Saturday, November 28, 2009


TRAI notifies MNP porting charges at Rs 19; expect MNP to adversely impact EPS of companies under coverage by 8-39%, target prices by 7-22%; maintain 'Under performer' ratings on Bharti and RCOM, downgrade Idea to 'Sell'

The telecom sector regulator, the Telecommunications Regulatory Authority of India (TRAI) has notified the key charges for the implementation of mobile number portability (MNP). The per port transaction charge has been fixed at Rs 19, the porting charge has been fixed at a ceiling of Rs 19, while dipping charges have been left to mutual discussions between the service provider and MNP service provider. We expect the introduction of MNP to be a negative for the Indian telecom sector and for telecom stocks, even as it would be beneficial for subscribers.

In terms of a company-specific impact, we believe Bharti Airtel and Reliance Communications (RCOM) will be less impacted, given their larger scale and country-wide network. We expect Idea Cellular, given its lower scale as compared with Bharti and RCOM, to be impacted more, especially in the event of it losing high-value and more sticky post-paid subscribers. Overall, we believe MNP will be an additional 'pressure point' for telecom companies and even as it is overall a zero-sum game, it will be margin-dilutive. We estimate a 6-9% decline in ARPUs, a 50-82 bps negative impact on margins and consequent EPS declines to the tune of 8-39% in FY11, with consequent changes in target prices by 7-22%. We remain negative on the sector and maintain 'Under performer' ratings on Bharti Airtel (downgrade target price from Rs 289 to Rs 269) and RCOM (downgrade target price from Rs 167 to Rs 151), while we downgrade Idea Cellular to 'Sell' from 'Under performer' (downgrade target price from Rs 45 to Rs 35).

The porting charges notified by TRAI are significantly lower than the range of Rs 75-200 that has been appearing in media reports over the past few days. This makes it considerably cheaper for subscribers to port their numbers and is likely to be a major factor driving the increasing usage of the MNP facility as and when it commences, given the current dissatisfaction with quality of service (QoS), significant choices of operators and plans for subscribers and the dual SIM card phenomenon in the Indian telecom market.

MNP expected to be a negative for the Indian telecom sector, positive for subscribers; next phase of battle to be fought on the post-paid front We believe the implementation of MNP would be a negative for the Indian telecom sector from an operator point of view, while for subscribers it would be a key positive. Churn rates, already in the region of 4-5% monthly (pre-paid subscribers) are likely to increase even further. Competition levels are already very high and in fact, an era of hyper-competition is being witnessed in the sector. Given the spectrum crunch in the key Metro service areas, on account of which call drops are frequent and QoS poor leading to low customer satisfaction rates, these areas in particular could witness higher churn rates. This is a negative, given the higher ARPUs and revenues that subscribers in these circles provide to operators.

For instance, while the Metro service areas (excluding Chennai) accounted for less than 10% of Bharti Airtel's total mobile subscriber base at the end of September 30, 2009, these circles accounted for over 15.5% of the adjusted gross revenues (AGRs) of the mobile segment in 2QFY10. For the industry, in 1QFY10, blended ARPUs of the metro service areas for the GSM segment, as per TRAI data, stood at Rs 221 per user per month as compared with the overall blended ARPU figure of Rs 185, thus implying a nearly 20% premium. Thus, these are a few examples of the importance of high usage subscribers in the key metro circles, the loss of which could hurt telcos' revenues and profitability significantly.

To read the full report: TELECOM SECTOR