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(TELE)COMPETENCE
Friday, January 26, 2007
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.
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TABLE 1
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 1
(hemant.sreeraman@gmail.com)
Observations
(TELE)COMPETENCE
Friday, January 26, 2007
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.
TABLE 2
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 2
(hemant.sreeraman@gmail.com)
Observations
(TELE)COMPETENCE
Friday, January 26, 2007
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
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.
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 3
(hemant.sreeraman@gmail.com)
Observations
(TELE)COMPETENCE
Friday, January 26, 2007
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 pre-
paid 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 4
(hemant.sreeraman@gmail.com)