GSM subscriber addition run rate remains modest: Angel

Cellular Operators Association of India (COAI) reported GSM net subscriber addition data for May 2012, which improved on mom basis and stood decent. The subscriber base grew by merely 1.1% mom to 677.8mn. Net subscriber addition number stood at just 7.3mn in May 2012, up 12.1% mom. GSM subscriber net addition was led by incumbents.

Operator-wise highlights:
In May 2012, Bharti Airtel (Bharti) maintained its lead in net GSM subscriber addition by adding 2.0mn subscribers (28% of the total net subscriber addition), almost flat mom. We believe this was primarily because 1) subscribers now want to switch to a more reliable service provider after the cancellation of 2G licenses of various other telecom players and 2) aggressive marketing campaigns and special vouchers launched by the company. Bharti was followed by Idea, which added 1.8mn subscribers in May 2012, up 18.1% mom. Uninor (whose net subscribers are growing aggressively since the past nine months despite its licenses being cancelled in all the 22 circles) again reported addition of 1.5mn subscribers in May 2012. This was followed by Vodafone and Aircel, which added 1.2mn and 0.8mn subscribers, respectively.

Net subscriber addition of BSNL again remained subdued. Amongst new players, S Tel and DB Etisalat, which have stated their intentions to shut down their operations in India post cancellation of 2G licenses, have not been adding any subscriber since February 2012. Videocon added merely 0.1mn subscribers and, according to media reports, Videocon is going to wind up its services in all circles, excluding those having over 5lakh customers, following the cancellation of its licenses by the Supreme Court. Circles namely Tamil Nadu, Haryana, Gujarat, Mumbai and MP have the largest Videocon subscriber base.

Circle-wise highlights:
In May 2012, net addition run rate of Metro circle as well as B circle improved significantly. B circle witnessed addition of 3.3mn subscribers, while metro circle added just 0.4mn subscribers. Net subscriber addition in Metro circle was led by Idea, which reported addition of 0.15mn subscribers, followed by Bharti and Uninor. In May 2012, A circle reported addition of 2.2mn subscribers, taking its total subscriber base to 233.2mn. Subscriber addition run rate in C circle stood at 1.3mn in May 2012 as against 1.5mn in April 2012, taking its total subscriber base to 98.7mn.

Valuation: The Indian telecom sector is currently experiencing heat due to a number of policy uncertainties related to spectrum and license fee payments. The recent discussion in the market after the release of a fresh set of recommendations by TRAI on April 23, 2012, regarding reserve prices of various spectrum bands points that these recommendations would appear to be burdensome on existing telecom players in the medium term. Also, INR has depreciated by 12-15% against USD in the past nine months, which has increased the liabilities of telecom companies such as Bharti and RCom in INR terms due to huge forex debt in their books. In our view, the telecom sector is poised for improvement in its revenue mix only if data revenue starts to pick post the launch of 3G and 4G services.

We prefer Bharti amongst telcos due to its low-cost integrated model (owned tower infrastructure), potential opportunity to scale up in Africa, established leadership in revenue and subscriber market share, and better KPIs. However, overall, due to the risk of increasing license and spectrum charges, slowing voice growth and higher debt/interest burden (adjusted for forex movement), we remain Neutral on the sector.

FIIs holding more than 30% in Indian cos

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