Indian Carrier Capex on the Rise

India’s mobile market continues to accelerate, overtaking China as the fastest-growing in the world, and altering the competitive and regulatory landscape. Those changes have prompted the analyst team at Lehman Brothers to revise their estimates for carrier spending and subscriber numbers.

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.
India’s mobile market has so far been dominated by four major operators, holding a combined 70 percent share -- Bharti, Reliance Communications Ltd. (RCom) , Bharat Sanchar Nigam Ltd. (BSNL) , and Hutchison Essar. But the field is expanding to accommodate 7 or 8 national players with the expansion of Idea Cellular Ltd. , Aircel Ltd. , BPL, Spice Telecom , and Reliance’s GSM network.

“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

brahmos 12/5/2012 | 3:36:36 AM
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Oct 28, 2006

Indians smash cell-phone sales record
By Siddharth Srivastava

NEW DELHI - A new world record has been set in India. On October 19, an auspicious day to purchase new products in the country, mobile-phone maker Nokia reportedly sold more than 400,000 handsets, a number not achieved in a single day anywhere else in the world, including China, one of the most rapidly growing mobile-phone markets.

The firm's previous sales high was about 100,000 phones in a single day.

On average, 150,000 new cellular-phone connections are sold in the country every day (about 6 million a month), across all brands, including Samsung, LG, Motorola, BenQ, Ericsson and Bird.

It may be recalled that it is festival season right now when Indians, high on the annual Diwali bonus combined with the auspicious shopping period Dhanteras, go on a spending spree, with mobile phones being one of the most desired consumer goods.

It is a gadget that is now accessible to people at almost every income level, with most handset manufacturers aggressively playing the price-cutting high-volume game. Airtime rates in India are among the cheapest in the world.

In a nation where the World Bank has estimated that close to 80% of the population survives on less than US$2 a day, mobiles have become the "poor man's phone".

The Indian retail market for mobile phones is pegged at Rs750 billion ($750 billion) and is growing at more than 20% per year. The number of mobile-phone users in India reached the 100 million mark in April, making it the fifth-largest market in the world. The subscriber base is expected to grow to 300 million by 2010. At the beginning of 2000, India had just 1.6 million cell-phone subscribers.

China, of course, remains far ahead, with the world's largest mobile-phone market by volume, and one of the fastest-growing. According to government estimates, the country will have close to 450 million mobile-phone users by the end of the year and 600 million by 2009. Almost 40 million people signed for their first mobile phone in the 12 months to July.

Apart from low cost, one of the main factors facilitating the spread of mobile phones in developing countries such as India is the huge number of people who have never had a phone of any kind. In developed countries such as the United States, fixed lines are the norm for the overwhelming majority, reducing demand for cell phones considerably.

Mobile phones also provide communication for people in remote areas where there is limited fixed-line telecom infrastructure.

It is estimated that connecting a fixed line in a remote area costs $1,400, while a mobile connection costs about a third at $500. The convenience of over-the-counter purchase of connections and lower costs being passed on to consumers in the form of cheap rentals in a highly competitive market, and good finance schemes, make cell phones a very desirable alternative to fixed lines.

Last year, the Indian music industry earned more than $35 million - 20% of its revenues - from mobile music. Media houses such as Star, Sony and BCCL have formed separate divisions to tap into mobile content. Star chief executive officer Peter Mukerjee said mobile telephony should eventually bring in 30% of the company's revenues.

In 2005, the number of legitimate music-download sites reached 335, up from 50 two years ago. In just two years, the volume of music made available online by record companies has increased more than sixfold to more than 2 million songs. Mobile music downloads in the domestic market are currently valued at $50 million, according to Soundbuzz India.

Royalties worth about $15 million were paid to the music industry in the past 18 months. About 400,000-500,000 ringtones are downloaded daily.

It is estimated that the Indian mobile gaming market, which generated $30 million in revenue in 2004, will rise to $336 million by 2009.

According to a report by industry consultants ARC Group, worldwide mobile entertainment revenues are forecast to grow to $25 billion by 2007, driven by the games sector. In the Asia-Pacific region alone, mobile gaming is expected to generate nearly $2 billion in revenue by 2008. In East Asia, mobile gaming has generated more than $850 million.

Mobile commerce is another area receiving attention. Recent Internet and Mobile Association of India figures estimate that the domestic e-commerce market will cross the $600 million mark by 2006-07, a nearly 100% increase over last year and more than 300% over 2004-05.

Siddharth Srivastava is a New Delhi-based journalist
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