The XLRI Student Fund Telecom SectorIndustry Research Report # 1July 2015Avinash Upadhyaystudentfund@xlri.ac.inavinash.upadhyay@astra.xlri.ac.inThe XLRI Student Fund 1Sector outlookThe XLRI Student Fund 2Performance of Big Three operators In FY15, Idea and Bharti Airtel showed outstanding performance with yoy revenue growth of 19% and 7% and PAT growth of 62% and 91% respectively The spectrum auction in 2015 boosted industry consolidation towards the three operators (Idea, Vodafone and Bharti Airtel)Data to be major driver of revenue Constant increase in blended Revenue Per Minute (RPM) has been reported in the sector, owed to higher share of data Data continues to report about 70-100% growth yoy majorly driven by 3G data subscriber growth All major telecom operators have been investing heavily in data infrastructureCompanies in the sector are shifting towards Capex Competition Model Telecom players in India have maintained a lower Capex / Sales ratio when compared to other telecom players in South-east Asia region With investments of Reliance Jio to create a parallel data network along with new 3G spectrum, other incumbent players (Bharti and Idea) would be forced to increase their network investmentsReliance Jios entry Reliance Jio would open a new household broadband stream in the country which has a significant potential to create value in next three to five years. However its effects would be limited on an immediate basis. Voice would exist as a complementary component rather than being a primary differentiatorRegulatory announcements expected Government is expected to announce spectrum sharing and trading guidelines in FY16 which will lead to further consolidations towards the incumbent players Government may also put additional blocks of 5Mhz spectrum in the 2100MHz band (released by the Defence industry earlier) for auction in the next 12-18 months. TRAI is expected to release consultation paper on net neutrality in 1H16 which will the issue that had gained significant traction on social mediaValuations Bharti can be the best pick in the telecom sector. It is expected to be the biggest beneficiary of the consolidation expected inthe near future Ideas cost control is best among its peers. Higher volumes and data growth would alleviate the the impact of lowered voice RPMCompany Subscribers (mn) Market shareBhartiAi rtel 228.3 23.5%Vodafone184.6 19.0%Idea159.2 16.4%Rel i ance109.8 11.3%BSNL82.0 8.4%Total (top 5) 763.8 78.5%Total (all players) 973.3 100.0%Telecom sector - Subscription dataThe XLRI Student Fund 3Wireless market share (based on number of subscribers as of May 2015)Top 5 wireless players (as of May 2015)Telecom subscription data (as of May 2015)Source: TRAI databaseParticulars Wireless WirelineTotalsubscri bers (mn) 973.4 26.4Urban subscri bers (mn) 558.8 21.4Ruralsubscri bers (mn) 414.6 5.0Overal ltel edensi ty 77.5% 2.1%Urban tel edensi ty 143.6% 5.5%Ruraltel edensi ty 47.8% 0.6%Broadband subscri bers (mn) 85.2 15.523.5%19.0%16.4%11.3%8.4%8.0%6.4%4.8%2.3%Bharti Airtel (22.9%)Vodafone (18.5%)Idea (15.1%)Reliance (11.9%)Aircel(7.9%)BSNL (10.1%)Tata (6.9%)Telewings (4.2%)Others (2.5%)Jargon busterThe XLRI Student Fund 4 ARPU: Average revenue per user per month, computed by dividing total telecom operations revenue for the relevant period by average customers and dividing the result by the number of months in the relevant period Voice ARPU: Computed by dividing total voice revenue for the relevant period by average customers and dividing the result by the number of months in the relevant period Churn: Computed by taking average monthly disconnections divided by opening monthly subscriber base in the relevant period; expressed as a percentage MOU: Total minutes of usage; calculated as sum of all incoming and outgoing minutes used on the access network by all customers in aggregate ARPM: Average revenue per minute; calculated as ARPU divided by the average voice usage customer per month VAS: Value added services, include SMS, MMS, caller tunes, voicemail services etc LTE: Long-Term Evolution, commonly marketed as 4G LTE VoLTE: Voice over LTE EBITDA: Earnings Before Interest ,Tax, Depreciation and Amortization EBIT: Earnings Before Interest and Tax (operating profit) ROTC (pretax): Return on tangible capital, calculated as EBIT/tangible capital Tangible capital: Net fixed assets + net working capital EPS: Earnings Per Share WASO: Weighed average shares outstanding PAT: Profit After Tax P/E: Market Price / EPS of Trailing Twelve Months BVPS: Book value per shareDisclosuresThe XLRI Student Fund 5General disclaimer This report has been prepared by The XLRI Student Fund and is meant for sole use by the recipient and not for circulation The document at best represents the opinion of The XLRI Student Fund The information and opinions contained herein have been compiled or arrived at, based upon information obtained in good faith from sources believed to be reliable Such information has not been independently verified and no guaranty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness All such information and opinions are subject to change without notice This document is for information purposes only Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as an offer or solicitation of an offer, to buy or sell any securities or other financial instruments