There’s bad news and there’s good news. Let’s take the bad first. The Indian telecom sector has been growing with hyper-competitive intensity over the past three-four years and regulatory uncertainty has impacted its outlook, profitability and financial strength, no arguments. It’s easy to explain why Bharti Airtel, the leader of the pack, has seen its stock under-perform significantly over this period. But all that is set to change, I think.
The good news is that the sector is at an inflection point and Bharti’s under-performance will be reversed in 2013. I have my reasons for this and will get to them shortly. But first, it would be pertinent to understand a little bit of Bharti’s background. Bharti Airtel, which has 30% of market share in revenues, is the dominant player in the Indian telecom sector and is likely to benefit the most from the changing outlook. A deeper look at some of the key issues that impact the sector and the stock would not be out of place here.
First, an improvement in the realisation rate, which has been under pressure, thanks to recent hyper-competition in Indian telecom, is now inevitable because the rates are at an inflection point and we can expect them to move up significantly over the next six-nine months. Why now? The telecom sector’s dynamics have changed irrevocably after the cancellation of the controversial new licences that were given in January 2008 and, more recently, the failure of the 1,800 MHz spectrum auction.
Operators can improve their realisation rates in three ways — they could rationalise their free or promotional minutes, introduce activation fees to reduce churn, or increase headline tariffs. I feel they will reduce their free or promotional minutes first because it is low hanging fruit, and activation fees and headline tariffs will follow as the industry consolidates further. Our analysis shows that voice realisation per minute (RPM) can move up 20% without any increase in headline tariff, that is, mobile operators can improve the yield on minutes by significantly reducing or eliminating promotional minutes.
I expect the mobile base tar