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.
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 February 2014, operator Bharti Airtel announced plan to buy out the assets of smaller operator Loop Mobile, following the Vodafone's decision in January 2014 to increase its equity stake in its Indian mobile operation. BMI analyses the reasons for Bharti's latest acquisition.
Bharti's decision to acquire Loop Mobile lies in the latter's position in the Mumbai telecoms circle. Loop Mobile had previously provided mobile services in 14 of 22 Indian telecoms circles. However, the company was reduced to only operating in the Mumbai circle after the Indian government revoked 122 2G licenses from operators in 2012. Loop Mobile had 2.89mn subscribers in Mumbai in December 2013, according to the latest official data published by the Telecom Regulatory Authority of India (TRAI).
We believe the acquisition of Loop Mobile is a strategic attempt by Bharti Airtel to own the largest market share in the Mumbai telecoms circle. Prior to the acquisition, Bharti lagged behind rival operators Reliance Communications and Vodafone in terms of subscription figures in Mumbai. Post acquisition, however, Bharti would be the largest operator in Mumbai after adding additional 2.89mn subscribers into its portfolio.
In January 2014, the Vodafone Group received government approval for its plan to buy its minority partners' shares in Vodafone India for a consideration of US$1.6bn. In October 2013, following the recent relaxation of the foreign direct investment (FDI) rules, Vodafone submitted an application to the FIPB to acquire 100% control over Vodafone India. At the time of the submission, the Vodafone Group's stake stood at 64.4%, with a further 20.1% share in its mobile network through various uncontrolled subsidiaries. Vodafone has also indicated its ambitions to buy out smaller rivals in India's telecoms market.
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.