Telecom consolidation is the writing on the wall:UBS's Mahadevan

According to TRAI data, Airtel had 25.22 crore subscribers, Vodafone had 19.79 crore and  Idea had 17.46 crore as of April 2016.Below is the verbatim transcript of Suresh Mahadevan’s interview to Anuj Singhal, Latha Venkatesh & Sonia Shenoy on CNBC-TV18.Anuj: That is the caveat that this is just exploratory and a potential merger but if that was to take place would your view on Idea Cellular change?A: I think the Indian market is any way consolidating as we have seen and I think that is clearly the riding on the wall, right. Because in a data era you need a consolidated market because the more operators you have the more wide spread the spectrum will be. The customer experience won’t be very good, if you have like too much of players each with a little bit of spectrum. So, from that perspective I think you have already seen some level of consolidation in the market especially Bharti Airtel buying Videocon spectrum and few other transactions you have seen. I think consolidation could be an interesting theme for the market because specifically on this we can’t really comment because as you said it is exploratory and stuff. However, generally what I can say is globally and even Asia wide the trend is that regulators and even companies are realising that in the data era it is good to have large amount of spectrum. So, to that extent any consolidation obviously helps in the process. Of course you know consolidation also helps in pricing power and things like that I suppose.Latha: At the moment how are you placed on the two big telecom stocks Bharti and Idea?A: Clearly, we have been positive on this sector, but clearly there are some concerns in the market around the entrance of a new player Reliance Jio. We are still waiting I suppose for the Jio entry. I think there are been some concerns around the data users growth as well. However, if you look at the large picture here, we have give or take a billion users each spending probably Rs 150-140 a month and hardly using much data may be the top 20 percent uses data. So, I do think in a country like India where fixed line penetration is not very good beyond the large cities I do think the mass market is basically going to access internet through the mobile. I do believe that where the technology has reached to a 3G and to certain extent 4G, I do think on a five inch or five and a half inch phone I do think it is very viable way to deliver the internet. So, that presents a large opportunity for the existing players to benefit from which the market seems to be currently ignoring. The market seems to be thinking – there is a new player. He will come and disrupt and that is what the line of thoughts seems to be. Of course everything has two sides to it. My sense is there is a market expansion argument on mobile internet which is currently being ignored. So, we are very positive on both the names and we are positive on the sector as such because of the data growth prospects we have seen how data evolves the China, Indonesia, Thailand and the other markets. We are fairly convinced India will have the same kind of evolution path and that presents a big opportunity of the market leaders.Sonia: Just in the very near-term wouldn’t you worry about how aggressive the pricing is from the new player in the market both with respect to voice and data? Free services are being offered as introductory schemes. Don’t you think that will cause the revenue pie as a whole to shrink?A: It could happen for a quarter or so but think about it, so if Jio had come in two year ago and said here okay here is a 4G offering I think there would have been a lot of takers and they would have taken that positioning of, we are the 4G company. However, now everybody has 4G whether it is a Bharti Airtel or Vodafone, Idea, Reliance Communications you name it and they have 4G. The other thing is we have talked about the billion users, 20 percent have smart phones but you know how many people have 4G phones that is a very small percentage of that. So, obviously, on day one unless Reliance is aggressively selling the Wifi device or MiFi device your addressable market is limited to that, 30-40 million phones which have 4G which will grow. However, my sense is the disruption is also not on these billion users. It is a 5 percent of the users let us say. So, that is the thing market may be missing I am guessing. There is no doubt that Reliance will have a very attract data pricing but how many people can really access that. 90 percent of the people I can assure you cannot access that because they are either on a 3G smart phone or they are not even in a smart phone. So, that is missing in the market.Anuj: This has been one of the worst performing sectors in the market now. It is become commoditise so the valuations have come down. Do you see this sector coming out of this overhang of this commoditise business?A: As you rightly said, it is overhang which needs to play out, so I am not sure when Jio is going to launch. I am sure it is going to launch in the next few days, next few weeks. However, certainly in this year they will launch. My sense is that could probably be the catalyst of the overhang removal because you know as the numbers play out as I said a vast majority of the addressable population is not on a 4G phone; please remember this. Second thing is vast majority of mobile users in India today do not use mobile internet. So, these are two things I think to keep in mind as this overhang kind of plays out and we will see where it takes us right. Latha: Can you leave us with any price targets and ratings for the current stocks in your focus?A: Given the regulation and the disclosures around it we are generally positive on all the stocks which it is Bharti Infratel, Airtel, Idea Cellular. Our positivism stands from the fact that there is a huge mobile market data growth opportunity. As I said I think while Reliance price will be disruptive the disruptive effect won’t be felt over the vast majority of the population.

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