Lehman Says India's Hot Stuff
India is a market that's set to explode in the next few years, according to the telecom team at Lehman Brothers. And having just done a tour of the country to scope out the vendor opportunities, they've picked out the companies likely to benefit from that growth.
Of the major vendors, LM Ericsson (Nasdaq: ERICY) and Motorola Inc. (NYSE: MOT) are set to be the main beneficiaries of operator plans for significant wireless network expansion, while Tekelec Inc. (Nasdaq: TKLC) is also in line for order growth, the analysts said today.
Others, too, are set to benefit in a country that has no home-grown vendors of any significance. Lehman believes Cisco Systems Inc. (Nasdaq: CSCO) is well placed to win major deals as the data services market grows. It's in line for new business from Bharat Sanchar Nigam Ltd. (BSNL), which is planning to spend $2 billion building a national Internet backbone. This project is still out to tender, however.
Others that should see an uptick include ECI Telecom Ltd. (Nasdaq/NM: ECIL), which is set to land more orders for metro optical gear from Tata Teleservices Ltd., and Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA), which will benefit from direct sales to wireless and wireline carriers and from its relationship with Ericsson.
Among those with less to cheer about, according to the assessment of the Lehman team, include Alcatel SA (NYSE: ALA; Paris: CGEP:PA), Lucent Technologies Inc. (NYSE: LU), Marconi Corp. plc (Nasdaq: MRCIY; London: MONI), Nortel Networks Corp. (NYSE/Toronto: NT), and Siemens AG (NYSE: SI; Frankfurt: SIE). For these vendors, the outlook is either flat or down.
While figures for overall and specific capex are tough to pin down, the Lehman team believes the Indian operators will spend between $5 billion and $6 billion in 2004, though this also includes license payments. And it's likely this figure could drop in 2005, according to Lehman estimates. However, it's likely that by 2005 the major backbone buildouts will be complete, and capex will then rise along with subscriber and usage growth.
Teledensity in India is still quite low, with just 42 million fixed lines and 31 mobile lines in a country with more than 1 billion people. These numbers are set to grow at very high rates, particularly now that the country has government regulators that are committed to eradicating barriers to growth in the telecom sector. In addition, customs duties on hardware and mobile handsets have just been reduced from 14 percent to 5 percent.
There is also pent-up demand for connectivity, driven particularly by the expanding IT services sector.
One carrier hoping to cash in on that demand is Reliance Infocomm Ltd., which has aggressive plans in the wireline and wireless markets, as well as global ambitions (see Monster Metro Ethernet Project Unveiled and Reliance Raises Flag ). Reliance has built a national backbone, with Nortel as the sole supplier, and has built out metro Ethernet networks and dug thousands of kilometers of fiber in India's major cities. Lehman's Steve Levy notes that the operator's fiber was running down the street behind his hotel in Mumbai.
Reliance is set to hook up 1.7 million buildings with fiber to deliver triple-play services (voice, video, data) to homes and businesses from early 2005, though a soft launch of data services to business users is set to start any day now, according to the Lehman team.
While the analysts are unsure which vendors have benefitted from the metro buildouts, Levy believes Atrica Inc. is supplying edge router gear (see Atrica Closes in on Indian Deal).
But it's not all great news. Though its economy is picking up, personal disposable income is still very low, and average revenue per user (ARPU) is not set to climb anywhere near the rates of western countries or even other emerging nations, such as China. Levy says India's operators are building their networks with a view to making a profit from an ARPU of as little as $7 a month, while the ARPU in China is about $12, about $35 in Western Europe, and about $55 in the U.S.
As a result, carriers are looking for the best prices, and vendors can expect very low margins on their equipment sales. In fact, Levy says most of the vendors are losing money on their contracts in India at present, or at best breaking even, though the hope is that they will see profitable business in the future once they're established as incumbent suppliers.
— Ray Le Maistre, International Editor, Boardwatch