Indian Telecom Story (Part XV): Net operating margins at Risk

An extension of an earlier post, which has discussed the problem of reducing operating margins for Telecom Operators in India in the of falling ARPUs and high operating expenditures; this post profiles the predicament for Airtel. If Airtel being such an established player in the market is facing a crunch in its operating margins, the performances of other marginal players and new comers could be under serious doubt!

Airtel registered a 17% YOY revenue increase. However, its quarterly sequential revenue growth seems to be tapping out at 1.19%. Thus the revenue growth is slowing down. Net profit is up 26% but that is mainly because of lower financial costs and spends. Operating profit margins are reduced from 30% in last year to 27% this year.

The concern for Airtel is that the growth in number of subscribers is hitting a plateau. With more competitors, the subscriber figures growth may actually dip. The ARPU has decreased 20.6% YOY. With both these numbers going south, it would be difficult for Airtel to keep up its performance in the next few quarters.
Applying the same analogy to other operators and the new comers, one would expect some congruence in the statuses. The overall market situation is same in all cases and thus the performances would not be very different for other operators. It is in this context one needs to evaluate the price discounting options that the new operators are resorting to. It may be a short cut to establishing a quick base but sustainability and profitability are very big questions. Couple that with the high initial spends of getting a toe hold in the market, the break even seems to be distant. Ask Virgin Mobile for validation.

Bharti - MTN: The making of a Telco Behemoth

The Indians are going places and they are doing it fast and furious. The case in point is Bharti which has now emerged as a front-runner for equity stake in South African MTN. This would make Bharti-MTN the 4th largest Telecom Operator in the world leap frogging big names such as Verizon, AT&T and the likes. Only the Chinese Telcos would have more subscribers than Bharti MTN. One of the most important reasons for Bharti to emerge as a frontrunner for equity stake in MTN is its leadership position in the Indian Telecom market.

After almost an year, India's Bharti Airtel and South Africa's MTN Group are back to the talking table. The duo have restarted merger talks to create $20 billion telecom entity. In fact, at a time when global giants are complaining about a cash crunch and putting ambitious plans on hold, Bharti Airtel has relaunched its audacious merger bid with MTN that could create a $61-billion transnational telecom Goliath with combined revenues of $20 billion and over 200 million subscribers across Africa, Asia and Middle East.

The Bharti-MTN deal, if it goes through, will usher in the next round of the Indian telecom M&A story. At an estimated ticket size of $23 billion, this will be the biggest cross-border deal that India Inc has been involved in, and twice as much as what British telco Vodafone paid to acquire a little over half of Hutchison Telecom International’s Indian operations in early 2007.

The Proposed $23-29 bn deal would be biggest ever M&A transaction involving an Indian company, almost double the previous highest of $13bn paid by Tata Steel for Corus. It would be the third largest deal in the world in 2009 so far, after Pfizer’s $64bn buyout of Wyeth and Merck’s $46bn deal with Schering-Plough Excluding pharma, Bharti-MTN deal would be the largest in world this year so far. Bharti-MTN’s combined subscriber base of 200m would make it the world’s 4th-largest telecom entity, and largest outside China. The top 3 are China Mobile (472m), China Unicom (247m) and China Telecom (237m). If the deal goes through this time, it will make Bharti the largest telecom entity in the world (by number of subscribers) outside China. Add MTN’s 100 million subscribers to Bharti’s 100 million, and the combined figure of 200 million will see Bharti comfortably leapfrog US giants Verizon (122m) and AT&T (108m), among others.

Fund managers with exposure to Bharti feel that with the Indian telecom market showing signs of saturation, the stock-swap deal will be critical for the company’s next phase of expansion. The deal is a good opportunity for Bharti to enter into a lesser-penetrated market like Africa, especially when the company is generating free cash flows.The valuations that have been offered by Bharti may be at a premium to MTN’s share price, but its valuations are cheaper than Bharti’s.

Indian Telecom Story (Part VI): What downturn? The party continues...

TRAI's report  dated 20th February 2009 has the following updates on the Indian Telecom market.

• Subscribers base crosses 400 million
  
• 15.41 million wireless subscribers added in January 2009
  
• 5.65 million subscribers in Broadband segment
  
• Teledensity reaches 34.50% mark!
  

Interestingly, 15.41 million new mobile subscribers takes the mobile connectivity number to 362.30 million. Comin on the back of a downturn and economic meltdown, the subscriber additions dont show any slow down as they beat the sub-adds in December 2008 (10.81 Million) by almost 50%. While the stock indices ove

r the world are flatering, here is one index that is still going and growing strong. Broadband penetration statistics pale in comparison as it registered an increase of .2 million over a December base of 5.45 million in January (3.6% growth).

The other significant bit in here is the launch of Reliance GSM services.  http://technologyandtelecom.blogspot.com/2009/02/ada-reliance-telecom-exercising-muscle.html. 

The link in here is an earlier post on how the competitive scene was heating up between Reliance and Bharti with the launch of Reliance GSM services in the country. Reliance muscled its way in January 2009 adding 4.95 million subscribers compared to Bharti Airtel's 2.73 million subscriber additions and Vodafone's 2.4 million subscriber additions. Certainly Reliance got a super start and has got it 4.95 million subscribers into its network in the first month of operation. At this rate, Reliance will beat Vodafone's no 2 market share position by March 2009. There is no surprise that Airtel feels threatened!

Already there is a renewed push to register more and more users into the Post paid services. (By Vodafone). The idea here is by reducing call, SMS, data browsing, VAS and STD charges on Post Paid, customers are lured to Post paid connections which is supposed more sticky and loyal than the Pre Paid option.

It is going to be an interesting battle for the top honours in Indian Telecom market. Watch this space.