Cellular: Gaining Strength

Presently, India's teledensity is estimated at around 20% of
which mobile contributes the majority. And this has been possible due to life
time validity schemes, low cost of handsets (bundled as well as standalone), low
cost of services, low roaming charges, low STD cost, and a slew of value added
services which keep on attracting Indian consumers to get connected in large
numbers. Apart from this, the aggressive stand of operators in coming out with
new and low cost schemes have benefited not only urban population but also
rural.

It was also a landmark year for India as we overtook China in
terms of monthly net additions and this process will continue. The urban
teledensity is more than 50% plus whereas rural teledensity varies from 4-6%.
With vast discrepancies in rural teledensity and more than 70% of the population
residing in rural areas, India has a long way to go in terms of increasing
teledensity. So, the opportunity for operators is also immense.

In terms of net additions we have been adding 6-7 mn lines in
the second half which will continue for at least two to three years. FY '06-07
was also a landmark year as GSM base crossed the 100 mn mark in December 2006.

The Story in Numbers

India has emerged as the third largest market in the world after China and
the US. And even second position is not far off. In terms of mobile
subscriptions, India added around 66 mn lines ie 5.5 mn lines every month. India's
total mobile base in FY '06-07 stood at 156.97 mn from a base of 90.88 mn in
FY '05-06. In terms of growth, the industry witnessed 72.7% growth vis-à-vis
73.5% growth in FY '05-06.

GSM has been a major contributor in India's mobile success
story. In terms of break-up, GSM contributes around 77% whereas six CDMA
operators contribute around 23% share of the total mobile base. In toto, CDMA
operators contributed 36.65 mn subscribers whereas GSM operators contributed
120.32 mn. Majority numbers of CDMA came from sales of low-end handsets as large
number of handsets are now available for less than $50, within the bundled
scheme. All this led to CDMA operators adding around 1.5 to 2 mm subscribers
every month whereas GSM operators have been adding around 4-5 mn every month.
This can be attributed to large number of handsets available in the Indian
market with different variants like color, camera and music, making phones
attractive.

In terms of coverage, India has a long way to go. Indian
operators have covered almost all the census towns. As of now, we are present in
around 60% of the population and it is expected that with the USO obligation
plus aggressive strategy of operators wrt rural, we might cross 75-80% coverage
in terms of population in FY '07-08. If this happens, it would be a huge
achievement for us in the coming year.

On the subcribers front, Tata Teleservices and Aircel have
achieved three-digit growth with Tata Teleservices leading with a 136% growth
followed by Aircel with 111%. It is heartening to see that all the Top 5 players
have grown by more than 50%. In FY '07-08, there would be a drop in growth
numbers but India is well set to achieve 425 mn plus lines in 2010.

In FY '05-06 all the operators were neck to neck but the
scenario changed in FY '06-07. In terms of subscriber base, Bharti Airtel is
way ahead with 23.7% market share whereas other top operators like BSNL,
Reliance and Hutchison Essar are neck to neck with a market share between 16.8%
to 17.8%.

According to VOICE&DATA, the cellular services industry for
FY '06-07 is estimated at Rs 56,183 crore ($12.76 bn) and it grew at the rate
of 56%. Previous financial year the industry was estimated at Rs 35,994 crore
($8.2 billion). Even on the revenue front, Tata Teleservices led the table in
terms of growth. All the top operators have shown more than 45% growth.

In terms of revenue, Bharti Airtel is way ahead with 23.9%
whereas other operators are neck to neck with market share between 16.7% to
19.1%. This shows that Bharti's strategy clicked in the FY '06-07.

In the mobile space, we currently have twelve operators and they
have licenses for 150 circles, but there is demand for more as both Idea and
Spice are looking for expansion. Reliance is also planning to increase its GSM
circles. TRAI has recently floated a consultation paper that talks about number
of licenses in a particular circle. And it is expected to take care of the new
licenses. Hopefully, by the end of this year we might see expansion, once
spectrum is available.

The Policy

Last fiscal was important since subscribers went for a reverification
exercise, and it was a huge success. As per the directive after April 1, 2007,
if any subscriber number was found working without proper subscriber
verification, the service provider shall be required to disconnect such
subscribers and pay a penalty of Rs 1,000 per unverified subscriber. As per
industry estimate, operators were able to complete around 90-95% in the given
timeframe.

There was also a drastic cut on roaming and ADC charges. On
January 24, 2007 TRAI reduced the ceiling rates on all domestic roaming calls.
TRAI also announced reduction in ADC charges by Rs 1,200 crore from the existing
level of Rs 3,200 crore. The revision was announced on March 21, 2007. It is
also expected that international roaming calls within SAARC as well as other
countries are on a higher side and we might see some drop in FY '07-08.

TRAI has extended infrastructure sharing benefit also for
backhaul that is fiber and microwave connectivity between MSC and BTS, as it
helps in optimum utilization of existing fiber and microwave capacity. Later, we
might see TRAI extending these facilities even for active infrastructure.
Recommendations to 3G and WiMax policy is out but the DoT has still not
announced the 3G policy as it is waiting for the 3G spectrum from defense. This
is going to take time as one has to build an alternate network for defense
before they vacate the existing spectrum. Things are moving at a slow pace and
the new telecom minister has to give it a big push if 3G is to be a reality in
FY '07-08.

The Players

Bharti Airtel, the number one in the mobile space, has grown by 63% and has
netted revenues of Rs 13,431 crore. The company has consolidated its position
thanks to its expansion, distribution, VAS and brand strategy,

Presently, Bharti Airtel is the number one player with presence
in 4,676 census towns and 207,327 non-census towns and villages thus covering
around 59% of the country's population. In the last fiscal, the company has
added around 900 towns and over 1.2 lakh non-census towns.

In terms of investment, the company has added around Rs 23,141
crore in mobile services which contributes 72% of its total investment. The
company has also increased its retail presence, which is presently at around
500,000 outlets.

With its innovative services, the company also leads in the non-
voice plus SMS space as this segment contributes 16% of the overall kitty. For
Bharti churn is at around 6.8% whereas ARPU is at Rs 406 per user per month. For
Bharti, prepaid is on a higher side as it contributes around 88.5% of the total
base. The company is also doing a pilot project on global money transfer along
with GSMA to remit money to India through their mobile phones.

In terms of capex, the company invested around $2 bn in FY '06-07
and this has resulted in an addition of 18,000 new sites. In FY '07-08, the
company is planning to add around 30,000 base stations, and this will help in
increasing the coverage to around 70%. Bharti is looking at a capex in the range
of $3.3-3.5 bn in FY '07-08 of which 70% will go for mobile.

It was an excellent year for Reliance Communications as the
company reached the five-figure mark. In terms of revenue, Reliance clocked Rs
10,728 crore registering a growth of 61%. The company claims to be the largest
provider of wireless communication services in the country wrt minutes of usage
in terms of voice and data. Apart from this, the company also claims to be the
largest PCO operator in the market with 50% market share. Last year, the company
also focused on increasing rural penetration and connected around 40,000
villages.

In terms of coverage, the company covers around 8,000 towns
across India, providing coverage to around 54% of the population. The company
also has a strong distribution network with a retail presence of over 1,650
owned and operated Reliance World stores in over 700 Indian cities. Together,
with preferred retailers, the company has a retail presence in over 1,300 towns.

The company has been adding nearly 1 mn users a month, thanks to
the Rs 1 per minute of STD calls for Reliance customers. The company has also
announced the Hello Capital Plan, which enabled Reliance customers to make calls
between state capitals at the local call rates of 40 paise per minute.

This year it plans to reach out to 22,000 towns. The company is
going deep into rural areas. Non-voice plus SMS contributes around 8% to the
overall kitty.

It was an eventful year for Hutch as it completed the
acquisition of Essar Spacetel thereby expanding its reach to Madhya Pradesh,
North East, Himachal Pradesh, Bihar, Orissa, Assam, and Jammu and Kashmir. And
with this the company is now present in twenty-two circles.

In terms of revenue, Hutchison Essar registered a revenue of Rs
10,565 crore, registering a growth of 55%. On the subscriber front, Hutchison
Essar grew from 15.36 mn to 26.44 mn, registering a growth of 72%.

Hutchison's growth can be attributed to its aggressive
expansion and attractive products launched through out the year. The lifetime
validity card and the introduction of other longer-term validity prepaid
products were amongst many tariff initiatives introduced by the company. Apart
from the innovative tariff plans the company also launched a plethora of
innovative services. These include phone backup service and innovative
M-ticketing initiatives with Jet Airways; it also launched the service to book
flight tickets through SMS. Alliances with various content providers have been a
strong strategic policy for the company. The operator also tied up with Nokia to
launch local languages SMS service tapping into the semi-urban and rural markets
of the country.

The company has invested heavily in the networks by doubling the
number of cell sites. Now with Hutchison Essar renamed as Vodafone Essar, the
Hutch brand will continue for some time and Vodafone will appear in India as a
sub-brand to start with and replace Hutch later. However, phasing out a strong
brand will not be easy as it requires lot of funds. In terms of capex, the
company is planning to invest $1 bn in FY '07-08.

BSNL, the number four operator has grown by around 51% in
subscriber numbers and around 45% in revenue. The company could have grown at a
higher rate but had limitation in terms of future expansion since a 45.5 mn
lines' tender was stuck because of litigation. This year with a large
expansion contract, the company will do better but the company has to focus more
on VAS, a weak link in the past. With excellent coverage, BSNL will have an
advantage on the rural front.

In terms of capex, BSNL spent around Rs 2,000 crore in mobile
and plans are for spending around Rs 9,000 crore in FY '07-08.

In FY '05-06, Idea was operational in eight circles and the
company expanded its operations in three more circles during September-November
2006. In September, the company launched operations in Himachal Pradesh and
launched services in UP (E) in the month of November 2006. Idea is planning to
further expand in Mumbai and Bihar to cover nearly 70% of India's potential
from 58% in FY '06-07. In terms of town coverage, the company is present in
1,972 census towns and 2,462 other population centers.

The company grew by 45% and touched revenue of Rs 4,335 crore in
FY '06-07. In terms of capex spending, the company incurred around Rs 2,893
crore in FY '06-07. In the next two years, Idea is planning to invest
approximately $2 bn. Of this around 70-75% will go in existing circles and
expense in Bihar and Mumbai collectively for two years would be around Rs 1,500
crore. The company also plans to give 25% of its tower to independent tower
companies.

In FY '06-07, Idea completed a public issue of 333,333,333
equity shares of Rs 10 each for cash at a price of Rs 75 aggregating Rs 2,500
crore, including pre IPO placements of 50 mn equity shares of Rs 10 each,
amounting to Rs 375 at the above mentioned price. In the last fiscal, March 9,
2007, the company got listed on the NSE and BSE.

In FY '06-07 Tata Teleservices (Group) has registered
impressive growth with revenues of Rs 4,092 crore with growth of 118%. The
subscriber base has also crossed the 10 mn mark putting it in the league of
telecom bigwigs of the country. In the last couple of years, Tata Teleservices
has been focusing more on building capacities, enhancing distribution network,
focusing on VAS and enterprise applications and improving on quality of service.
And all this has started paying off in terms of quantum jumps in subscriber
additions as well as revenue growth.

Operational in twenty circles, Tata Teleservices has done well
on the sales and distribution front. The company stressed on branded retail to
provide lively experience to end customers. It has around 3,000 True Value Hub
and True Value Shops, and around 1,200 distributors in the country, and now the
focus is on small towns and cities. It became the first operator to open 100
True Value Shops on a single day. Apart from that the company also took the
initiative to open an online store, i-choose.in, for mobile connections.

In FY '07-08, the company plans to invest Rs 3,000-3,500 crore
which includes investment in three new circles and rollout of services in 1,000
plus census towns.

Having emerged from a small player to a large pan-India player,
Aircel is focusing on technology, people, and processes. As on March 2007, the
company was present in nine telecom circles and secured licenses for the
remaining fourteen of the twenty-three telecom circles, it is planning to
operate in all the circles within two years.

In terms of topline, the company has grown by 54% whereas on the
subscriber front growth has been 111%. Last year, the company focused on new
services like talking SMS and Aircel Phone Book.

Having done well in Tamil Nadu and Chennai, the company plans to
replicate its success in other circles. Till date the company has invested close
to Rs 2,640 crore after acquisitions and plans are for investing close to $2.5
bn over two to three years.

From a small regional operator in the Karnataka and Punjab
circle, Spice has carved a pan-India strategy to expand services in all
twenty-three circles. Presently, the company is present in 766 towns and cities
across Karnataka and Punjab, and has around 2,783 towers. In terms of coverage,
Karnataka is on a lower side at 33% whereas Punjab is higher at around 55% of
the population. The company is looking at aggressive coverage in a couple of
years for both Punjab and Karnataka.

All this has happened due to Telekom Malaysia's investment in
Spice. TM is an established player in the Asia Pacific region with investments
in Sri Lanka, Bangladesh, Indonesia, Cambodia, Singapore and Pakistan. The
company is still awaiting licenses in these circles.

On the distribution front, the company has around 300 exclusive
distributors and over 28,000 independent retailers. The company has opted for an
IPO and plans to raise around Rs 650 crore. Of this Rs 325 crore will go for
repayment of loans and capex planning.

In terms of cell sites, BPL has nearly doubled from 570 cell
sites to 900 plus sites. And plans are to reach 1,300 cell sites by the end of
the year. The company has also installed new IN system and this has resulted in
increased network capacity by about 75% and increased minutes of usage by around
30%.

Unlike the other operators, BPL has a large postpaid
contribution of 32%. The company has also introduced free lifetime prepaid at Rs
666 and later made it available for Rs 444. In terms of services, the company
has introduced voice SMS and push mail service, and plans are for introducing
Blackberry and Mobile TV.

MTNL, the incumbent operator has grown by around 41% and
registered revenues of Rs 807 crore. The company expanded mobile services and
has launched Jeevan Saathi scheme for government employees. Recently, the
company has opted for expanding its network in 2.5 G/3G equipment for both Delhi
and Mumbai circles for 2 mn each. It is planning to launch 3G services as and
when the government gives license.

HFCL Infotel and Shyam Telelink are the other operators, but
their focus is more on fixed than on mobile services.

The Rural Focus

The flavor for this year is rural and all the operators as well as vendors
are focusing their attention to come up with models to make rural strategy
viable in the long run. The USO Administrator has taken the first initiative of
providing infrastructure support for mobile services in rural and remote areas.
Plans are to spend around Rs 1,600 crore over a five-year period to provide
mobile connectivity to rural areas through service providers like BSNL and
Hutchison Essar, and IP-1 players like GTL Infrastructure, Nitel, Quipo and
Reliance Infrastructure.

The USO Administrator is planning to set up 7,871 mobile towers
in around 500 districts of India, and would initially provide voice services.
The administrator is also planning for phase II project where operators can
choose the clusters and make reimbursement to the operator afta they put up
towers in rural and remote areas.

Recently, Idea Cellular, Ericsson and GSMA's Development Fund
has powered four base stations in rural India by locally produced biofuels. This
will help in a big way to provide uninterrupted power supply in rural areas.

India is running at a fast pace thanks to the mobile boom. Even
in the future, mobile will have a bigger role as it is considered not only for
connectivity but also for broadband as we do not have many options in wireline.

The innovative India model is paying off. The model talks about
lowest tariff and highest minutes of usage. But the model is paying off, thanks
to innovation. Indian operators are continuing with their innovation strategy,
and are now planing to go global ie focus on countries like the Middle East,
South Asia and Africa. Operators should now focus on international strategies as
markets are opening up for mobile services.

Apart from the worldwide market, the Indian market is on a
strong wicket as well. In terms of coverage, we are at around 60-65% of the
population and in terms of teledensity we are at around 20%. India has a long
way to go vis-a-vis neighboring countries in terms of teledensity. This provides
enough opportunity for mobile operators not only in India but also outside
India. And the expansion phase will continue for another 2-3 years.

Pravin Prashant


pravinp@cybermedia.co.in