The Indian telecom sector has come a long way since its liberalisation, which began more than a decade ago. Today, with close to 190 million subscribers, the Indian telecom industry is rated as the second largest telecom market in Asia.
The industry has witnessed exponential growth in the last few years with subscriptions growing at a compounded anuual growth rate (CAGR) of 32 per cent since 2000 and mobile telephony surging ahead at a CAGR of close to 90 per cent. The fixed line segment, on the other hand, has grown at a CAGR of only 10 per cent over the same period.
Ernst & Young has made projections for the different segments of the telecom market. We bring you excerpts from the report “From Emerging to Surging: India Telecom 2010″…
Future projections
Indian telecom market ?? Revenue
The teledensity is likely to reach 41 per cent with a total subscriber base of 485 million by 2010, translating into a CAGR of 27 per cent. Fuelled by a growing subscriber base, the Indian telecom services revenue is estimated to reach $35 billion in 2010 from the present level of $20 billion. At the 2010 level, telecom revenue as a percentage of GDP would be approximately 3.6 per cent, which is in line with other mature markets.
Mobile segment
By 2010, the subscriber share of mobile telephony is estimated to be at 85 per cent of the Indian market, up from 73 per cent today. The mobile subscriber base will reach about 410 million, driven by affordability and increased network coverage. However, fixed lines are expected to see only a 50 per cent increase and operators would increasingly focus on the corporate market.
The tariff levels are likely to reduce further. Simultaneously, entry-level handset prices are expected to fall to the $10 level due to higher sales volumes and shifting of the equipment-manufacturing base to India. Network coverage by population will also go beyond 75 per cent by 2010 with 100 per cent coverage in urban areas and 65 per cent in the rural areas.
To meet the mobile network needs of the future, the industry requires an estimated capex of $30 billion in the period 2007-10. Of this, an estimated 75 per cent will need to be invested in rural India.
Urban landscape
While the metros have nearly scaled the 60 per cent penetration levels, urban India as a whole will continue to show significant subscriber uptake. The overall urban teledensity is projected to reach close to 87 per cent by the end of the decade with urban mobile teledensity reaching 72 per cent.
The average revenue per user (ARPU) is expected to fall by 34 per cent in the next four years with the fall in post-paid ARPU being less than in prepaid ARPU.
The introduction of 3G services in India will contribute over 30 per cent of the revenues in the urban market. In addition, high broadband penetration growth will see the emergence of applications such as internet protocol television (IPTV) and triple play.
Rural landscape
The rural markets are projected to lead the way by contributing just over 50 per cent of the net subscriber additions by 2010, by when rural penetration is projected to increase to 21 per cent. This will be driven by the availability of low-cost handsets and affordable tariff options with the ARPU composition in this market being primarily voice and SMS based. Also, prepaid mobile connections will dominate.
Sharing of passive infrastructure will be a key cost-control strategy in providing rural connectivity. With 35 per cent of the towers being shared, third-party infrastructure sharing is crucial. This number is expected to rise beyond the 75 per cent mark by 2010.
There may also be an appearance of the service-based operator concept. Some challenging rural markets may compel operators to set up a common network with multiple operators selling Erlang capacity to the market by 2010.
Internet and broadband ?? Key growth drivers
This segment is slated to see significant growth in the coming years. The number of internet users will grow at a CAGR of 20 per cent to reach 143 million by 2010. The broadband segment, which currently has less than 3 million subscribers, will also witness growth during this period, primarily due to the availability of commercially viable devices and alternative last mile technologies.
Government initiatives such as those undertaken in Andhra Pradesh will help foster growth of this sector. The Universal Service Obligation (USO) Fund will also act as a driver of rural broadband.
Operators
The market will witness eight telecom operators competing nationally by 2010, with some of them focusing on niche market segments.
They are likely to have strong financial backing and will be focused on capturing a large portion of the market. By 2010, five major players will account for 79 per cent of the subscribers vis-? -vis four players today accounting for close to 85 per cent.
EBITDA margins, which will be under 40 per cent by 2010, are not likely to fall despite falling ARPUs and increasing cost of retention as volumes will ensure EBItDA sustenance. They are also not likely to match the EBITDAs of international operators with similar penetration levels.
By 2010, the Indian telecom market (at 45 per cent penetration) is likely to see tapering growth projections. Indian operators will then enter overseas growth markets to ensure sustained shareholder value growth.
Equipment manufacturing
Although the equipment manufacturing sector has not been able to keep pace with telecom growth in India, the year 2006 witnessed immense growth fuelled by numerous equipment tenders.
Most of these have provisions which encourage domestic production and help local players to achieve a base-level scale and match the international market demand. For instance, 15.5 million lines of BSNL’s 60 million line tender were reserved for ITI, a local equipment manufacturer.
It is estimated that the cumulative capex by telecom companies will be over $30 billion in the next four years. Moreover, central and state government duty and levy exemptions along with single-window clearance and 100 per cent FDI will trigger growth.
This sector is expected to attract about $1.5-$2 billion in the next two to three years. Several multinationals have set up shop in India, driven by the huge domestic demand, investor-friendly policy measures, and other factors that make India a low-cost manufacturing base.
Value-added services
The value-added services segment (VAS), with total revenue in the $900-$1,000 million range, has acquired a separate identity in the Indian telecom space.
In the urban market, premium SMS and ringtones will become increasingly innovative while the rural market will focus on commerce and knowledge. Over 300 firms, estimated to earn between $5 million and $50 million with an EBITDA of 15-35 per cent, will enter the segment.
The VAS market is expected to evolve fast, with a proliferation of developers and services in 2007-08 followed by consolidation.
Challenges ahead
Some of the key challenges are as follows.
Spectrum: Urban subscriber growth and lack of spectrum have led to significant network congestion and quality of service issues. This is compelling operators to increase the radio tower density in a falling ARPU regime, which is challenging.
Pressures on EBITDA: EBITDA margins in the country are closer to 35 per cent as compared to 50 to 60 per cent in other Asian markets with fewer subscriber numbers. Tariffs need to be maintained while increasing the subscriber base as any significant tariff reduction will adversely affect margins.
Handset prices: Despite a fairly liquid grey and second-hand market, handset prices are a key hurdle to growth.
Penetrating rural India: The major stumbling block in reaching these areas has been the high cost of building rural infrastructure versus the low revenue opportunity. Network management is a challenge in the difficult terrain and erratic power supply compounds the problem. However, initiatives like the USO Fund, passive infrastructure sharing, and managed network services will help address these issues.
High regulatory levies: The total levies in the sector, including licence fees, service tax and spectrum charges, were in the range of 15 to 24 per cent of gross revenue in 2006 as opposed to less than 3 per cent in China. A reduction in overall regulatory levies and migration towards a single-levy system will fuel growth and help operators manage margins in a falling ARPU regime.
Clearly, India is headed towards being one of the largest telecom markets in the world by 2010. However, these challenges need immediate attention so that the sector can sustain its exponential growth.
