Cell wars: Limited mobility, unlimited danger

Telecom stocks have not been the darling on the bourses anyway, but now they could just witness another dip.

This time, it is not just about price wars and profit squeeze. It is a question of survival, as the launch of limited mobility services will alter the dynamics of the telecom game.

Sample this: As per the tariff plan filed by Reliance, it will offer limited mobile services at 20 paise per minute, about a sixth of what one pays on an average for a cellphone call. What's more, incoming calls will be completely free.

Even the standard tariff prescribed by the Telecommunications Regulatory Authority of India for limited mobility operators is only Rs 1.20 for three minutes with Rs 200 monthly rental and free incoming calls.

No wonder, leading cellular players such as Bharti and Hutchison have been fighting tooth and nail to somehow stall the launch of code division multiple access (CDMA)-based limited mobility or what is called the wireless-in-local-loop mobile services.

But there has been some respite for the cellular operators. The Supreme Court has ruled that the case should be reviewed by the telecom tribunal afresh.

According to the cellular operators, the main issue of contention is the absence of level playing field between the two wireless services.

The cellular industry have been crying foul as they had to fork out huge entry fees to offer wireless service. Besides, they have to shell out part of their revenues as licensee fee (revenue share), which is as much as 12 per cent of gross revenues in metro circles.

"This is nothing but a backdoor entry into mobile services for the basic fixed line operators," feels T V Ramachandran, director general, Cellular Operators Association of India.

Apart from this, there are other anomalies such as the deferential treatment in local call access charges for limited mobility and cellular customers.

To access the same fixed-line subscriber, a cellular subscriber pays Rs 1.2 for a three minute call, while WLL subscriber gets free access. Similarly, there is access charge levied only on cellular subscribers for calls between WLL and cellular phones.

Now, WLL players also want to offer value-added services such as roaming, SMS, et cetera just like cellular services provider.

But some industry experts argue that the discriminatory regulatory environment is not the only reason for the woes of cellular industry.

They also lose out as CDMA is fast emerging as a more cost-effective technology. That's because, as in wireless services where spectrum is one of the most scarce resource, CDMA is believed to be much more efficient.

"CDMA is at least 5-6 times more spectrum-efficient than GSM," claims V P Chandan, president, Qualcomm India, pioneers in CDMA-based wireless technology.

However, there are others who do not agree and the issue has been debated extensively.

"Both are excellent technologies and have grown together in many countries," points out Kobita Desai, senior analyst, Gartner India Research.

So what is the way ahead for cellular operators?

Undoubtedly, the introduction of limited mobility services is expected to trigger another price war which could be disastrous for them.

They are already straddled with accumulated losses of Rs 7,700 crore (Rs 77 billion), amounting to almost one-third of the total investment in the sector.

Yet, some analysts are optimist about the future of cellular players. They say that there is enough market for both the technologies to grow in tandem.

"Though there would be some pressure on cellular players, the introduction of WLL will only broaden the overall market," feels Srinivas Rao, research analyst, Edelweiss Capital.

More so, as the WLL mobile services are limited to only a small distance charging area and can not offer roaming facilities. So a large chunk of consumers that require roaming and other value-added services will remain with cellular operators.

Agrees Jaspreet Singh, analyst UTI Securities, who feels that despite the cost advantage offered by WLL players, cellular services will be preferred in locations other than metros.

"Take for example Maharashtra circle, it is a local call for Pune-based cellular subscriber even if he is travelling to some other town within the circle like Nagpur, Nashik, et cetera. This will make cellular services more cost effective in semi-urban and rural areas," points out UTI's Singh.

Plus, the relatively higher cost of CDMA handsets (at about Rs 10,000) could act as an deterrent for lower income group users.

Moreover, the government is deliberating on lowering the licensee fee for cellular operators.

"The government has realised that the licensee fee (in form of revenue sharing) can not be seen as a source of revenue generation. Consequently, the revenue sharing will be brought down to much lower levels of 2-4 per cent prevailing globally," asserted M S Verma, chairman, TRAI.

In addition, sorting out the other issues like anomalies in access charges and calling party pays regime should enable cellular operators to effectively deal with the threat from WLL players.

But the government and regulator needs refrains limited mobility players from cross-subsidising their services or adhere to predatory pricing. "Predatory pricing could virtually kill the cellular industry before it can actually mature," adds Gartner's Desai.

Given the emerging scenario, it is not surprising that the listed telecom companies have seen a sharp erosion in their market cap in recent past. Bharti Tele, the only private sector operator, touched its new low of about Rs 22 recently.

Analysts feel that the worst may have been discounted in Bharti's current valuations. But a further decline cannot be ruled out if WLL players receive a very encouraging response.

On the other hand, government announcement to drastically bring down the licensee fee or provide any other sops, and a hike in FDI limit could trigger some upside in the stock.

"Increase in FDI limit in telecom sector from 49 per cent to 74 per cent can significantly push up the stock," says Sanjay Chhabaria, analyst, IDBI Capital.

Currently, foreign investors like Singtel, Warburg Pincus, IFC and others, hold nearly 49 per cent of the equity and are believed to be interested in the acquiring a much large share. However, the long-term outlook of the stock will largely depend on the regulatory framework that finally evolves in the country.

MTNL is another stock that has suffered as limited mobility players are expected to be more aggressive in big cities and metros like Mumbai and Delhi.

The scrip has been beaten down already due to the government's intentions to merge it with big brother BSNL (the scrip lost over 30 per cent within one month). The merger will effectively stall MTNL's privatisation. Although the stock could decline further as some of MTNL's retail clients could shift to much cheaper limited mobility services, analysts believe that the downside will be quite limited. The scrip is already trading at very low valuations due to merger concerns.

Also, the company has huge cash reserves on its book, amounting to around Rs 60 per share. "The possibility of an exceptional dividend will continue to play on the minds of investors," feels Edelweiss's Rao.

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