to switch between service providers while retaining their mobile number, could also add further pressure on existing players, in terms of lower tariffs and higher focus on quality of service in a bid to retain customers. Though MNP was to be introduced a year ago it has still not taken off. Analysts estimate that it will be implemented across the country by the first half of calendar year 2010. While MNP could result in churn, thus increasing the marketing cost of a company, analysts believe that it may not result in a major dent in the market share of existing operators.
We analyse the impact of the new tariff plans on the three major listed players.
| TALK MORE, PAY LESS | |||
| FY10E | Bharti | Rcom | Idea |
| Subscribers (nos in cr) | 12.6 | 9.9 | 6.0 |
| % change y-o-y | 34.0 | 35.6 | 39.5 |
| MoU/subscriber | 481 | 368 | 412 |
| *% change | 1.8 | 2.8 | -0.8 |
| RPM (Rs) | 0.53 | 0.51 | 0.52 |
| *% change | |||