The Indian telecommunications market has experienced a considerable number of challenges in the last few years due to constant regulatory disputes and a hostile business environment, which includes an aggressive price war that has eroded operators' profitability. Despite the country's significant growth potential, the industry is struggling to capitalise on the opportunities, which will remain the central theme in the near future as we do not expect the market to reach a swift resolution of these complicated issues.
- In September 2013, the Indian mobile subscriber base fell back slightly relative to the previous quarter, although the overall momentum over the year to date has been positive, and we envisage a rise to 876mn subscribers by the end of 2013.
- We continue to expect ARPU levels to trend higher due to 3G and value-added services, although we highlight the fact that the industry is prone to downside risks such as aggressive price competition, with a number of key operators having recently slashed their 2G data charges.
- Looking longer term, the government's recent move to allow foreign operators to have a stake of up to 100% in local telecom companies is likely to result in the injection of much-needed funds to roll out the nation's 3G network infrastructure.
- We forecast slow but steady fixed broadband subscriber growth as operators and consumers opt for cheaper and more convenient mobile solutions.
India is in 13th position in BMI's Asia Pacific Telecoms Risk/Reward Ratings, with a Telecoms Rating score of 46.5 in Q413.
Key Trends And Developments
In July 2013, the Indian government lifted the 74% foreign direct investment (FDI) cap in the telecoms sector, allowing foreign investors to increase their stake to a full 100%. Although this is likely to help stimulate a process of industry consolidation, BMI expects that the process will not begin in earnest until the TRAI issues new M&A guidelines for the sector. Up until now, consolidation has been hampered by the 2G concession cancellations and uncertain acquisition rules.
In September 2013, it was reported that Bharti Airtel was holding talks over a possible takeover of Mumbai-based mobile operator Loop Mobile. Loop's owners are reportedly looking to exit the telecoms sector, but will not close a deal until regulatory issues have been ironed out, including clarification on proposed new rules requiring an operator buying a competitor to pay a spectrum acquisition fee. Loop Mobile has around 3mn subscribers in Mumbai, as well as an attractive 8MHz of 900MHz spectrum in the region. Loop's owners may not want to pay spectrum renewal fees themselves, so the companies may attempt to finalise the transaction before the November 2014 expiry of the current licence. The two companies' combined market share in Mumbai would reach 23.2%, only slightly higher than the largest operator in the circle. On competition grounds, BMI believes the acquisition could be approved by regulators. Alternative buyers could include state-owned BSNL, the country's fifth largest player but currently without a licence for the Mumbai circle.
In October 2013, the Vodafone Group submitted an application to the FIPB to acquire 100% control over Vodafone India, with the company estimating that the buyout of its minority partners would be likely to cost around US$1.65bn. Vodafone has also indicated its ambitions to buy out smaller rivals in India's telecoms market.
Also in October 2013, Bharti Airtel acquired the remaining 49% stake in US-based Qualcomm's Indian wireless broadband unit Wireless Business Services. The acquisition, which had previously been planned for 2014, is reported to have been fuelled by the forthcoming entry of Reliance Jio Infocom into India's 4G market. Notably, Reliance Jio Infocomm announced in the same month that it had become the first operator in the country to obtain a pan-India Unified Licence after securing the licence for all 22 service areas across India. This will enable the company to offer voice telephony and high speed data services when it goes live with its services in FY2014/15.
Looking specifically at mergers, an intriguing possibility is the tie-up of Tata TeleServices, Sistema Shyam and Aircel. According to a report in the Economic Times in October 2013, these three companies are currently undergoing merger discussions, which could potentially result in the creation of India's third largest player. That said, given that rules governing mergers remain in flux, the potentially high cost of transferring spectrum and licences remains a significant barrier to any deal and a significant downside risk over the long term.
Meanwhile, the Indian government has announced that it is planning to conduct the next round of spectrum auction in January 2014, and that it has set a target of reaping US$1.76bn from the sale. Following the poor response from bidders in the previous two auctions, the TRAI recommended cutting the reserve price for 1,800 MHz spectrum by 37% and for 900MHz by as much as 60%. However, in November 2013, it was reported that India's Telecom Commission had amended the TRAI's proposals: the commission suggested a 15% hike in cost for 1,800MHz spectrum from the TRAI's originally proposed price and a 25% increase for 900MHz airwaves.
In September 2013, it was reported that BSNL was poised to enter into a network sharing agreement with MTNL, which would provide the two operators with access to each other's markets for the first time. Previously, neither company had been able to offer services throughout the country on a 'competitive basis' owing to geographical restrictions on their licences. However, the agreement was expected to permit national roaming between the two networks.