By Nirmal Bang

In line with the robust growth witnessed over the past few months, Indian Telecommunications sector saw a record addition of 19.01 mn subscribers for the month of December 2009. Launches in new circles by incumbent players and the entry of couple of new entrants boosted the subscriber addition. The number of telecom subscribers in India increased to 562.2 mn at the end of December-09 from 543.2 mn in November-09. This reflects a growth rate of 3.5% which surpassed the growth witnessed any time in the current fiscal. This increased the overall Tele-density of India from 46.32% to 47.89% over last one month.

The increase in the subscriber numbers was led by wireless segment which saw the subscription figures increase by 19.1 million to 525.15 million at the end of December-09. This increase represents a growth rate of 3.78% MoM. Wireless Tele-density now stands at 44.73%. The number of subscribers for wireline segment continued to fall from 37.16 million in November-09 to 37.06 million at the end of December-09. Wireline Tele-density declined to 3.16% at the end of December-09 as against 3.17% in November-09.

Bharti Airtel remains the market leader with over 121 million subscribers. But its market share reduced from 21.9% in November-09 to 21.7% in December-09. Reliance Communications has maintained its position of being the second biggest player in terms of subscriber base by addition of 2.81 mn subscribers to reach 94.96 mn subscribers at the end of December-09. Vodafone Essar with 91.4 mn subscribers surpassed BSNL in terms of overall subscriber base in December-09. BSNL has been losing customer base because of the decline in the wireline segment which forms over 30% of BSNL’s subscriber base.

Tata Teleservices added 3.36 mn subscribers in December-09, the highest compared to any other players. It achieved a share of 17.6% in new subscriber additions and outperformed Idea Cellular in terms of subscriber base. At the end of December-09, Tata Teleservices had 58.43 million subscribers as against 57.61 million subscribers of Idea Cellular. The low cost tariff schemes launched by Tata DOCOMO have enabled it to garner a substantial chunk of new subscriber additions. Aircel with its operations in 17 circles have been steadily growing its subscriber base at a growth rate of more than 5.7%.

The month of December saw launches in new circles by established players as well as launch of services by a couple of new players. Idea Cellular achieved pan India presence through its final launch in North East Circle. On the other hand, Sistema Shyam Teleservices increased its presence by launching wireless services in Haryana, Maharashtra and Mumbai Circles. Two new telecom players made an entry into the wireless space. S Tel Private Limited, a JV between Siva Group and Bahrain Telecommunications Company has acquired licenses and spectrum to operate in six Category C Circles. It initiated its operations under the brand S Tel by launch of services in Bihar, Himachal Pradesh and Orissa and had 0.14 mn wireless subscribers at the end of month. On 3rd Dec., 2009 Uninor simultaneously launched its wireless services in Tamil Nadu, Kerala, Karnataka, Andhra Pradesh, UP East, UP West and Bihar (including Jharkhand) telecom circles. It added Orissa by launching wireless services in the latter half of the month. By the end of the month Uninor had secured over 1.2 mn subscribers from the eight circles where its GSM service was available, thus garnering 6.32% share of the total wireless additions for the month of December-09.

Category A and B circles continue to dominate subscriber additions, adding 13.65 mn subscribers (over 71% of industry net additions). Share of additions for category C circles increased from 13.81% in November-09 to 16.59% in December-09.

The growth phase witnessed in Indian Telecommunication Industry has caused the various players experiencing substantial addition in their subscriber base over the last fiscal. However, this subscriber addition has not been entirely transformed into revenue growth due to the price cuts resulting from a price war initiated by the new entrants. Despite this Bharti Airtel due to its brand image and reach remains in a strong position and has been relatively less impacted than its peers.

Bharti Airtel has been able to maintain its EBITDA margin in the range of 39-41% in spite of the ongoing price war. On the other hand, Idea Cellular and Reliance Communication have seen their EBITDA margins decline by more than 300 bps over the last two quarters. All the players suffered a dent in their PAT margins.

Launch of low cost tariff schemes by the new entrants in a bid to grab market share from incumbents and a probable increase in churn rate after implementation of mobile number portability by the fiscal end will put further pressures on the margins and profitability. On 2nd February 2010, Fitch revised its rating for Indian Telecommunication sector from ‘stable’ in 2009 to ‘stable to negative’ for 2010 due to stiff competition and a faster than-expected decline in tariffs, which has impacted revenue and profitability. Fitch is of the opinion that the falling call rates won’t be offset by the minutes of usage in the medium term and the revenues will decelerate sharply for major operators. Fitch envisions further decline in EBITDA margins in the upcoming quarters.

Over the past four months, wireless segment has witnessed an increasing addition of subscribers every month while adding record 19.1 million wireless subscribers in December 09. This growth was achieved by increasing addition by incumbents and launch of services by new entrants.

The falling tariffs of the wireless services and the convenience of mobility which cellular services provide has caused more and more subscribers opting out of fixed line services. For the month of December-09, while BSNL achieved a 3.42% M-o-M in wireless segment, it saw its wireline subscriber base being reduced by 0.12 million.

Bharti Airtel maintains its market leadership position with a market share of 21.7%, but has been losing its market share over the past few months. Vodafone Essar surpassed BSNL in terms of market share in December-09. Similarly Tata Teleservices has outdone Idea Cellular with respect to the overall subscriber base. New entrants are also causing a dent in the market share of established players like Bharti Airtel, Reliance Communications and BSNL. The top three players together own more than half of the overall telecom subscribers.

Market Leader Bharti Airtel clocked a growth rate of over 38% y-o-y. After two quarters BSNL recorded an increase of over 2 million subscribers. Aircel had a M-o-M growth rate of 5.69% while it achieved a growth of 93% y-o-y. On m-o-m basis, Tata Teleservices had a growth rate of over 6.2%, supported by low cost tariff schemes.

Tata Teleservices had a declining rate of share in net addition over the last few months. It saw a reduction in its share of net additions from 18.8% in Nov-09 to 17.5% in Dec-09. As against addition of 2.56 million subscribers in November-09, Idea Cellular had a dismal performance in December-09 wherein it added just 1.71 million subscribers. On the other hand, BSNL increased its subscriber additions from 1.35 million in November-09 to 2.08 million in December-09. This offset the reduction in wireline subscribers of BSNL to some extent.

Over the last year, major chunk of new subscriber additions have been from the Circle C and rural areas characterized by low usage customers. This along with the falling tariffs due to the ensuing price war has resulted in declining average revenue per user as well as minutes of usage per user. Though the rate of decline of minutes of usage per user has reduced due to falling tariffs, average revenue per minute still continues to decline. It has fallen from Rs. 0.56/min to Rs. 0.52/min which is putting further pressure on the margins and profitability.

The stock prices of all telecom companies have partially recovered after they plunged in the month of November following the tariff war and increasing competition. However, still the telecom stocks are trading at a huge discount to their historical levels. Looking at current prices, Bharti Airtel offers good potential upside in near to medium term.