Voice will remain the main growth driver for Indian telcos over the next few
years, in our view, given that growth in data will likely be capped by limited
spectrum assets. In this note, we look at voice pricing as a driver for industry
growth and conclude that we have not yet reached a ‘clearing price’ for voice
i.e. there is still room to reduce the cost of producing a minute of voice.
Therefore, we expect voice pricing to decline again after a few quarters of
stable/ increasing voice ARPMs. This expected decline in the medium term is
positive for penetration and industry growth, in our view. We remain positive
on the Indian telecom sector and view declining tariffs as a necessity of
growth. We remain positive on Bharti.
Increasing costs drove recent hikes but room for further cost
efficiencies: Management teams have cited increasing operating expenses
(some related to 3G rollouts) as a key driver for hiking tariffs recently. We
don’t disagree with this. However, we also see several levers ahead which
can drive cost efficiencies. These include [1] optimized SG&A expenses [2]
lower tower rentals and energy cost efficiencies [3] Scale benefits and also
[4] Voice on 3G networks
Is India really that cheap? We don’t think so. On an absolute basis,
India’s ARPMs at ~1 US cent are the lowest among several emerging
markets. However, when we look at India’s per capita telecom spend
adjusted for affordability, other markets such as Philippines, Taiwan,
Malaysia and Indonesia come out lower than India. We do not subscribe to
the argument that India’s tariffs are too low to fall any further.
Why declining tariffs are welcome? We're not calling for a disruptive price
war but we prefer to see continued pricing declines for penetration of
wireless services into a wider addressable market as well as higher usage.
India’s underlying penetration of ~50% still has room for growth but this
growth is likely to come from lower-income-price-sensitive segments. We
believe robust revenue growth is essential for profitability.
Lessons from other emerging markets suggest that ARPMs have declined
as penetration ramped. We find a strong correlation (0.75-0.98) across
several emerging markets between increasing wireless penetration and
declining ARPMs. Furthermore, even assuming a consolidated market
structure for Indian telecoms, a sustained stable-to-increasing pricing
environment is a stretched assumption with 5-6 players in our view.
Investment Conclusion
Growth in data services appears to be the latest baton on which hopes for the Indian
telecom sector are hinged. However, we believe that based on current spectrum
assets available with telcos, data will develop as a niche product and that voice
services will remain the main bread & butter for Indian telcos. In this note, we look
at recent developments in India’s voice market and propose scenarios for the future
of voice. Our conclusion is that we have not yet reached a ‘clearing price’ for voice,
i.e. a level beyond which further cost reductions are difficult, which is positive for
penetration and industry growth. We remain positive on the Indian telecom sector
and view declining tariffs over the medium term as a necessity of growth. We remain
positive on Bharti.
We see two scenarios for the development of voice services
[1] If in fact, telcos in India have reached a clearing price for voice, i.e. further
reductions in cost/min are difficult, then this limits the potential of telcos to cut voice
tariffs further while also maintaining margins. So stable to increasing pricing is
positive for the short term for revenue and revenue growth in turn for profitability.
However, it also means that stable or rising pricing would limit the potential for
penetration and industry growth.
[2] If however telcos see further room to drive efficiencies in cost/min then pricing
can remain flexible driving penetration growth.
We believe that the latter situation is more likely to pan out based on our
conversations with leading telcos. We believe that after a brief period of price
stability/increases over the next ~4 quarters, we will see voice tariffs declining again
allowing for continued industry growth. We do not believe that Indian telco tariffs -
adjusted for affordability - are necessarily "too low" that they cannot fall further.
Increasing expenses a driver for recent tariff hikes
Over the past 2-3 months, announcements of tariff increases have been well received
by the market. We too welcomed this positive development and we expect the impact
on telcos’ financials to meaningfully start showing in Q3FY12 (quarter to Dec’11)
with limited impact in Q2FY12 (the quarter to Sep’11). Tariffs have been increased
by ~20% across most large telcos for local on-net calls and we believe only 5-8% of
a telco’ sub base was put on the new tariff every month.
Management teams have cited increasing expenses – some attributable to new 3G
related costs – constrained spectrum, and maturity of urban markets as drivers for the
increase.
We note that based on subscriber data from July-August, GSM net adds are down
11% and 30% M/M respectively and the monthly run rate so far for Q2FY11 is down
33% Q/Q. We believe it is too early to draw conclusive linkages between the tariff
increase and the net add slowdown given other factors including [1] a reduction
and/or deferment in dealer commission by several telcos to prevent dealers from
issuing new SIM cards when a recharge would suffice and [2] lack of sufficient
numbers available. Also we note that Idea saw strong net adds in August (2.3m,
+132% M/M) despite increasing tariffs similar to Bharti.
years, in our view, given that growth in data will likely be capped by limited
spectrum assets. In this note, we look at voice pricing as a driver for industry
growth and conclude that we have not yet reached a ‘clearing price’ for voice
i.e. there is still room to reduce the cost of producing a minute of voice.
Therefore, we expect voice pricing to decline again after a few quarters of
stable/ increasing voice ARPMs. This expected decline in the medium term is
positive for penetration and industry growth, in our view. We remain positive
on the Indian telecom sector and view declining tariffs as a necessity of
growth. We remain positive on Bharti.
Increasing costs drove recent hikes but room for further cost
efficiencies: Management teams have cited increasing operating expenses
(some related to 3G rollouts) as a key driver for hiking tariffs recently. We
don’t disagree with this. However, we also see several levers ahead which
can drive cost efficiencies. These include [1] optimized SG&A expenses [2]
lower tower rentals and energy cost efficiencies [3] Scale benefits and also
[4] Voice on 3G networks
Is India really that cheap? We don’t think so. On an absolute basis,
India’s ARPMs at ~1 US cent are the lowest among several emerging
markets. However, when we look at India’s per capita telecom spend
adjusted for affordability, other markets such as Philippines, Taiwan,
Malaysia and Indonesia come out lower than India. We do not subscribe to
the argument that India’s tariffs are too low to fall any further.
Why declining tariffs are welcome? We're not calling for a disruptive price
war but we prefer to see continued pricing declines for penetration of
wireless services into a wider addressable market as well as higher usage.
India’s underlying penetration of ~50% still has room for growth but this
growth is likely to come from lower-income-price-sensitive segments. We
believe robust revenue growth is essential for profitability.
Lessons from other emerging markets suggest that ARPMs have declined
as penetration ramped. We find a strong correlation (0.75-0.98) across
several emerging markets between increasing wireless penetration and
declining ARPMs. Furthermore, even assuming a consolidated market
structure for Indian telecoms, a sustained stable-to-increasing pricing
environment is a stretched assumption with 5-6 players in our view.
Investment Conclusion
Growth in data services appears to be the latest baton on which hopes for the Indian
telecom sector are hinged. However, we believe that based on current spectrum
assets available with telcos, data will develop as a niche product and that voice
services will remain the main bread & butter for Indian telcos. In this note, we look
at recent developments in India’s voice market and propose scenarios for the future
of voice. Our conclusion is that we have not yet reached a ‘clearing price’ for voice,
i.e. a level beyond which further cost reductions are difficult, which is positive for
penetration and industry growth. We remain positive on the Indian telecom sector
and view declining tariffs over the medium term as a necessity of growth. We remain
positive on Bharti.
We see two scenarios for the development of voice services
[1] If in fact, telcos in India have reached a clearing price for voice, i.e. further
reductions in cost/min are difficult, then this limits the potential of telcos to cut voice
tariffs further while also maintaining margins. So stable to increasing pricing is
positive for the short term for revenue and revenue growth in turn for profitability.
However, it also means that stable or rising pricing would limit the potential for
penetration and industry growth.
[2] If however telcos see further room to drive efficiencies in cost/min then pricing
can remain flexible driving penetration growth.
We believe that the latter situation is more likely to pan out based on our
conversations with leading telcos. We believe that after a brief period of price
stability/increases over the next ~4 quarters, we will see voice tariffs declining again
allowing for continued industry growth. We do not believe that Indian telco tariffs -
adjusted for affordability - are necessarily "too low" that they cannot fall further.
Increasing expenses a driver for recent tariff hikes
Over the past 2-3 months, announcements of tariff increases have been well received
by the market. We too welcomed this positive development and we expect the impact
on telcos’ financials to meaningfully start showing in Q3FY12 (quarter to Dec’11)
with limited impact in Q2FY12 (the quarter to Sep’11). Tariffs have been increased
by ~20% across most large telcos for local on-net calls and we believe only 5-8% of
a telco’ sub base was put on the new tariff every month.
Management teams have cited increasing expenses – some attributable to new 3G
related costs – constrained spectrum, and maturity of urban markets as drivers for the
increase.
We note that based on subscriber data from July-August, GSM net adds are down
11% and 30% M/M respectively and the monthly run rate so far for Q2FY11 is down
33% Q/Q. We believe it is too early to draw conclusive linkages between the tariff
increase and the net add slowdown given other factors including [1] a reduction
and/or deferment in dealer commission by several telcos to prevent dealers from
issuing new SIM cards when a recharge would suffice and [2] lack of sufficient
numbers available. Also we note that Idea saw strong net adds in August (2.3m,
+132% M/M) despite increasing tariffs similar to Bharti.
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