INDUSTRY ANALYSIS AND VALUATION - Telecommunication - INDIA

Assignment of :
Akanksha Mittal- PGDIE-38,NITIE
                   and
Ashish Anand- PGDIM-15, NITIE  

Class of 2008-2010

 

 Industry Classification

Life cycle position

The Telecom Industry in India is in its growth stage. Telecom is one area in India where significant improvements have happened. Now the private operators also are providing services which is giving rise to more choice.
The Telecom sector in India is experiencing a stage of Mature Growth. The growth in sales is still above normal. Due to rapid growth of sales and profit margins, new players are getting attracted to the Industry giving rise to more and more competitors.This is leading to an increase in the level of supply and lower prices. Profit Margins will start declining over time.
The new players in the industry are:
Datacomm
S Tel Ltd
Unitech Wireless Ltd
ByCell Telecommunications
Swan Telecom Pvt. Ltd
Alcatel Lucent
ATC Tower Company of India Pvt. Ltd.
Aster infrastructure Pvt. Limited
Nokia Siemens Networks

Business cycle

Telecom is one area in India where significant improvements have happened. Even in the current scenario, where most of the industries are suffering due to global economic recession, telecom is one sector which is still going strong.
In February 2009, total subscriber addition was 13.25 million. Though this was marginally lower than 15.35 million additions in January.
The total subscriber base in the country now stands at 375 million, nearly 50% more than that a year ago.
  (Source: www.trai.gov.in)

External Factors

–Government & Social

Telecommunications in India were introduced in 1851 when the British Raj first laid telegraph lines near Calcutta. Later, in 1881, the telephone was invented by Graham Bell and British firms introduced what was then known as POTS (Plain Old Telephone Services) into the colony. By the time India achieved independence in 1947, the country had 321 telephone exchanges in urban areas with a tele-density of just about 0.25 phones per 1000 people. Telecommunication has been a state subject since independence, especially till the mid 80s, when the government controlled all the aspects of the sector through the ministry of Posts and Telegraphs as a natural monopoly. Telephones continued to be looked upon more as a luxury than as an essential means of communication that could benefit business and administration. The result was a concentration of telephones around urban and metropolitan centres. Policy makers however, shifted their stand on telephones being a luxury rather than an essential infrastructural tool for efficient business and economic growth in the seventh 5 year plan (1985 to 1990). Thus began the real development of telecommunications in the country. After a long and extended debate over the ineffective development of the telecommunication in the country, the Public Accounts Committee of the Lok Sabha recommended a complete overhaul of telecommunications and a long sought after reorganisation was undertaken in 1986 to split the public, postal and telecom operations into separate departments.

The growth of telecommunications in the real sense began with the late prime minister, Rajiv Gandhi initiating the liberalisation of the sector firstly by demonopolizing telecom equipment manufacturing in 1985. This allowed private firms to manufacture telephones, while the Department of Telecommunications (DOT) licensed switching technology from various foreign firms. A simultaneous thrust was provided to the national development of telecommunications equipment by hiring non-resident Indian engineer, Satyen
(Sam) Pitroda to start the Centre for Development of Telematics with the goal of designing an indigenous digital telecommunication switch, whose manufacture would be licensed to local firms.

When actual reforms were initiated in 1994, there were three incumbents in the fixed service sector, namely DoT (Department of Telecom), MTNL and VSNL. Of these, DoT operated in all parts of the country except for Delhi and Mumbai while MTNL operated in Delhi and Mumbai, and VSNL provided international telephony.An essential part of the entire game of privatisation is the setting up of tariffs in order to be beneficial for all the players. This task has been entrusted by the government to the newly formed body for the purpose, The Telecom Regulatory Authority of India (TRAI). TRAI issued its first directive regarding tariff-setting following National Telecom Policy of 1994 aimed at re-balancing tariffs and to usher in an era of competitive service provision. 

As the NTP 1994 did not fulfil many of the important areas, so TRAI introduced a reformed policy in 1999, called the New Telecom Policy or NTP 1999. 

Telecommunication is one of the fastest growing segments in the country with the tele-density (number of telephones per every hundred people) reaching 14.40% at the end of July 2006, compared to 8.6% in Dec 2004. This was primarily because of the liberalisation of the sector by Government of India, which made telecom services readily accessible and affordable. This phenomenal growth in Indian telecom has drawn the attention of the world. 

–Technology

The latest technology in telecom is 3G. 3G is the third generation of tele standards and technology for mobile networking, superseding 2.5G. It is based on the International Telecommunication Union (ITU) family of standards under the IMT-2000.[1]

3G networks enable network operators to offer users a wider range of more advanced services while achieving greater network capacity through improved spectral efficiency. Services include wide-area wireless voice telephony, video calls, and broadband wireless data, all in a mobile environment. Additional features also include HSPA data transmission capabilities able to deliver speeds up to 14.4 Mbit/s on the downlink and 5.8 Mbit/s on the uplink.

Unlike IEEE 802.11 networks, which are commonly called Wi-Fi or WLAN networks, 3G networks are wide-area cellular telephone networks that evolved to incorporate high-speed Internet access and video telephony. IEEE 802.11 networks are short range, high-bandwidth networks primarily developed for data.

Service providers provide different services on networks. BlackBerry is the latest one.BlackBerry services bring together smart phones  and software services to provide customers with easy wireless access to email, phone, web and multimedia applications. At present, four telecom operators - Reliance Communications, Airtel, Vodafone and Tata Teleservices - are providing BlackBerry services. 

Introduction of new technology in Telecommunications Services Sector is always welcome by the customers since telecommunication has become the dire need of the hour. Hence new technology causes customer expansion and high profit margins.

-Demographics

The following demographic statistics are from the CIA World Factbook

Total Population

1,147.996 million (July 2008 est. CIA)

Rural Population

72.2%, male: 381,668,992, female: 360,948,755
Age structure:
0–14 years: 30.8%, male: 188,208,196, female: 171,356,024
15–64 years: 64.3%, male: 386,432,921, female: 364,215,759
65+ years: 4.9%, male: 27,258,259, female: 30,031,289 (2007 est.)
 The median age of Indians is 25.1 years.

The majority of the Indian population is in the age group of 15-64 years. Mostly users of mobile phones belong to this category of age. Hence, Indian holds a great potential market for telecom service providers. Even yuong generation of India is attracted more and more towards cell phones and this has become a trend and need of even small children in India. This assures a high growth in this industry in future.
Most of the service providers have covered majority of the urban population of India. But many far fledged villages of India still need to be connected through mobile phones. The untapped rural population of India is a huge proportion of the 72.2% total rural population of India. Also, the demand for telecom service in rural people is increasing day by day. This further ensures growth in the industry. 

Demand Analysis

- Real and Nominal Growth & Supply/Demand Analysis

Indian telecom continues to register a significant growth in the current fiscal year. This has been due to the impact of economic reforms and pro-active policies of the government. Today, Indian telecom network with about 364 million connections in October 2008 is the third largest in the world .Indian telecom has achieved another milestone as it has become the second largest wireless network in the world by surpassing USA. With the current pace, where about nine million telephones are being added every month, the target of 500 million connections by 2010 is well within our reach.

The total number of telephones has increased from 76.53 million on March 31, 2004 to 363.95 million on October 31 2008. While 94.63 million telephones were added during the twelve months of 2007-08, about more than nine million subscribers are being added every month during the current fiscal year. Tele- density has also increased from 12.7 per cent in March 2006 to 31.50 per cent in October 2008. Rural teledensity increased to 13.4 per cent in October 2008 with 109.05 million rural telephone connections. Urban teledensity on the other hand has been 74.61 per cent in October 2008.

The growth of wireless services has been phenomenal, with wireless subscribers growing at a compound annual growth rate (CAGR) of 87.7 per cent per annum since 2003. The share of private sector in total telephone connections is now 77.44 per cent as per the latest statistics available for October 2008 as against a meager 5% in 1999.

Rural telephones have gone up from 12.3 million in March 2004 to 109.05 million in October 2008 with a teledensity of 13.04%. The target of 100 million rural telephones by 2010 has been achieved well in advance.

It is also envisaged that internet and broad-band subscribers will increase to 40 million and 20 million, respectively, by 2010. As per the latest available statistics for September 2008, about 5.7% villages have broadband coverage and the number of rural broadband connections is 1.55 lakh.

Foreign direct investment (FDI) is one of the important sources to meet the huge funds that are required for rapid network expansion. The FDI policy provides an investor-friendly environment for the growth of the telecom sector. The policy of the Government of India is to strive to maximize the developmental impact and spin-offs of FDI. At present, 74% to 100% FDI is permitted for various telecom services. The total FDI equity inflows in telecom sector have been 1261 million USD during 2007-08.
The government is now looking forward to achieve the target of 600 million telephone subscribers by the end of Eleventh Plan and to achieve rural teledensity of 25% by means of 200 million rural connections at the end of 11th Plan. It is also envisaged that internet and broad-band subscribers will increase to 40 million and 20 million, respectively, by 2010.

Supply Analysis

–Degree of Concentration

Today, the telecommunications industry is a vast one with a large number of private players who are constantly bringing down the cost to consumers thereby making services more affordable and helping improve life in general and business in particular. On the Indian business scene are successful government owned institutions like MTNL and BSNL on the one hand, and even more successful and aggressive players like the Tata’s and Reliance on the other. Competition has just begun and is heating up every day with either lowering of tariffs or introduction of newer and improved services to keep a larger share of the market. Reliance, for instance, has been one of the recent, more aggressive players in the telecom business when it introduced a wireless phone in the market for as low as Rs. 500.    

–Ease of entry

Friction does exist between existing players and the newer entrants, as also between the providers of
services based on different technologies (CDMA Vs Cellular). The same needs to be resolved with government intervention through the regulator in order to further improve the services. The telecom sector today is not a small one and covers various services and many players within each service. One of the most vibrant developments in telecommunications has been Cellular telephony – a technology that gives us
the power to communicate anytime and anywhere. This segment, a part of the broader telecommunications industry, has today spawned an entire industry in mobile telecommunication. Mobile phones today are an integral part of growth, success and economic efficiency of businesses. The government in India has today
recognized, providing world-class telecommunications infrastructure as the key to rapid economic and social development of the country.

 

–Industry capacity

 Conservative estimates put a tag of a 3% increase in the growth of GDP for every 1% rise in the tele-density in the nation. Accordingly, this sector has received a great thrust from the government for investments and development.

Profitability

Increased FDI Flows
The Telecom sector is one of the largest attractor of Foreign Direct Investment in the country, accounting for almost a fifth of FDI approvals since 1991.

Heavy investment in Infrastructure
The cellular industry is responsible for the single largest chunk of investment by any individual industry.
The industry has already invested over Rs. 20,000 crores and is expected to invest even more in the years to come.

Revenue Generation for the Government of India
The cellular telephony sector is poised for big growth going forward provided the government controls the
sector and its players in a healthy manner. Basic and Cellular telephony form the back bone of communications in the country though the internet too has played a pivotal role. 


Employment Generation
As the number of licensees goes up and they start their operations with 77 networks on air, the employment opportunities in this sector will be huge.



Originally posted at http://knol.google.com/k/ industry-analysis-and-valuation-telecommunication-india Knol number 947