In a note to investors, Sundeep Bihani and Stephen Chow write that analysts are underestimating the level of capex that will extend into 2010 as operators deal with explosive growth in the market.
With monthly mobile subscriber additions crossing the 6 million mark in September, they now expect India to hit 200 million subscribers in October 2007 rather than 2008 and 300 million in April 2009 instead of 2010 -- requiring significant network upgrades.
“We disagree with [the] consensus that FY07-08 will be the peak capex years…and think operators will likely sustain current annual capex for the next 4-5 years,” Bihani and Chow write. For example, “In our discussions with Bharti management in Sep’06, we find Bharti will continue to spend capex at current US$2bn levels till FY09; with the peak capex year only coming thereafter.”
Their estimate for capex growth in 2008 is now an 11 percent rise to $4 billion, compared with a previous forecast of 10 percent growth to $3.9 billion. They raise capex for fiscal 2009 and 2010 between 24 and 27 percent.
Lehman has identified five areas that it believes will help sustain India’s strength in customer additions and alter the competitive landscape:
- Accelerated network rollouts. The smaller operators have cleared up shareholding and financing issues and all have national ambitions, aggressively expanding their networks into new regions. (See Indian Mobile Set to Spread.)
- Seeing the flurry of activity from regional operators, the likes of Bharti Airtel Ltd. (Mumbai: BHARTIARTL) and Hutchison Essar have “moved into land grab mode…fully realizing that the coverage gap between them and the smaller operators could narrow down otherwise.”
- Infrastructure sharing initiatives. "With passive infrastructure being shared, the allocation of gross capex towards radio automatically rises."
- Stronger economic growth outlook. Lehman has updated its annual GDP forecast for India -- on which its bases subscriber forecasts -- to 9 or 10 percent growth. The Indian economy grew by 8.9 percent last quarter.
- Dual SIM ownership. “We believe increased competition is also starting to kick-in the dual-SIM phenomenon into India, similar to other markets (Indonesia, Thailand, Malaysia),” where mobile users with more than one SIM card artificially boost subscriber numbers: “While this has limited impact on total market revenues, we believe this is contributing to subscriber upgrades,” Lehman says.
“We believe the combination of more players in the market will lead to both lower tariffs and higher SG&A,” the Lehman analysts write, adding they expect to see lower margins as a result. Margin pressure will also continue for equipment vendors, who are likely to see good growth in revenues from the network buildouts and handset sales, against slim profit margins from "difficult pricing."
State-owned BSNL is ordering 60 million lines over three years, and expects that extra capacity to start coming online by April next year. (See Ericsson, Nokia Bid Low for BSNL.) Lehman says BSNL is focusing on building its market share after running at full capacity and losing customers to the likes of Bharti and Reliance, and has a target of filling up the first 20 million lines in 12 months.
“BSNL expects to focus 80% of the contract in new areas and highway connectivity, thereby implying a head-on competition with the larger operators like Bharti, Reliance and Hutch…we believe incremental market-share for the listed telcos would decline back as BSNL starts gaining share.” Bharti has recently pushed its share to 24 percent, but the analysts expect that to fall back to 21 percent. They add: “The tariff stability over last 6-8 months due to lack of capacity with BSNL could get a serious jolt next year.”
On the regulatory front, delays in releasing additional spectrum have been holding up carriers’ expansion plans. Lehman notes: “The regulator expects 20MHz spectrum in the 1800 band to be released by Jun’07... With over-eager vendors offering generous financing terms, we would expect more rollouts and crowding of the market over 2008.”
It’s worth noting that Lehman’s estimates could still be on the conservative side. The TRAI has recently recommended pricing for 3G spectrum, which is planned for auction in the next 6 to 9 months and could see carriers further increasing their spending. (See India Prepares for 3G Rollout.)
“We are yet to reflect 3G capex in our estimates,” Bihani and Chow write. “While operators believe that 3G capex will mostly replace 2G capex leading to no capex risks, we find operator 3G spending in other markets over and above their 2G capex – we do not rule out further upside risks to our capex assumptions for FY08-09.”
— Nicole Willing, Reporter, Light Reading