Sunday, March 8, 2009

Telecom Sector: 3G, WiMax & Number Portability

In the present times of economic turbulence in the global & domestic markets, hardly any specific sector has come out unscathed from the wrath of excessive pessimism and effects of slowdown. But one industry that has somewhat managed to scrape through amid the recent slowdown is the Indian telecom sector- which easily is one of the fastest growing industry in the world. Cellular telephony, in fact, forms a crucial part of the Indian infrastructure story which has been attracting large chunks of investments which can only go up with entry of new players and policies.

A Wireless Revolution:

Wireless telecom services can easily be the next big thing what with the lower Tele-density levels in rural & semi-urban areas, which still largely remains untapped. The new economic reforms, technological changes and policies led by the government has left open the door of hope for the Indian telecommunication sector in the form of 3G (third generation spectrum) technology. Though, this upcoming latest technology is moving forward at a snail’s pace and is struck by procedural delays. The government should revisit some of the pending issues faster with constant interaction with TRAI. New upcoming technologies like 3G services, WiMax, rural telephony, data services & Value Added Services will drive the growth prospects for the sector for the next few years at least.


Rumblings in the Telecom Sector:

The new restructuring changes in the Wireless world are set to sweep in the unusual changes in Telecom Services sector. The Indian telecom sector is still growing at a very fast pace with the total number of subscriber base crossing over 250 million mark; with a bounty of untapped rural population still in the fray as potential subscribers. It is no surprise than, that there are various rumblings in the telecom sector right from 3G spectrum allocation, WiMax, falling ARPUs (average revenue per user), tower infrastructure business, mobile number portability & price wars triggered by new entrants; which depicts the potential of high & continued growth rested in this sector in its foreseeable future.


What is 3G Technology?

3G spectrum is most widely heard term in the recent times used for the next generation of mobile communication systems. It provides access to a wide range of telecommunication services specific to mobile users by helping in providing faster data access and multimedia services through the mobile phones. 3G helps to simultaneously transfer both voice data and non-voice data. It also aids in accessing of video telephony. 3G is about better bandwidth and high speed transfer of data & internet browsing.

In India, State owned telecom companies BSNL and MTNL are the first two firms to get the 3G license. Whereas for firms in the private sector, an auction process would be conducted through bidding for acquisition of 3G spectrum.


How will 3G Technology bring in revolution?

The telecom operators are anxiously awaiting launch of 3G spectrum so that they can provide high-end services to its customers. 3G can be useful in various other ways like e-learning, stock transactions, and various other applications through wireless communication. It will serve as a one-stop entertainment source through mobile accessing for downloading purposes, e-mailing, mobile TV, ticker services, music, mobile games, movies, mobile banking, GPS, etc. while on a move.

The next generation technology will evolve into an entertainment devise, organizer, payment devise & serving other useful purposes needed to make life easy & comfortable by just logging in to ones mobile device.


Constraints in embracing 3G Technology:

The major deterrent for 3G technology may turn out to be expensive handsets with state of art features with 3G enabled technologies. Most subscribers in India still use mobile phones for voice services with low-end value providing handset features & hence bleaker multimedia functions.

The DoT insists in its policy that the base price for 3G spectrum allocation would be Rs.2,020 crore while that for broadband access technologies would be Rs.1,010 crore. But, the finance ministry has different views & is demanding for doubling up of such charges as prescribed by DoT. This would lead to increase in the cost of 3G services & make it expensive for the final consumers. This would also reduce the interest of bidders in the auction process & may yield poor response from the service provider companies including Internet service providers.

As per some reports from a few Telecom Analysts, during the current recessionary times, the absence of foreign bidders would further lead to rationalization of expectations of high bid realizations on the part of government entities & waning of interest in the auction process.


Delay in 3G Auction:

The spectrum demand for 3G licenses is expected to far outstrip its supply going ahead in to future. The telecom companies are required to buy the spectrum from the related government entities. Now, even the government is slowly realizing that spectrum allotments can garner smart revenues & should be considered as a valuable resource. This has prompted government entities to sell the spectrum at the highest possible prices.

This has led to a constant delay in the auction process of 3G spectrum. There are differences of opinions between various ministries of government organization on the real value of these spectrum resources, prompting a delay in its auction. Even the defense sector is playing its own role in complicating releasing of 3G frequencies from its control reasoning that some portion of the spectrum be reserved for their communication needs. Now, the auction is expected to take place early next fiscal year in the light of disagreements between various government departments on some key parameters.


Mobile Number Portability:

Mobile number portability (MNP) enables the subscribers of telecom services to retain their numbers while switching over from one network operator to other within the same service area on the look out for better product / service offerings. Analysts say that this policy may act as a customer deterrent for some operators whereas allowing the better service provider an opportunity of newer customers from the competitor’s camp.

The much awaited mobile number portability policy being in place is still to see the day light for the benefit of subscribers. As soon as the regulation comes into implementation, it will lead to further refinement of services & product offerings by various service providers, small and big. Customer relation & satisfaction will form a core part of company policies as sound services will lead to customer retention. Also, during such times, customer poaching from various competitors will also become common as subscribers could then shift to other service providers with the comfort of communicating with the same number & no need to change their old numbers while changing their service provider in the look out of better service & product offerings.

As per Telecom analyst GV Giri, “Only those incumbents who manage to win 3G license will emerge as winners, as they will be best positioned to grow their ARPUs exploit their existing infrastructure better and at the least, remain competitive in a MNP regime.”


Constraints in implementing MNP:

1) Gearing up present telecom infrastructure to suit changes in subscriber’s service provider for availing of the MNP facility.
2) Maintenance and updating of ported number database.
3) Recovering costs of porting from an individual network to another. During times of competition, the acquiring company may have to provide free portability service on the prospect of gaining new customer.
4) Operational challenges like a prepaid subscriber will not be able to transfer unused balance in their accounts to the other service network.


3G Technology vs. WiMax:

WiMax stands for Worldwide Inter-operability for Microwave Access. It is a digital communications system which enables wireless transmission of data. WiMax is predominantly used for fixed services. It is a second generation protocol which allows more efficient bandwidth use, interference avoidance, and is intended to allow higher data rates over long distances. Initially, WiMax is expected to be used for the fixed residential & enterprise broadband access in urban areas & than to large untapped rural parts India. WiMax networks, when deployed across, one can connect to the internet wireless from any point of the vicinity, even on the move.

Whereas 3G networks, on the other hand, offers its users various services like video telephony, voice calls, high speed internet and other advanced services while on a move. This technology provides more enhanced value services at lowered costs.


Review of recent Q3 Result’s of Telecom Majors:

Telecom major Bharti Airtel reported a growth of 26%. It witnessed a rise in net income from Rs.1720 crore in third quarter of previous year to Rs.2160 crore in the Q3 this financial year. The company added a substantial number of subscribers for this quarter under review, though there was a marginal fall in its ARPU.

Idea Cellular, an Aditya Birla Group company, on a standalone basis, reported a new profit of Rs.219 crore for the third quarter current fiscal, down 7.3% from Rs.236 crore same quarter previous fiscal. This drop in margin was witnessed on the back of increased overall income.

Reliance Communications, on the other hand, posted a mere 2.7% rise in profits in the third quarter this fiscal compared to the one in the last fiscal. Though, it witnessed a jump in the number of subscribers by 5.3 million users


GSM launch by Reliance Communications:

During the first month of calendar year 2009 Reliance Communications added 5 million (CDMA+GSM) new mobile users on the back of its recent GSM launch. With this the total number of subscribers for the company sums up to 66 million. The company has rolled out GSM services across 14,000 towns. The company has guided capex for FY10 at $3.2 billion.

However, I feel, Reliance Communications recent GSM launches & promotional offers should ensure reasonable growth in subscriber base & revenues in the near term, but it remains to be seen whether it can settle with higher growth in margins over a sustained period of time.



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16 comments:

Faisal said...

This is another nice article with detailed analysis...I wanted to ask how much of a positive impact of this do you see for VAS companies like OnMobile and Tanla?Do they stand to benefit equally from this growth potential?

BULLS said...

Dear Faisal,

Your Query on VAS companies & effects on them from the positive movements in the Telecom sector.


MY VIEWS ON VAS:

The Indian telecommunication industry is growing at a fast tick. As this growing market of telecom industry gets saturated, more and more competition will get intensified, which will put downward pressure on the pricing power of the service operators. With the onset of MNP likely in next few months, carrier operators will increasingly look for value added services in order to provide support & stability to their margins. There is no doubt that VAS services will derive equally fast growth as does the domestic Telecom sector.

The VAS industry will evolve rapidly with every development in sophisticated handsets, evolvement of rich content & new policies like MNP. VAS is currently a fast growing nascent industry thriving on growth potential of Telecom industry.


OnMobile Global is a leading provider of value added software products & services. The company offers a broad range of applications like voice portals, ringtone downloads, mobile radio, classified Ads, Contests, tele-voting, etc.

The company has a market reach of approximately 95% of Indian subscribers through various mobile operator networks. The company has also launched various mobile commerce applications like mobile ticketing, utility bill payment, etc.

The mobile Advertising markets is growing at an innovative & a very fast clip. Typically, this source of advertising is closing up with larger target audience with a wider reach. One such form of innovation is Caller Ring back tune, Ad Ring back tone, Caller Profiling, etc.

-BULLS

Faisal said...

Thanks Bulls for posting your views on VAS...OnMobile should do well as one of the leading VAS players and an Infosys management background sure does help...

mohd said...

Hello Bulls
Thank you so much for giving us
this detailed description and
future growth potential of VAS
companies. i would like to know
about Tanla. as per my knowledge
this company derive more of
revenues from abroad.recently
there was issue about share pledge
and hammered....lost >90%. is it
that fundamentals are poor or high
FII holding -sell off. please do
advise about medium to short term
future and valuations. thanx

mohit said...

Excellent article bulls,

one observation if I try to search your blog by typing stock-mkts.blogpost.com ....it would not find your blog even after trying complete adress it shows one on comment section on stockmarketguide but not your blog......I would say u can just write google to add your blog for search may be that can jump ur reader base ....and eventually more ppl will benefit from excellent articles you share with us

Shabu's said...

Excellent! Its a great experience reading your comprehensive topics.
Please let me know how u view Tanla Solutions and who all are the players other than Onmobile ?

Mahesh said...

BULLS

you analysis really captures once attention keenly.

Thanks for great article and spending time on it.

BULLS said...

Hello All,

REFERENCE : Query on Tanla

First of all, I would like to take this opportunity to thank my readers on this blog for their active participation though the ‘Comments’ section, especially, Faisal, Mohit, Mahesh, Mohd, Venu, Shabu and others whose names I may have missed mentioning over here. I appreciate your queries & appreciation posted from time to time which certainly encourages me to keep posting newer & better quality articles on every other occasion.

Above 2-3 readers have asked for my opinion on Tanla Solutions. So, over here I am trying to put up few paragraphs on Tanla Solutions with few details on the company’s business & operations:


BACKGROUND OVERVIEW :

Tanla Solutions caters in the space of telecom related infrastructure, products & services. The company has a wide presence in the UK market. It is one of the few companies providing solutions & products related to the wireless telecom space. The company has recently forayed into domestic market & plans to expand its market share over a period of time. The company has reported a tremendous growth over the years in this niche sector of operation.

BUSINESS OVERVIEW :

The company is involved in providing mobile content aggregation & various other solutions for the telecommunication industry. Operations related to content aggregation constitutes more than two-thirds of the company’s revenues. The company is also involved in products sales like messaging applications. Tanla’s platform provides number of VAS services like mobile commerce, mobile internet, video related chat, SMS, alerts, etc.

CONCERNS :

The company has expanded multi-fold over the last few years inducing rapid expansionary plans & that has led to jump in its costs & operating expenses. Most of the company’s revenues accrue from UK. The company may not be benefiting in a big way by recent depreciating in rupee, since it incurs a large part of its expenses in foreign currency terms. I also tried to find out data on Tanla promoter’s pledged share details but could not find any such disclosures from their promoter’s side.

Both OnMobile & Tanla Solutions are the leading companies involved in the Mobile VAS space. Both are good companies. But, I prefer business model of OnMobile in the space of VAS industry operations.

-BULLS

(NOTE TO MOHIT: Thanks for your keen observation on the blog's status in the 'Google's Search' list. I'll definitely look into it & try to sort out the problem. As of now, i am still exploring the advanced aspects related to blogging, since it is a bit new space for me. It will take a bit time to determine its reason.)

Faisal said...

Happy Holi to Bulls and all Blog Readers...

Tanla has infact come out with a release to BSE/NSE that it has not pledged any of its shares...

Also for the google search thing I believe you can always submit your blog to the google search engine...I think there is one such process...

Besides that I am sure the blog will find its way up in the search engine just on the strength of the class content provided...

BULLS said...

Very True Mr Faisal...

Thats what i acutually meant to say, on Pledging issue of Tanla shares by its promoters, when i said, "I also tried to find out data on Tanla promoter’s pledged share details but could not find any such disclosures (of share pledging in Tanla) from their promoter’s side."

Anyways, thanks for further clarification on the issue & more clarity. Also, thanks for your guide on listing on google's search list.

-BULLS

Altaf Rahman said...

WOWW. The article on telecom industry in India is like a must read for everybody to understand the sector basics.
I would like to add my own view to the article. India should allow 3g services ASAP as the same is already in use elsewhere. Many millions of NRIs are already using the services. Once 3G is allowed in India the families of NRIs living in India will buy them irrespective of cost and once the others see it in hands of NRI relatives they too will buy the sets and slowly the heat will catch up.

mohd said...

Hello BULLS
thank you for your comments and
advise about Tanla.sir it would be
more better to us if you could do
comparison about business model
and valuations.according to
management they are foraying into
domestic market more now.http://www.blonnet.com/2008/10/24/stories/2008102451720401.htm
and it seems that they also have
good business model and future.
but this kind of price correction
doesn't support that. please share
your concerns and advise about
investment in this counter. wish u
Happy Holi and nice day.

Anonymous said...

I have different view.Tanla solutions is not worth a buy.Onmobile is good company.But why would i invest in pure VAS players?? Bharti,Reliance communication have already ( or are planning) to have dedicated VAS segment.So it doesnt make sense.I would prefer complete package like Bharti or Reliance -- viz Core telecom,Telecom infrastructure(tower) & VAS services. I would rather not buy stocks like onmobile ( only vas services) or GTL infra( only tel infrastructure,ie towers).

So my logical conculsion invest in Rcom & bharti rather than bits and pieces.

Ashish said...

Excellent work BULLS.
I've couple of observations and thought to bring in everybody's notice.
1) Even though Onmobile has good prospects but major concern is it's valuation. It's still trading at P/E of 27 which is quite high in current market scenario. Any Selloff at this point will result in drastic fall in share price.
2) Apart from Onmobile and Tanla, there is one more company "Geodesic Ltd." which is trading at P/E of just 4 and has equally good prospects post 3G launch considering great product portfolio like Mundu application etc. Company has grown many folds in last couple of years (Sales up from 17 cr in 2004 to 255 cr in 2008, GrossPrfit from 11 cr to 155 cr in same period). And if it maintains same momentum, this is probably next multibagger.

Just food for thought.

-Ashish

BULLS said...

Very Nice additions & comments on VAS companies from above 2 readers - Ashish & Anonmymous.

Anonymous comment's regarding Telecom majors planning for thier own division related to VAS services, if that turns out to be true- it certainly is a food for thought. But, it shall take quite a while until these companies fully develop & operationalize in this space for integrated services.

Regarding valuations of Tanla & OnMobile, there is a peculiar gap in terms of their valuations. Markets already seem to have discounted some major bad news in Tanla's stock (which majority of the players are still unaware of) that reflects in the depressing PE valuations of below 5 for the company as against above average 23 odd levels PE for OnMobile.

-BULLS

Kumaran said...

Bulls, nice article. But one thing I want to mention here is, Anything which people find it as a "Luxury" would do well only during good times. Mobile VAS is a mobile "Luxury" which will do well during the bull market. Even if it does well financially during the bear market, investors usually tend to avoid these stocks presuming that people would avoid using extravagent mobile services.That might be the reason,VAS companies have come down so much in value even though they have announced decent results if not great. Remember, actual physical and financial growth of certain companies do not always translate into good stock price.