Sustainable growth of Indian telecom sector and learning from China

Abstract

The telecom sector in India seems to be at the verge of a great transition. A great deal of merger and acquisition transactions are expected to happen in the sector owing to the following reasons • Foreign companies and funds are favourably inclined towards regarding the Indian telecom sector and are waiting to invest in the sector for a greater return as compared to their mature domestic returns • Parallel to the next level of growth in the sector, some technological (especially 3G) shifts are expected to happen; Indian companies would invite foreign partnerships to assist them in this shift • Given the current context, greater potential for growth lies in the consolidation and achieving synergies to prepare for the next level of reach to the consumers Valuation of telecom companies have thus become an important event in the Indian Telecom sector. India, as a nation could take several examples from China in terms of the economic activities. Telecommunication is not an aberrant sector and therefore a prudent valuation process should consider China’s experience combined with Indian nuances in arriving at the evaluation methodology. A comparative study of China and India reveal that China’s experience could be best used in determining a rough growth rate for the Indian telecom sector whereas for determining the final value of a company, the business model of the company need to be carefully looked at. For estimating the profitability of individual companies the following categorizations are recommended. I. Categories based on technology and service provided a. Pure play GSM mobile b. Pure play CDMA mobile c. Pure play fixed line or basic service operator (BSO) d. CDMA based mobile and fixed line II. Companies with NLD/ILD license versus companies without NLD/ILD license For estimating the growth rates of individual companies the following categorizations are recommended. 1. Companies which have broadband service in their business portfolio versus companies which don’t 2. Companies which are predominantly servicing to category B and C circles versus companies which aren’t The growth drivers in Indian telecom industry comprise of falling minimum subscription costs, expanding network coverage area and increased interest in technology among consumers. These factors will result in robust sales growth for all the telecom operators. A particular company’s above or below the average performance will depend on the crux of operation for the company most of which will be captured in the categorizations listed above.The sector is identified to be poised in a very good inflection point. There are several changes that are awaited to happen, prominent of which are – • Mobile number portability • 3G technology implementation • Convergence of telecom, internet and television businesses These factors are expected to increase the competition in the sector. Convergence will go one step ahead to introduce competition among players in different sectors. The expectation that VAS (Value Added Services) will play the main role in enhancing revenues and market shares implicitly makes it important to study convergence and its impact on different players during valuation. To conclude the valuation of a telecom operator in India the following four factors are important – General industry growth trend for which China presents a good example, presence in category B and C circles of operation (B & C circles are expected to show a higher future growth rate), provision of VAS (value added services) through broadband/internet and possession of NLD/ILD licenses (the licenses make the costs for providing service cheaper for operators ensuring greater profit margin)