Telecom Data Services

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Analyst Presentation
July, 2018
Flow of the presentation

● Key conclusions

● Internet demand

● Non-voice revenues

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● Enterprise data services
Industry structure to undergo changes across segments
● Overall internet subscribers to touch 835 million by fiscal 2023
■ Wireless broadband subscriber additions to drive growth while narrowband to continue declining owing to demand for better speeds
■ Complete transition of 2G/3G data subscribers to 4G expected by 2023
■ Wireline broadband subscribers are expected to grow at a moderate pace of 7-8% CAGR between fiscals 2018 and 2023
■ Commercialization of Jio Giga Fiber is expected to boost wireline subscriber growth; pricing, however to remain key monitorable

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● Data revenue to drive non-voice revenue
■ Data revenue as a % of total non-voice revenue reached 90% in fiscal 2018 led by growth in data traffic and is expected to reach over 95% by
fiscal 2023
■ Revenue from non-data services (SMS and other VAS) to decline at a sharp CAGR of 22% from fiscals 2018 to 2023
○ Shift to OTT messaging applications & change preferences with respect to VAS
○ Total volume of SMSes sent to decline at a CAGR of 5-7% from fiscal 2018 to 2023 to below 15 SMS per subscriber per month

● Enterprise data services (EDS) market to grow at a tepid pace

■ Leased line services expected to witness a fall in demand due to efficient substitutes available (virtual private network)
■ Volatility in the number of ATM additions to impact future cash inflows in the (VSAT) Very small aperture terminal segment
■ VSAT industry is set for a transformation with the expected entry of in-flight communication services
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Internet demand
India’s internet penetration likely to reach ~60%* by fiscal 2023 led
by 4G and FTTH services

* Internet penetration is defined as total internet users as a percentage of total households

Wireless internet subscriber base to cross 835 million by fiscal 2023
Wireless subscriber proportion to dominate internet base Demand for 4G to buttress growth of wireless broadband

165 252 302 342 422 494 ~508 835 (in million) FY16 FY17 FY18 FY19E FY23P

Wireline

Narrowband 3.5 3.3 3.3 3.1 2.0

87% 93% 94% 94% 95% 96% 96% 97%

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Broadband 17.0 18.2 18.0 18.8 26.6

Wireless
13% 7% 6% 6% 5% 4% 4% 3%
Narrowband 177 138 79 44 5

FY19E

FY20P

FY21P

FY22P

FY23P
FY13

FY14

FY15

FY16

FY17

FY18

Broadband 145 263 394 442 801

Wireline Wireless
Note: E – Estimated; P:Projected
Note: E – Estimated; P:Projected Source: TRAI, CRISIL Research
Source: TRAI, CRISIL Research

● Overall internet subscribers to grow at 10-12% CAGR between fiscals 2018 and 2023
■ Broadband growth to be much higher at ~15% as against narrowband growth at -38% for the same period

● Proliferation of 4G services and the increased demand for better speeds is expected to aid wireless internet subscribers growth

● Wireline broadband internet subscriber base likely to expand at a slower 6-8% CAGR between fiscals 2018 and 2023. Growth to be driven by:
■ Launch of Jio Giga Fiber by Reliance Jio. However, initial pricing to remain key monitorable
■ Better value proposition being provided to subscribers in terms of speed and pricing
■ Government focus to provide broadband services to all by 2022 as envisioned in draft National Digital Communications Policy, 2018
Migration to 4G leading to a decline in 2G and 3G user bases
2G and 3G data subscribers to completely phase out by 2023

(Mn)
1000 70%
62%
60%
800 52%
46% 50%
41% 42%
40%
600 40%
34%
29% 31%
26% 30%
400 799

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17% 8 131 287
1 373 20%
13% 84 138
200 47 132
29 106 10%
16 186 199 177 69
100 114 138 80 2 5
0 44 0%
FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19E

FY20P

FY21P

FY22P

FY23P
2G data users 3G data users 4G data users Data subscriber proportion (RHS)
Note: E – Estimated; P:Projected
Source: TRAI, CRISIL Research

● 4G is expected to drive growth in the wireless broadband segment led by -

■ Increased availability of affordable 4G smartphones
■ Continuing cut in data tariffs luring even lower ARPU subscribers to opt for services
■ Players matching prices of 3G and 4G services in order to push subscribers to migrate to 4G
● Launch of Jio Phone 2 is likely to drive uptake of 4G data services especially for consumers (rural mostly) who are sticky towards use of feature phones
● Large players like Bharti has already announced that it is likely to shut down 3G services in next two to three years
● Telcos are making partnership with handset vendors and are offering attractive discounts/offers in order to attract new subscribers
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Non voice revenues
Data-hungry users to feed non-voice revenue over the next five
years
Traditional VAS to gradually die-out by 2023; SMS to stay
Value added services to decline at a CAGR of ~21% from fiscals 2018 to 2023 Data services dominate non-voice revenues

(Rs Bn) 2%
120 8% 4% 1%
110 12% 6%
22% 8%
36% 30% 11%
100 83 44%
29
70 19%
80
20 62 29%
25 55
60 19 46 39% 90% 97%
20 19 33% 84%
16 23
~36 77%
40

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14 14 59%
8
56 11 10 9 13 42%
20 44 36 0 26%
30 23%
22 21 19 13 5
10 9 9
0

FY13

FY14

FY15

FY16

FY17

FY18

FY19E

FY20P

FY21P

FY22P

FY23P
FY19E

FY20P

FY21P

FY22P

FY23P
FY13

FY14

FY15

FY16

FY17

SMS
Note: E – Estimated; P:Projected
Source: CRISIL Research
FY18
Data revenue as % of wireless revenue SMS (P2P) revenue as % of wireless revenue
CRBT Other non-data Other VAS as % of wireless revenue
Note: E – Estimated; P:Projected
Source: CRISIL Research

● Ease of use of internet services on handheld devices is expected to cause consumers to shift from traditional VAS to data segment

■ Services such as caller ring back tunes are relatively popular than other traditional ones such as wallpaper & video downloads, astrology, live scores

■ Most carriers have stopped video/wallpaper download segments and are entering the OTT entertainment segment (Wynk music app, Airtel TV). Key monitorable will
be the acceptance and growth of these new OTT and music streaming apps as monetization of these apps is still a challenge in India

● SMS revenues to decline sharply ensuing an expected shift to OTT applications such as WhatsApp & Viber

■ Total volume of SMSes sent is projected to decline at a CAGR of 5-7% from fiscal 2018 to 2023 to below 15 SMS per subscriber per month by fiscal 2023

■ Commercial messaging is also witnessing decline since 2013 (post TRAI’s regulation) and situation is expected to remain same going forward.
Data volumes to drive data revenue growth
Data as % of wireless revenue to double over next five years Realisation to remain under pressure while volume to continue growing

(Rs bn)
1200 100% Metrics Unit FY16 FY17 FY18 FY19E FY23P
84%
1000 Data subscribers million 1034 1170 1183 1198 1296
73% 80%

800 61%
60% Avg realisation per MB Rs/MB 0.229 0.076 0.016 0.012 0.011
51%
600 42%

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35% 39% ~1085
40% Data usage/sub/month MB 420 1360 4746 6800 10700
400 22%
18%
10% 498 443 ~455 20% Share of data traffic
200 8% 331
241
78 119 2G 25% 7% 1% 1% 0%
0 FY19E 0%

FY20P

FY21P

FY22P

FY23P
FY13

FY14

FY15

FY16

FY17

FY18

3G 65% 22% 13% 5% 0%

4G 10% 71% 85% 94% 100%

Data Revenues Data as a % of wireless revenues (RHS)
Note: E – Estimated; P:Projected Note: E – Estimated; P:Projected
Source: CRISIL Research Source: CRISIL Research

● Data usage/sub/month is expected to grow 43-45% in fiscal 2019 led by subscriber mix shifting towards 4G (having high data usage)
■ Availability of appealing content driving demand of video content driving data usage. As per Nokia Mobile Broadband Index 2018, video constitutes 65-75% of
mobile data traffic

● Increase in data usage to result in data volume growth. CRISIL Research expects data traffic to cross 100 trillion MBs by fiscal 2023, growing at a CAGR of
~30% between fiscals 2018 and 2023

● Continuous cut in data tariffs is resulting in deterioration of data realisation. However, we expect data volume (traffic) to offset the decline in data realization
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Enterprise data services
Customer shift towards more cost-effecient technologies within the
space to pressure realization leading to muted growth
Falling realization to limit EDS segment growth
Overall EDS to grow at a tepid pace VPN to account for over half of total EDS segment revenue by fiscal 2023

(Rs bn)
200 11% 10% 9% 9% 10%
9% 8% 7% 6%
13%
160
34%
41% 44% 43%
120 43%

165 176

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80 157
145
121 119 126
102 50%
40 40% 40% 41%
33%

FY19E

FY20P

FY21P

FY22P

FY23P
FY13

FY14

FY15

FY16

FY17

FY18
FY20P

FY21P

FY22P

FY23P
FY19E
FY13

FY14

FY15

FY16

FY17

FY18

VPN DLC IPLC VSAT

Note: E – Estimated; P:Projected Note: E – Estimated; P:Projected

Source: CRISIL Research Source: CRISIL Research

● EDS is expected to grow at a tepid pace going forward ensuing the decline in prices in VPN and leased line segments

● The industry is witnessing a shift to higher speed bandwidth across segments

● Among service lines, demand for VPN and VSAT will grow faster than other connectivity solutions, given that enterprises are looking for on-the-go wireless
services

● Share of VPN is expected to increase with a shift of demand from leased lines owing to cost efficiencies and other factors
Flexibility and scalability advantage makes VPN popular
High acceptance to propel steady growth in VPN revenues Value chain of VPN segment

(Rs bn)
100 VPN Service Dealers End Users
Providers
90
80
70 • Airtel • I-Knowledge Services • Banks
• Reliance • Computech • PSUs
60 Communications Infosystems • IT
50 • Tata Communications • FMCG
89 • Indian Railways

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40 • Others
63 67
30 54 58
20 47
34 39
10
0

FY19E

FY20P

FY21P

FY23P
FY13

FY14

FY15

FY16

FY17

FY18

FY22P
Note: E – Estimated; P:Projected Source: CRISIL Research
Source: CRISIL Research

● VPN growth is expected to be brought about by an increase in demand (volume); Pricing of services is expected to either remain flat or display a marginal
decline. However, increase in demand is likely to arrest expected decline in price

● IT, ITeS, manufacturing, and banking sectors are crucial to VPN segment’s revenue
■ Increased automation and utilisation of artificial intelligence will demand higher VPN bandwidths

● An increase in demand from the banking sector is expected as they shift from traditional leased line connections to VPN owing to increase in digital
transaction
■ Number of mobile banking transactions is expected to cross 1.6 billion in fiscal 2018 as compared to ~53 million in fiscal 2013. This figure is going to rise in future as
the government pursues its vision of a cashless economy
Falling tariffs and preference for other modes to impact DLC growth
Rise in virtual private networks to limit DLC growth Demand of leased lines increased over the past two fiscals

(Rs bn) ('000)

80 Volume growth
Price 140
72
revision 69
70
60 59 120
60 56
100
50 43 46 46
40 80

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30 60 123
110
20 90
40
10 60 62 65
0 20 41

FY19E

FY20P

FY21P

FY22P

FY23P
FY13

FY14

FY15

FY16

FY17

FY18

0
FY13 FY14 FY15 FY16 FY17 FY18 FY19E

Note: E – Estimated
Note: E – Estimated; P:Projected
Source: TRAI
Source: CRISIL Research

● DLCs are gradually losing out to virtual private networks, which offer cost advantage, easy scalability and rapid roll-out

● A fall in demand coupled with ever-ongoing price reduction is expected to cause a decline in revenue going forward

● Going forward, a requirement for backhauling (in telecom) and government initiatives such as Bharat Net are expected to drive demand
IPLC revenue to shrink as end user demand tapers off
Gradual decline in market expected due to fall in tariff, emergence of cloud technology

(Rs bn)
14
12
10
8
6 13.1 13.0 12.9 12.5 12.6 12.5 11.9
10.1
4

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2
0

FY19E

FY20P

FY21P

FY22P

FY23P
FY13

FY14

FY15

FY16

FY17

FY18
Note: E – Estimated; P:Projected
Source: CRISIL Research

● Revenue of IPLC segment is expected to slide downwards in the future as demand from end user segments is expected to shift to more convenient & efficient
options such as global multi-protocol label switching (MPLS) and cloud services. Prices, too are expected to decline leading to decline in revenues from IPLC
services

● Demand from IT and ITeS sectors is expected to be subdued owing to slower employee additions
■ Employee count of IT and ITeS is expected to grow at 2-3% annually over next five years, from annual rate of ~5-7% over past five years

● However, infrastructure is expected to improve as more investments are being done for undersea cables
■ In January 2018, RCOM announced laying a 68,000 km undersea cable to carry data across Europe and Asia. The project cost is estimated at USD 600 million
■ Reliance Jio has launched Asia-Africa-Europe One (AAE-1) submarine cable system in 2017 with 21 cable landing points planned
■ The Bay of Bengal Gateway (BBG) Submarine Cable System Landing, has also been granted clearance by the Environment Ministry
VSAT segment to grow at tepid pace
De-growth ensued due to lower demand from banking Market share concentrated among top three players

(Rs bn) Subscriber Market Share (March 2018) Revenue Market Share (FY18)
20
18 Infotel Satcom,
HCL Comnet 0.9%
16 Systems, 7.6%
14 Tatanet Bharti
12 BSNL, Services, Airtel,
Bharti 22.7%
6.5% 24.4%
10 Airtel,

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8 17.5 27.1%
13.1 13.8 14.0 13.5 14.4 BSNL,
6 12.3 Tatanet
11.2 2.8%
Services, Hughes
4
21.3% Communications, HCL
2 Hughes 36.1% Comnet
0 Communications, System

FY19E

FY21P

FY22P

FY23P
FY13

FY14

FY15

FY16

FY17

FY18

FY20P
36.5% s,
14.0%

Note: E – Estimated; P:Projected Source: TRAI

Source: CRISIL Research

● Decline the segment was due to reduction in the number of ATMs post demonetisation and reduced demand from oil exploration sector

● While ATM growth is expected to be relatively muted, the need to connect branches in far-flung areas, where fibre infrastructure is not
present, presents an opportunity for the sector

● TRAI’s recommendation to permit in-flight communication will help open a new end user segment for the VSAT industry as they are well
equipped to cater to the requirements. However, final approval from government is still awaited
BFSI, manufacturing and IT/ITeS largest end-users of EDS

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Source: CRISIL Research
 Annexures

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 Annexure I: EDS: Methodology

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