Observations - (tele)competence

Observations (TELE)COMPETENCE Friday, January 26, 2007

“Hope…can’t substitute Reason.”

Readers of newspapers in India, of late, have had to deal with a liberal dose of news coverage on the Hutch stake sale. The stake sale has suddenly put the spotlight on the Indian telecom sector. Investor interest has picked up drastically, with intense speculation on how the Indian telecom landscape could be altered, should the stake sale go through successfully. In this issue, I take a look at why I, as an investor, ought to take a closer look at the Indian telecom market. I adopt a macro view, with a liberal sprinkling of numbers. _____________________________________________________________________________________

The BIG guys I will begin by looking at the ‘developed’ nations first. This will put things in perspective and also assist us in appreciating the situation closer home better. TABLE 1

Population (Mn)

USA 298

UK 61

Japan Germany 127 82

Telephone - Main Lines (Mn)

268

33

59

55

% of Population

89.8

54.4

46.1

66.8

Telephone - Mobile (Mn)

219

61

95

79

% of Population

73.5

100.8

74.4

96.1

Total (Mn)

487

94

154

134

163.3

155.1

120.5

162.9

Penetration %

Labor Force (Mn) Penetration %

GDP Real Growth Rate %

152

30

66

44

321.7

309.3

231.1

307.5

3.4

2.6

2.8

2.2

Source: Culled from various websites; Mn stands for Million; Population figures are estimates as of July 2006

The above table captures the level of penetration, or, the extent of telecom usage in the countries covered. A glance at the penetration levels shows that in each of the developed country, the extent of telecom penetration is well over 100%. This essentially means that there is more than 1 telecom connection for every individual in the country. The levels indicate a degree of saturation in these markets, where the telecom companies are now chugging along unspectacularly, with most of the growth seen in the decades past. For the companies, and Hemant Sreeraman ([email protected])

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Observations (TELE)COMPETENCE Friday, January 26, 2007

“Hope…can’t substitute Reason.”

investors, the penetration levels mandate a look elsewhere around the world, to grow at near historical growth rates. Now, not everybody in a country will be employed. So I have included the Labor Force, as a proxy for employable populace. Here again the findings are not surprising. Assuming that all the telecom connections are owned by the Labor force alone, an unlikely event, the penetration levels go up even further. Where will further growth come from? I have introduced the above exposition to provide a background of the interest surrounding the Hutch sale. Vodafone, seeing growth slowing down, is now looking elsewhere to keep shareholders happy. It has a stake in India’s largest GSM mobile service operator, Bharti Airtel and is hungry for more. Now let’s try to ’see’ what Vodafone saw…

The India story Now I turn my attention to the crux of this article. The Indian telecom market. I present below a table comparing India to its other ’BRIC’ peers; Brazil, Russia and China. TABLE 2

India 1,100

China 1,314

Brazil 188

Russia 143

Telephone - Main Lines (Mn) % of Population

50 4.5

350 26.7

42 22.5

40 28.0

Telephone - Mobile (Mn) % of Population

69 6.3

437 33.3

86 45.8

120 83.9

Total (Mn) Penetration %

119 10.8

788 60.0

129 68.4

160 112.0

Labor Force (Mn) Penetration %

509 23.4

798 98.7

96 133.5

74 216.7

8.5

10.5

3.1

6.6

Population (Mn)

GDP Real Growth Rate %

Source: Culled from various websites; Mn stands for Million; Population figures are estimates as of July 2006

One couldn’t have asked for a simpler table to stare at. I have juxtaposed India and China to drive home the huge difference in the telecom area (too…). Hemant Sreeraman ([email protected])

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Observations (TELE)COMPETENCE Friday, January 26, 2007

“Hope…can’t substitute Reason.”

One can see that India, which has 8 times as many people as Russia, has roughly 40 million fewer phone connections. Also, each of the BRIC countries, barring maybe Brazil, are growing much faster than the developed nations. The table shows why India is the most attractive market to be in. Even the penetration levels at the Labor Force level brings out India’s relative attractiveness. Penetration levels, are among the lowest in the universe covered. A 11% penetration level merits a real close look. What could be the reasons behind this? Could it be the Per Capita GDP? Lets take a look. TABLE 3

GDP Per Capita (in $; PPP)

USA 43,500

UK 31,400

Japan 33,100

Germany 31,400

GDP Per Capita (in $; PPP)

India 3,700

China 7,600

Brazil 8,600

Russia 12,100

PPP stands for Purchasing Power Parity

Clearly, one of the reasons that somewhat explains the low penetration levels is India’s relatively poorer GDP Per Capita position compared to others. But China, whose GDP Per Capita is about twice that of India’s has over 6 times India’s penetration levels! An opportunity? I present below a table which illustrates the scorching pace of growth witnessed in subscriber numbers in India. Tariffs have fallen over the years, but the superior volume growth has resulted in companies posting fantastic results. TABLE 4: ALL INDIA SUBSCRIBER NUMBERS

2006 105

2005 59

Y-o-Y Grow th %

80

57

5 Year CAGR %

81

Subscribers (Mn)

2004 2003 2002 2001 37 22 10 5 71

109

91

Source: COAI

In conclusion I believe herein lies the big opportunity. While it is foolish to expect India’s GDP Per Capita to reach China’s levels anytime soon, India’s superior GDP Real Growth Rate (8.5%) compared to other developed countries, positions India as a very attractive investment destination in telecom. The babudom in India notwithstanding, the market is too juicy for companies to not step in. Hemant Sreeraman ([email protected])

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Observations (TELE)COMPETENCE Friday, January 26, 2007

“Hope…can’t substitute Reason.”

The India telecom market has been growing at a frenetic pace over the past 5 years and I think it will continue to do so in the coming years. There are some grey areas that warrant investor attention. One is the subscriber numbers. Companies have their own definitions and interpretation of ‘subscribers’, which may be different from the general concept of ‘subscribers‘. I wish companies, in addition to providing prepaid and post-paid customer figures, also provide the ‘active’ and ‘inactive’ customer figures. This will go a long way in critically appreciating a company’s actual position vis a vis its claims. Maybe there is a strong reason for companies to not report this explicitly! The ultimate winner in the Hutch battle should at least get some head start into the lucrative Indian market, although there might be other issues to contend with. The recent decision by TRAI (Telecom Regulatory Authority of India) to slash roaming rates comes as a boon to customers. With increasing competition, customers like you and me can expect prices to go down. However I feel there isn’t much leeway from here on, on the pricing front. Economies of scale will assume paramount importance in deciding the Indian telecom pecking order. Investing in this sector seems a foregone conclusion. India has a long way to catch up with the big guys and should slowly get there, of course, with some help from the government along the way. Also as the industry matures I feel consolidation will be inevitable, as companies gun for the Holy Grail - Economies of Scale. Should this happen, there might be only 3 to 4 major players in the market. Till that time, investors could do well to look closely at this sector and think about participating in the India telecom growth story.

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**************************************************************************************************************************** Disclaimer: This article is meant for information purposes only.

Hemant Sreeraman ([email protected])

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