The Indian Telecom industry has been truly exciting and engaging in the last few years and is now entering a phase of consolidation after many years of exponential growth and hyper competition. Having said that, there is still a lot of growth to be created in the new business segment of mobile data and its numerous applications! Cognitel is pleased to present the first of a series of research reports that are intended to provide a perspective on the key current developments and the expected trends that this Industry is likely to confront. The attached report "Telecom Sector Update" is an analysis of the First Quarter (Q1FY14) results of the Service Providers that were declared last month. While this report is a comparative analysis of the financial results of the listed Indian Telcos, it also seeks to draw out relevant benchmarks with the global industry on some key attributes.

1.
1
The
Indian
Telecom
Industry
–
An
analysis
The
Indian
Telecom
Industry
An
analysis
of
the
first
quarter
results
(April
–
June,
2013)
Segment:
Service
Providers

2.
2
The
Indian
Telecom
Industry
–
An
analysis
Industry
Analysis
Contact:
Sachin
Chadha
sachin.chadha@cognitel.com
+91
98182
41512
The
Indian
Telecom
Service
Provider
Industry
has
witnessed
considerable
turmoil
over
the
course
of
the
last
few
quarters.
From
hyper
competition
all
through
2010
–
2012,
to
a
somewhat
hostile
licensor
/
regulator
and
a
government
that
looked
to
extract
anything
permitted
under
the
license
conditions
(and
beyond!).
The
last
quarter
(Apr
–
Jun,
FY14)
assumes
importance
as
being
the
first
of
relative
calm
after
the
cancellation
of
the
controversial
licenses
issued
in
the
year
2008
and
their
associated
termination
of
services
in
Feb
2013.
A
view
into
this
quarter
therefore
provides
a
sense
of
what
the
industry
is
capable
of
delivering
in
the
wake
of
at
least
one
variable
being
marginalized
(hyper
competition)
even
though
by
the
judiciary
and
not
the
market
forces.
In
this
report
the
Cognitel
research
team
analyzed
the
comparative
positions
of
the
Indian
operators
on
certain
key
parameters
to
see
whether
the
industry
is
finally
seeing
a
reversal
of
sliding
fortunes.
Additionally,
the
team
thought
it
relevant
to
highlight
certain
parameters
in
the
context
of
other
global
operators
to
create
a
comparative
benchmark
of
performance
against
the
mature
operators.
The
companies
reviewed
in
the
report
include
only
those
that
make
a
detailed
declaration
of
their
quarterly
results.
These
include
Bharti
Airtel,
Idea
Cellular
and
Reliance
Communications
(RCOM),
which
collectively
contribute
in
excess
of
50%
of
the
subscriber
market
share
and
thus
constitute
a
representative
sample.
In
the
case
of
Bharti
Airtel,
the
team
took
only
the
India
financials
so
as
to
provide
a
closer
comparison
with
the
competitors
in
India.
September
2013

3.
3
The
Indian
Telecom
Industry
–
An
analysis
1.
Consolidated
Revenue:
Revenue
increase
among
the
operators
was
healthy
with
Idea
Cellular
reporting
an
industry
leading
19%
growth
in
y-­‐o-­‐y
revenue
followed
by
Bharti
Airtel
at
12%
while
RCOM
returned
a
disappointing
growth
of
2%.
Idea
Cellular
stole
the
‘revenue
growth’
show
on
account
of
a
stellar
performance
on
the
parameters
that
constitute
the
revenue
index
such
as
‘net
subscriber-­‐adds’
and
‘average
revenue
per
user’.
The
company
also
reported
a
significant
increase
in
the
‘active
subscriber’
base
on
the
network.
For
Bharti
Airtel,
while
Mobile
Services
continued
to
show
double-­‐digit
growth
(11%),
the
high
growth
areas
in
percentage
terms
were
the
Digital
TV
Services
and
the
B2B
segment.
Further,
for
all
the
operators
the
revenue
mix
is
now
starting
to
reflect
the
changing
consumption
patterns
of
the
subscribers.
While
voice
continues
to
dominate
the
overall
service
mix
with
revenues
in
excess
of
80%,
the
erstwhile
SMS
services
seems
to
be
gradually
fading
away
in
the
face
of
alternate
IP
based
messaging
platforms
such
as
WhatsApp
and
WeChat.
Indian
operators
clearly
have
a
long
way
to
go
on
their
share
of
the
global
market
revenue.
The
collective
revenue
of
the
Indian
Service
Providers
is
pegged
at
around
$40B
as
per
a
recent
statement
by
TRAI.
This
translates
into
a
meager
2.5%
of
the
global
service
revenue.
With
almost
16%
of
the
global
subscriptions
in
India
the
need
for
the
operators
to
garner
a
bigger
percentage
of
the
revenue
pie
is
immediate.
By
way
of
a
somewhat
basic
but
striking
comparison,
Sprint
Corporation
with
65
million
subscribers
makes
around
2.5X
the
revenue
that
Bharti
Airtel
does
(with
operations
in
20
countries
and
with
a
subscriber
base
of
around
250
million!)
Quarterly
Revenue

4.
4
The
Indian
Telecom
Industry
–
An
analysis
2.
Profitability:
The
profitability
index
has
been
a
difficult
metric
for
most
of
the
Indian
operators
especially
over
the
last
few
quarters.
Idea
Cellular
was
the
only
operator
to
beat
that
trend
reporting
a
consolidated
PAT
of
INR
462
Cr.,
which
was
an
impressive
97%
increase
y-­‐o-­‐y.
On
the
other
hand
Bharti
Airtel
saw
a
decline
in
PAT
to
INR
1478
Cr.
or
an
erosion
in
excess
of
6%
(This
was
the
14th
consecutive
quarter
of
reducing
profits
for
the
company).
RCOM
fared
the
worst
with
a
profit
erosion
of
33%.
However,
Bharti
Airtel
still
continues
to
return
an
industry-­‐leading
“PAT
as
a
percentage
of
sales”
at
almost
9%,
which
shows
the
existence
of
a
robust
cost
management
system
built
over
the
years.
On
the
same
metric,
Idea
Cellular
returned
7%
whereas
RCOM
reported
a
figure
of
2%.
Figures
for
all
the
operators
above
are
for
Q1FY14
1580
234
162
1478
462
108
Bharti
Airtel
Idea
Cellular
Reliance
Infocomm
Q1FY13
Q1FY14
Cr
INR
Quarterly
Profit
0%
5%
10%
15%
PAT
as
a
%
of
Sales
Proiit
%
The
Indian
industry
returns
a
PAT/Sales,
which
is
almost
at
par
with
the
leading
operators
in
the
US
such
as
ATT
and
Verizon.
This
is
a
great
testament
to
the
cost
efficiency
built
up
in
the
execution
machinery
of
the
Indian
operators,
which
allows
them
to
return
such
profit
even
when
the
revenue
from
the
average
user
is
among
the
lowest
in
the
world.
These
efficiency
areas
include
different
parts
of
the
organization
and
some
of
the
best
cost
structures
are
generated
in
the
following
areas:
• Network
/
IT
(outsourcing
contracts)
• Low
cost
distribution
(lesser
company
owned
outlets,
lower
retail
margins)
• Low
acquisition
cost
(no
handset
subsidy)
• High
network
utilization
levels
(among
the
highest
globally)
• Focus
on
prepaid
(low
bad
debts,
upfront
collections)

5.
5
The
Indian
Telecom
Industry
–
An
analysis
3.
Mobile
ARPU:
200
174
129
568
1040
Airtel
Idea
Reliance
APAC
Average*
Global
Average*
Wireless
ARPU
-­‐
Q1FY14
INR
/
month
Mobile
ARPU
trends
provide
both
cheer
and
worry
for
the
industry.
The
aggressive
‘voice’
pricing
plans
that
the
operators
pursued
over
the
last
few
years
have
barely
been
able
to
drive
consumption
proportionately
higher,
thus
leading
to
a
stagnation
or
at
best
a
marginal
increase
in
voice
ARPU
levels.
However,
with
the
new
trend
of
voice
tariff
rationalization
(read
increase!)
being
currently
pursued
by
the
operators,
this
metric
is
expected
to
get
healthier.
While
RCOM
still
has
the
lowest
ARPU
among
the
three
operators,
it
registered
the
best
y-­‐o-­‐y
growth
(in
excess
of
30%)
to
record
an
ARPU
of
INR
129
(see
figure
below).
Bharti
Airtel
leads
the
race
with
an
ARPU
of
INR
200.
Bharti
Airtel
saw
its
data
ARPU
increase
an
impressive
59%
(y-­‐o-­‐y
basis)
whereas
Idea
Cellular’s
increased
by
15%.
Clearly
the
contribution
of
data
ARPU
to
the
overall
ARPU
will
continue
to
increase
over
the
coming
quarters
in
line
with
the
trend
in
the
mature
markets.
Probably
the
metric
with
the
most
disparity
compared
with
the
mature
operators
in
the
US
and
Europe
is
ARPU.
Over
the
years,
specifically
during
the
years
between
2010
–
2012
heavy
discounting
in
tariffs,
have
left
telecom
prices
battered
in
India.
A
simple
comparison
in
cost
levels
between
India
and
the
US
indicate
a
difference
in
prices
of
everyday
commodities
to
the
tune
of
2X
–
4X
(more
in
the
US).
The
odd
(and
rare)
service
may
even
be
around
10X
more
expensive
in
the
US.
However
a
simple
call
rate
or
data
rate
comparison
shows
that
the
difference
in
telecom
tariffs
is
to
the
tune
of
20-­‐22X
more
in
the
US.
This
indicates,
quite
simply,
to
a
product
being
priced
at
almost
unreasonable
levels
in
India.
*Global
and
APAC
Averages
are
Cognitel
estimates

6.
6
The
Indian
Telecom
Industry
–
An
analysis
4.
Subscriber
Growth:
Wireless
Subscriber
growth
has
been
the
subject
of
much
admiration
(and
in
many
cases
disbelief!).
India
has
been
for
many
years
(until
2011)
adding
around
12-­‐15
million
subscribers
on
a
month-­‐on-­‐month
basis
and
with
the
result
the
tele-­‐density
in
the
country
is
now
hovering
around
the
75%
mark.
It
continues
to
be
one
of
the
few
metrics
the
government
has
been
able
to
achieve
much
ahead
of
its
projections!
However,
due
to
the
problems
associated
with
a
high
level
of
unproductive
customers
and
a
new
policy
that
delinks
subscribers
and
spectrum
allocation,
operators
are
now
wary
of
purely
adding
more
numbers
to
an
already
choked
network.
Subscriber
additions
are
far
more
monitored
and
in
certain
cases
(such
as
RCOM)
large
numbers
of
unproductive
subscribers
have
been
churned
out
of
the
network.
In
terms
of
net
subscriber
adds
in
the
Apr-­‐Jun
2013,
Idea
Cellular
leads
the
pack
with
the
highest
additions
to
the
tune
of
3.4million.
The
graph
below
shows
how
dominant
the
Indian
operators
are
in
the
metric
with
5
of
the
top
Indian
operators
making
a
presence
in
the
top
20
global
operators
by
subscribers.
This
has
been
the
result
of
sustained
subscriber
growth
through
the
period
between
2005-­‐
2011.
Subscriber
adds
in
Q1FY14

7.
7
The
Indian
Telecom
Industry
–
An
analysis
5.
Data
Users:
Data
services
in
general
and
IP-­‐based
messaging
and
voice
platforms
have
been
gaining
acceptance
and
popularity
in
all
markets
across
the
world
including
India.
Further,
with
the
smartphone
segment
growing
rapidly
and
with
India
emerging
as
the
third
largest
market
for
data
users
in
the
world
(the
largest
being
China,
followed
by
the
US),
the
Indian
operators
are
likely
to
look
to
data
as
the
revenue
enhancer
for
the
next
few
years.
Additionally,
most
of
the
operators
have
a
renewed
focus
towards
3G
given
the
southward
movement
in
prices
of
devices
over
the
last
few
quarters.
This
focus
is
leading,
among
other
things,
to
a
greater
usage
of
the
3G
networks
and
while
the
revenue
increase
is
not
linear
to
the
data
usage,
it
provides
for
the
moment
the
much-­‐required
cheer
the
industry
desperately
needs.
The
table
below
provides
a
view
of
the
number
of
mobile
Internet
subscribers
with
each
operator.
Total
Data
Subscribers
(Millions)
Further,
with
3G
subscribers
growing
rapidly
in
the
country
and
the
ARPU
from
3G
services
being
close
to
double
that
of
2/2.5G
users,
it
is
clearly
a
business
segment
operators
will
look
to
increasingly
harness.
Million

8.
8
The
Indian
Telecom
Industry
–
An
analysis
Conclusion
The
results
were
a
mixed
bag
but
the
team
felt
that
there
were
far
more
positive
take-­‐aways.
That
leaves
us
with
the
sentiment
that
the
Industry
is
clearly
forging
a
recovery
and
the
situation
should
continue
to
improve
unless
some
unforeseen
regulatory
intervention
upsets
the
gathered
momentum.
By
and
large
most
operators
are
now
reporting
a
slew
of
metrics
that
augur
well
for
the
coming
quarters
Increased
ARPU
Tighter
control
on
the
‘Operating’
Expenses
Higher
voice
‘realization
per
minute’
High
percentage
of
‘Active
Subs’
in
the
network
While
Bharti
Airtel
has
a
major
challenge
with
declining
PAT,
it
showed
a
confidence-­‐boosting
increase
in
Mobility
EBITDA
levels,
an
increase
in
Mobile
ARPU
and
a
return
to
+ve
EBITDA
for
the
digital
business.
However
considerable
reductions
in
CapEx
spend
in
the
quarter
(India
Capex
was
down
49%
y-­‐o-­‐y)
displays
a
somewhat
muted
view
of
the
year.
Idea
Cellular,
which
has
been
the
dark
horse
in
the
last
few
quarters,
reported
yet
another
strong
performance
with
the
highest
revenue
growth,
the
highest
number
of
subscriber
adds
and
the
highest
growth
in
PAT.
However,
Idea
Cellular
would
be
worried
about
the
reduction
in
data
ARPU
(q-­‐o-­‐q
basis),
which
is
clearly
not
the
trend
for
the
industry
nor
a
healthy
sign
for
the
future.
RCOM
showed
a
healthy
net
add
in
subscribers,
an
industry
leading
“realization
per
voice
minute”
(contrary
to
expectation!)
and
manages
to
retain
its
lead
with
the
highest
total
3G
subscribers
among
all
the
operators.
However,
with
absolutely
no
network
expansion
(new
sites)
in
the
last
quarter,
clearly
the
operator
is
not
displaying
much
aggression
for
the
coming
quarters.
Lastly,
while
service
innovation
is
not
a
quarterly
index
for
measurement
of
performance,
it
definitely
serves
the
purpose
of
showing
the
operator’s
mindset.
Operators
globally
are
getting
active
in
their
tussle
for
consumer
mindshare
with
the
new
age
companies
(“OTT”
players),
either
by
collaborating
or
competing
depending
upon
market
conditions
and
individual
strategy.
However,
it
was
surprising
to
note
an
exclusion
of
any
mention
around
such
activity
from
the
reports
of
both
Idea
Cellular
and
RCOM.
Airtel
on
the
other
hand
lists
several
new
initiatives
taken
over
the
quarter
some
of
which
are
in
the
space
of
collaborating
/
competing
with
the
OTT
companies.