CREDENCE CAPITAL

IIM LUCKNOW

TELECOM SECTOR
CONTENTS
Headings Page Number
Introduction and Executive Summary 3
Key Stakeholders 5
Telecom Service Providers 6
Handset and Device manufacturers 8
Fiber, equipment and accessory manufacturing 9
Data Centers 10
Current Trends in the market 11
Valuation Metrics 13
Future Trends & Opportunities 13

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INTRODUCTION AND EXECUTIVE SUMMARY:
India is the second largest telecommunication market in the world and has the third highest
number of internet users in the world with a subscriber base of ~118 Crores as of August 2023
(wireless + wireline subscribers). India has an overall tele-density of 84.69%; tele-density of
the rural areas stands at 57.97% whereas that of urban areas is 133.55%.

In terms of average monthly data consumption per wireless data subscriber, the volume has
increased from 61.66 MB in March 2014 to 17.36 GB in March 2023.

The telecom sector is the fourth largest in terms of FDI inflows, contributing to 6% of total FDI
inflow and contributing directly to 2.2 million employment and indirectly to 1.8 million jobs.
100% FDI has been allowed in the telecom sector. Between 2014-21, FDI inflows in the
telecom sector grossed $20.72 billion, observing a 150% hike against $8.32 billion FDI during
2002-14.

The Indian telecom sector’s exceptional performance can be attributed to several key factors.
One of the pivotal achievements is the substantial reduction in mobile data tariffs, symbolizing
India’s commitment to affordability and accessibility. The dramatic reduction in costs has not
only empowered Indian citizens but also resulted in significant savings for families across the
nation.

Moreover, India’s rapid strides in 5G technology are another critical aspect contributing to the
sector’s success. The nation has achieved the fastest rollout of 5G services worldwide, covering
more than 700 districts. This progress underscores India’s dedication to staying at the forefront
of technological innovation. The Prime Minister’s vision for India’s telecom sector extends
beyond 5G, as he introduced the ‘Bharat 6G Alliance,’ a dedicated task force aimed at
propelling India to lead the world in 6G technology. This ambitious endeavour solidifies
India’s position as a technological powerhouse with a forward-looking approach.

The average time for approving Right of Way (RoW) approvals has reduced from 230 days to
just nine days on average, showcasing the government’s commitment to streamlining
regulatory processes. Additionally, the number of base transceiver stations (BTSs) has grown
from 6 lakhs to 25 lakhs today, signifying a massive expansion in network infrastructure.
India’s 4G footprint now extends close to 99% of the country, with the remaining areas set to
achieve 100% coverage thanks to a significant investment of about Rs 38,000 crore.

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Furthermore, India’s telecom sector is making remarkable progress in the realm of 5G
technology. A total of 2.70 lakh 5G towers have been deployed in India, and the country is
witnessing the deployment of a 5G tower per hour, underscoring India’s rapid strides in
becoming one of the top three 5G ecosystems globally. In just nine months, India has outpaced
many other countries in the 5G arena, with only a few nations competing at a similar pace.

The telecom sector’s success is not just about technological advancements but also about
making digital services accessible and affordable for all, ensuring that every Indian can reap
the benefits of the digital era. India’s telecom sector’s performance is a testament to the
nation’s commitment to progress, innovation, and inclusive growth.

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KEY STAKEHOLDERS:

Network
Telecom Service
Infrastructure Tower Companies
Providers
Providers

Key Acquired by Brookfield

Players

Devices and equipment Set up towers for TSPs Players across wireless,
Position manufacturer for both and deploy the passive wireline and internet
in value telecom service physical infrastructureservices interacting with the
chain providers and tower necessary to house the end user and providing them
companies active equipment network services
• Fixed voice & data
• Manufactured goods
data • Multiple tenants services
(optical &
Sources lease vertical space • Subscription based
networking products)
of on the tower for their mobile services.
• Installation &
revenue communications • Enterprise solutions
commission
equipment • Broadband connections
• Annual maintenance
• Infrastructure
• Research and • Ground rent, utilities
development
development and fuel, site
• Network installation &
Major • Software and maintenance,
development
operating hardware insurance
• License Costs
costs • Selling and • Additional tenants
• IT Upgradation
marketing result in incremental
• Staff salary
• Manpower operating costs

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TELECOM SERVICE PROVIDERS:

The TSPs have been the most beneficial stakeholder from the COVID-19 pandemic. While
urban mobile data consumption has largely remained the same, the rural mobile data
consumption has risen by more than 30%, due to increased consumption of media content via
OTT, audio podcasts, online gaming. As a result, rural mobile data usage now accounts for
45% of the total mobile data usage against 55% urban mobile data usage. This ratio has
improved from the pre-pandemic levels when consumption was largely restricted to urban areas
and accounted for almost 65% of the total domestic mobile data usage.

Additionally, the migration of service businesses virtually has aided the growth of TSPs.
Companies invested heavily in wireless broadband availability for their employees to ensure
seamless communications. This helped the telecom service providers which had readily
available alternative present to be effectively utilized. As a result, the broadband subscribers
observed a spectacular 23% CAGR over 2017-21.

Broadband Subscribers (in millions)

778.09

276.52

2017 2021

NOTEWORTHY DEVELOPMENTS IN 2023:

The landmark achievement for 2023 has been Indian TSPs completing their minimum 5G roll-
out obligations in each of 22 Licensed Service Areas in India within a timespan of 10 months,
positioning India as the second largest 5G network in the world. Aligning with the ‘Digital
India’ mission, this has paved the way for 6G network establishment in the coming years.

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The Telecommunications Bill in 2023 was another landmark moment, wherein Government
made enabling provisions in RoW towards ensuring a robust telecom infrastructure and
availability of uninterrupted digital connectivity for its citizens.

Market Share by subscribers, 2022

BSNL,
9.34%
Jio, 37.14%
Vodafone Idea,
21.11%

Airtel, 32.16%

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HANDSET AND DEVICE MANUFACTURERS:

Major handset manufacturers in the world like Foxconn, Apple, Samsung, Xiaomi, Oppo have
started establishing their assembly units in India following the PLI (Production-Linked
Incentives) scheme offered by the Indian Government. Further incentivized by the China plus
one strategy, these original equipment manufacturers (OEMs) can save up to 4-6% in PLI
schemes, in addition to low assembly cost due to low labour costs.

The electronics manufacturing industry currently provides employment to more than 2 million
people. The industry is poised to reach $190 billion by 2025 with the country looking to export
more than 60 crore mobile phones worth $100 billion across both entry level and high-priced
segments, to markets like Europe, North America and Africa.

To further facilitate large-scale manufacturing, development of a supply chain ecosystem, and

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FIBER, ACCESSORY & EQUIPMENT MANUFACTURING
The higher demand for accessories and mobile phones stems from an increasing urban
population, higher disposable income and higher mobile penetration. Additionally, government
policies like the PLI scheme is driving the OEMs to set up assembly and manufacturing lines
in India. The accessory market is projected to reach ~$4 billion by 2028, driven primarily by
demand from India and China.

The optical fiber market is projected to reach ~$1.6 billion by 2026, primarily on the base of
widespread 5G deployment, increased adoption of fiber-to-the-home (FTTH) connectivity,
emergence of Internet of Things (IoT), technological developments in fiber optic cable
technology, increased investments in optical fiber cable (OFC) network infrastructure.

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DATA CENTERS
Data centers like Amazon Web Services, NTT Limited, Yotta have heavily invested in India
in establishing facilities. Under the hyperscale data center scheme of the Indian government,
policies will be promoted encouraging establishment of datacenters. These data centers are
looking towards building their own enterprise-grade fiber networks, lessening the reliance on
telecommunications providers. This stems from the stumbling issue due to limited dark fiber
access to datacenter operators and end users.

Additionally, as the average volume of data that consumers consume has grown, corporations,
OTT players, cloud service providers and global offshore centers will need more resilient
digital infrastructure in the form of datacenters to meet consumer demand. The rise of edge
datacenters is expected to accelerate as 5G services become commercially available in the
country. As 5G infrastructure improves data speeds, data consumption will rise, especially for
high-latency applications.

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CURRENT TRENDS IN THE MARKET:
5G Roll-out
First half of 2023 witnessed the auction of 5G spectrums where the government swept nearly
INR 1.5 lakh crores, mainly from 4 bidders. While Reliance Jio emerged as the highest bidder,
procuring nearly 25000 MHz, the auctions witnessed a new entrant, Adani Data Networks- a
unit of the diversified Adani Group- making modest purchases for its captive private network
needs.

5G can enable high speeds, low latency and massive capacity offering a much better
experience. 5G advent will drive the growth of ancillary industries, particularly the services
sector, gaming sector, will improve security in data transmission.

5G-related telecom employment is merely the tip of the iceberg. Driverless cars, virtual reality
(VR), augmented reality (AR), cloud computing, and smart gadgets under the Internet-of-
Things could all benefit from next generation wireless technology. As 5G becomes more
prevalent in India, more job openings will arise. With a slew of enterprises in India looking
into various 5G use cases, recruiting could extend beyond traditional telecom end-users.
Companies studying various components of the 5G value chain are anticipated to increase
hiring in the coming months.

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Tariff Hikes
The advent of Reliance Jio in the telecom sector has brought down the high tariffs which were
levied by telecom operators pre-2016. Now, with 4G technology in operation along with 5G
being underway, it is becoming unsustainable for telecom operators to operate at low tariffs.
Hence, we have observed instances of tariff hikes in 2022-23, and this may continue in 2023-
24 as well.

The current ARPU in the industry is around INR 200 but for survival and recovering the high
CapEx which the companies are incurring, they need an ARPU in the range of INR 270-300 in
the next 3-5 years. As a result, tariff hikes are expected in the coming years.

Tariff hikes is also expected to avoid the establishment of a duopoly in the market between
Reliance Jio and Bharti Airtel. Vodafone Idea is struggling to raise equity as well as the net
debt to EBITDA ratio stands more than 3x. A near term delay in tariff hike is expected to
strengthen Airtel/Jio’s pricing power and market share and expedite the transition to a duopoly
market by further deterring Vodafone-Idea’s fund raise plans. Additionally, state-owned BSNL
is still struggling to roll-out its 4G spectrum, despite regular support from the government in
terms of reform packages. For now, all eyes are on Vodafone Idea and the ramifications it will
have if the company does not sail through the tough times.

At the same time, a major reason why the hike may be delayed is the low adoption in the rural
markets. The weak consumption spending market, triggered by the interest rate hikes,
particularly in the rural markets, may limit the ability to absorb any hike in tariffs.

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VALUATION METRICS

In terms of trading or transaction comparable, EBITDA multiples are more suitable owing to
the nature of the telecom industry:

• Companies have a large base of fixed assets, leading to correspondingly high levels of
depreciation expenses.
• Characterized by high-growth and capital-intensive operations, most of the capital
expenditures are financed by debt, leading to high levels of finance costs.
• There can be a situation where one company is amid a major capital expenditure
whereas other may not; hence EBITDA multiples eliminate the bias.
• EBITDA multiples eliminate any bias arising due to irregular financing or accounting
decisions related to capital expenditures and associated costs.

In case of intrinsic valuation, discounted cash flow (DCF) is best suited for companies having
positive cash flows:

• Majority of capital expenditures is financed by debt; hence the cost of capital is

UPCOMING TRENDS & OPPORTUNITIES

Untapped rural markets: The tele-density levels at the urban areas in India is <60% which
represents a significant opportunity. The internet consumption pattern for rural users is more
aggressive as compared to urban users.

Internet of things (IoT): IoT is the concept of electronically interconnected and integrated
machines, which can help in gathering and sharing data. The Indian Government is planning
to develop 100 smart city projects where IoT will play a vital role in development of those

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cities. Additionally, IoT focused startups have emerged which are using data for information
communication and inferences within milli-seconds.

Increase foreign investment: With 100% FDI allowed in the telecom sector, foreign
companies have aggressively started to set up manufacturing and assembly operations in India.
Foxconn, Cisco, Samsung have shown interest in setting up manufacturing in India for telecom
and networking products under the new PLI scheme. Apple has set up their own stores and has
also established the manufacturing line for its new models in India.

Drone Technology: Increased data consumption finds application in the last-mile delivery
space using drone technology. Faster data communication through satellites can enable
automatic drones which assist in agriculture (chemical spraying), medicine (sample and reports
delivery), defence (tracking movement of troupes) and surveillance.

Satellite Broadband: Telecom companies are exploring the concept of satellite broadband to
deliver high speed internet to consumers without any physical optical fibre cables. Majority of
rural locations in India do not have access to broadband without any cellular or fiber
connectivity.

Machine Learning and Artificial Intelligence: With AI and ML models, customer service
automation is expected to witness significant boost. The automation will generate considerable
savings for companies as well as generate behavioural insights from the data which can be
leveraged to train the models.

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