All routes busy

Base effect catches up with the telecom industry

Growth in the GSM cellular space has slowed compared to earlier periods. The net additions of 1.13 million subscribers in February 2005 was the lowest in the last eight months and about 10 per cent lower than the net addition in February 2004.

In percentage terms, the subscriber growth of 2.9 per cent was the lowest in at least the last 18 months.

Including CDMA subscribers, the net addition in February stood at 1.66 million, taking the subscriber addition in the April-February period to 17.6 million.

In FY04, the industry had added 20.7 million subscribers, aided to a large extent by the 'calling party pays' regime and Reliance's 'Monsoon Hungama' scheme, which subsidised handsets.

Even if subscriber addition picks up to 2 million this month, the total subscriber addition in FY05 would still fall short of the FY04 figure.

Subscriber addition averaged 1.6 million in the 11 months between April 2004 and February 2005. Nevertheless, most analysts have estimated monthly subscriber addition to be around 2 million for at least the next couple of years.

Operators like Bharti have plans to increase their reach and tap new markets for growth. But the problem with entering new circles is that capex will not yield the same returns as existing circles, which are more densely populated.

The other obvious alternative to trigger growth is to cut prices. In the case of cellular operators, this could be done by cutting the entry level point in terms of the minimum pre-paid recharge from the current level of Rs 330. Another way is to subsidise handsets further in order to attract new customers.

In either case, service providers would take a hit on profitability. If the price cuts don't happen soon enough, there's the danger of subscriber growth rate falling even further.

Corporate debt market

One of the anomalies of the corporate debt market is that while the Reserve Bank of India has a very liberal policy towards external commercial borrowings (ECB) by corporates, FII investment in corporate debt is capped at $500 million.

Putting it differently, while the RBI has no qualms about letting Indian corporates assume forex risk, via their ECBs, it doesn't want to let FIIs to subscribe to Indian corporate paper, which means that FIIs shoulder the forex risk. That is, to put it mildly, a very strange policy.

Of course, there are two schools of thought on the issue. One of them believes that the overall $1.75 billion cap for FII investment in debt is justified, considering the fact that much of the inflow will be hot money, which could easily destabilise the market.

But if the equity markets can be opened to FIIs, then it makes sense to open the debt markets too. In any case, the sub-limit of $500 million for corporate debt makes little sense, as investors should be allowed to determine for themselves where they want to put their money.

Allowing more FII participation into the corporate debt market will help develop it. Proposals for credit derivatives and interest rate options have also been in cold storage.

Even interest rate futures have not taken off, thanks to the RBI's insistence that banks can only hedge their positions. Since banks have an underlying exposure, that means they can only sell in this market. But then, the only players in the market are banks, so who will be the buyers?

Now that Indian banks have been given a four-year period to gear up for competition for foreign players, surely RBI also needs to make sure that they can progress up the learning curve so far as new products are concerned.

Steel production

Growth in the infrastructure index has shown signs of slowing considerably over the last few months. One of the components of this index, steel has seen virtually no growth in output in December '04 and January '05.

The corresponding months in FY03 had seen aggressive expansion in the steel component, helped in part by a low base effect of the earlier year. Hence to sustain growth in the infrastructure index over the next few months, steel output will have to expand.

Several steel players have announced large expansion plans but in the short term i.e. the next few months, domestic capacity will rise only by about 1.6 million tonne (a million tonne at Tata Steel and the remainder at Ispat Industries).

Domestic steel production was estimated at 33 million tonne in CY04. Hence, a rapid pick-up in the steel component of the infrastructure index looks unlikely in the short run.

Steel prices are about 10 per cent higher on a year-on-year basis but input costs too have grown for all the players. Hence enhanced output levels are expected to provide a growth momentum for these two players expanding capacities.

In the case of TISCO, EPS in FY06 is expected to show a y-o-y growth of about 25 per cent.

However, other players (whose expansion projects will take time to come on stream) are attempting to grow their bottomline in the interim, by expanding the proportion of higher value added grades and also by reducing their financing costs. But such measures are not expected to help grow EPS in FY06 aggressively.

With contributions from Mobis Philipose & Amriteshwar Mathur