Unique Indian Telecom Market

The Indian Telecom Market is a unique market in many ways due to the following reasons

1. Fastest Growing Telecom Market in the world in terms of subscribers per month
2. Call rates are cheaper than any other country in the world
3. HyperCompetitive with 12-13 players compared to 3-4 in most other markets

Recently the market has seen a lot of turbulence due to Price Wars and “Winner’s Curse” 3G auctions. This comes after the huge controversy raised in spectrum allocation to new operators.

Competition leading to Huge Margin and Balance Sheet Pressure

The competition which used to be benign earlier with 4-5 big telecom operators turned into a hypercompetitive one with the advent of new telecom operators like TataDoCoMo, MTS,Maxis,Etisalat and others.The newcomers totally changed the market through Extremely Low Priced plans (as low as 3c/minute) to lure customers from existing operators.With price being the only differentiator between the the 10-12 operators , it quickly descended into  an All out Price War between the telecom companies with everybody a Loser except the Indian Customer.While market leader Airtel has a good balance sheet,other major players like Reliance Communications,Vodafone and Idea were put into a tough situation.Their  margins and profits collapsed at the same time they were spending billions of dollars to expand their telecom footprint across the country.The result was that Indian Telecom stocks have massively underperformed the general market with RCOM shares falling below the level it had reached when the Indian market was 50% below current levels.

Has the Consolidation Started?

The 3G Auctions came as an additional shock to the telecom companies with the bids being far in excess of what the government and companies had anticipated.These compounded the already mountain of problems that the companies were facing.Market analysts had predicted that M&A would soon being as the market was not big enough to support 10-12 operators under the present conditions.However with the Indian Telecom Regulator TRAI having strict guidelines against M&A ,the timeline for the M&A was unpredictable.Abu Dhabi based Etsalat which is one of the world’s biggest telecom operators and was one of the licensees in the recent 2nd round of telecom license allocations has confirmed talks with Reliance Communication.This company has the most strained balance sheet in the industry and with the recent detente between the Ambani brothers,a deal was waiting to happen.Though earlier big ticket transactions have taken place with Vodafone buying Hutchison Whampoa,this is the first big M&A deal to happen after the Price War started. Note this deal may fall through due to regulation and valuation hurdles , but eventually a market reorganization will have to happen because the current conditions are unsustainable for a lot of these companies.