Telecommunications- India: Indian Wireless Sector (May 2005)
The Indian wireless market has been witnessing a metamorphic change. Like other emerging markets, poor penetration of fixed line telephony (around 3% at 2001 end, when the incredible growth of wireless began) largely helped to drive the initial growth in wireless telephony. The growth was later driven by competition due to the introduction of fourth license Cellular Mobile Service Provider (CMSPs). Post 2002, the heightening of price-based competition after the entry of Reliance Infocomm and the introduction of Calling Party Pay (CPP) regime led to the exponential wireless growth.
India has been adding on an average of 1.6 mn mobile subscribers during the past 7-8 months, however of late the rate has been around 1.5mn due to strictness in the subscriber verification, and the total base stood at around 53.65 mn at the end of April 2005. Such is the spectacular growth and the future potential that the multinational telecom equipment companies are ready to finance the working capital or even the long-term funding needs of the Indian wireless companies. However, despite the spectacular growth, India is multi years behind that of its emerging market peers in terms of penetration, with its penetration standing at around 5%, as against China’s 27%, Brazil’s 39%, Russia’s 61% and Mexico’s 40%. The huge contrast in the income level provides an idea of the reason behind the penetration disparity. For instance, while a person earning less than $80-85 (at the current price) per month is categorized as falling below the poverty line in emerging countries, such as Brazil and Russia, ironically India’s per capita income is a mere $50 per month.
Nevertheless, with the Indian economy expected to grow at a sustainable rate of more than 6-7% (real growth rate) for the next 10 years and with a huge middle class population (23% of the total population) of 240 mn, which contributes around 42% to the total consumption, the wide gap in the penetration rate is expected to narrow down. We also believe that the increasing level of income would have a multiplier effect on the mobile penetration rate. Our Penetration Per Capita Income Index of 0.56 (definition explained in the Appendix) for India makes a stronger case for the propelling growth expected in the Indian wireless space in the coming future.
India, due to its immense potential, is in the crosshairs of foreign biggies like Vodafone, which has time and again showed interest in India. Germany has also shown interest in participating in India’s growth in infrastructure, telecom, etc. The Russians (Vimpel, MBT) are also into talks with Indian operators, on and off, for entry into the Indian mobile market. Plus, a host of smaller regional players (Aircel, Essar, after its stealth takeover of BPL recently) are expanding rapidly in the growth regions of smaller Indian towns and cities.
We believe that foreign operators were wary only of the foreign ownership issue, as they like to have a controlling stake rather than a minority stake. It is now pretty much clear that 74% foreign ownership issue will get the final government approval. It’s a just question of "When" rather than "If".
To seek an All India telephony license (i.e. for 23 circles) a new operator needs to shell out only around $400mn. i.e. INR 1600 crs. (For NLD- INR 100 crs and ILD- INR 25 Crs.) Metros and Circle “A” are the expensive belts for which the total license cost comes to around $275-300mn. Circle “B” and “C” provides better opportunity for growth than Metro and “A” circles (with lower entry cost), because of the relatively poorer penetration (penetration in these circles are around 2.8% as compared to around 9% in Metros and "A" circles). Also there are lower marketing and subscriber acquisition cost in these circles that make the “B” and “C” all the more attractive. All the operators whether big (Bharti Televenture and Reliance Infocomm) or small (Aircel and Essar group) are betting big on these circles.
GSM operators have been allocated spectrum in the 900MHz & 1800MHz radio bands in India, while CDMA operates in the 800MHz band. There is enough space left in the 1800MHz band to accommodate at least 2 new GSM operators across India. Moreover a part of 1800 MHz band which is currently used by Indian military forces, will be available for GSM operation as the military has agreed to vacate the same and move to some other band.
In fact recently, Indian telecom regulator TRAI has recommended that the GSM operators would get an additional spectrum in the 1800 MHz radio band by 2006 end that has been currently occupied by the defense authority. CDMA operators would get an additional spectrum in the 800 MHz band. Much anticipated 1900 MHz band is currently not available, as the defense sector has occupied the same that cannot be vacated. However, TRAI has recommended that GSM and CDMA operators would also be given spectrum in the 2 GHz radio band.
CDMA operators can launch their 3G services using the additional 800 MHz band however they will face some handset related problems, however that will be sorted out in the near future. Although, the GSM operators cannot provide the 3G services in the 1800 MHz band as this spectrum is configured for normal cellular services, they will have to wait until they get a few spectrums in the 2 GHz radio band.
In India, currently CDMA operators operate in 800MHz radio band, while GSM operators operate on 900MHz and 1800MHz radio band.
TRAI has also recommended that the ceiling on annual spectrum charges be reduced to 4 per cent of the adjusted gross revenue (AGR) from the existing 6 per cent.
These recommendations are to be approved by the Govt. of India.
India has been adding on an average of 1.6 mn mobile subscribers during the past 7-8 months, however of late the rate has been around 1.5mn due to strictness in the subscriber verification, and the total base stood at around 53.65 mn at the end of April 2005. Such is the spectacular growth and the future potential that the multinational telecom equipment companies are ready to finance the working capital or even the long-term funding needs of the Indian wireless companies. However, despite the spectacular growth, India is multi years behind that of its emerging market peers in terms of penetration, with its penetration standing at around 5%, as against China’s 27%, Brazil’s 39%, Russia’s 61% and Mexico’s 40%. The huge contrast in the income level provides an idea of the reason behind the penetration disparity. For instance, while a person earning less than $80-85 (at the current price) per month is categorized as falling below the poverty line in emerging countries, such as Brazil and Russia, ironically India’s per capita income is a mere $50 per month.
Nevertheless, with the Indian economy expected to grow at a sustainable rate of more than 6-7% (real growth rate) for the next 10 years and with a huge middle class population (23% of the total population) of 240 mn, which contributes around 42% to the total consumption, the wide gap in the penetration rate is expected to narrow down. We also believe that the increasing level of income would have a multiplier effect on the mobile penetration rate. Our Penetration Per Capita Income Index of 0.56 (definition explained in the Appendix) for India makes a stronger case for the propelling growth expected in the Indian wireless space in the coming future.
India, due to its immense potential, is in the crosshairs of foreign biggies like Vodafone, which has time and again showed interest in India. Germany has also shown interest in participating in India’s growth in infrastructure, telecom, etc. The Russians (Vimpel, MBT) are also into talks with Indian operators, on and off, for entry into the Indian mobile market. Plus, a host of smaller regional players (Aircel, Essar, after its stealth takeover of BPL recently) are expanding rapidly in the growth regions of smaller Indian towns and cities.
We believe that foreign operators were wary only of the foreign ownership issue, as they like to have a controlling stake rather than a minority stake. It is now pretty much clear that 74% foreign ownership issue will get the final government approval. It’s a just question of "When" rather than "If".
To seek an All India telephony license (i.e. for 23 circles) a new operator needs to shell out only around $400mn. i.e. INR 1600 crs. (For NLD- INR 100 crs and ILD- INR 25 Crs.) Metros and Circle “A” are the expensive belts for which the total license cost comes to around $275-300mn. Circle “B” and “C” provides better opportunity for growth than Metro and “A” circles (with lower entry cost), because of the relatively poorer penetration (penetration in these circles are around 2.8% as compared to around 9% in Metros and "A" circles). Also there are lower marketing and subscriber acquisition cost in these circles that make the “B” and “C” all the more attractive. All the operators whether big (Bharti Televenture and Reliance Infocomm) or small (Aircel and Essar group) are betting big on these circles.
GSM operators have been allocated spectrum in the 900MHz & 1800MHz radio bands in India, while CDMA operates in the 800MHz band. There is enough space left in the 1800MHz band to accommodate at least 2 new GSM operators across India. Moreover a part of 1800 MHz band which is currently used by Indian military forces, will be available for GSM operation as the military has agreed to vacate the same and move to some other band.
In fact recently, Indian telecom regulator TRAI has recommended that the GSM operators would get an additional spectrum in the 1800 MHz radio band by 2006 end that has been currently occupied by the defense authority. CDMA operators would get an additional spectrum in the 800 MHz band. Much anticipated 1900 MHz band is currently not available, as the defense sector has occupied the same that cannot be vacated. However, TRAI has recommended that GSM and CDMA operators would also be given spectrum in the 2 GHz radio band.
CDMA operators can launch their 3G services using the additional 800 MHz band however they will face some handset related problems, however that will be sorted out in the near future. Although, the GSM operators cannot provide the 3G services in the 1800 MHz band as this spectrum is configured for normal cellular services, they will have to wait until they get a few spectrums in the 2 GHz radio band.
In India, currently CDMA operators operate in 800MHz radio band, while GSM operators operate on 900MHz and 1800MHz radio band.
TRAI has also recommended that the ceiling on annual spectrum charges be reduced to 4 per cent of the adjusted gross revenue (AGR) from the existing 6 per cent.
These recommendations are to be approved by the Govt. of India.
posted by Vikas Maheshwari, CFA at 7:37 PM
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