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Indian Equity Market Outlook – Short to medium term view, considering the global economic & liquidity situation

I have been bullish on Gold and Equity Market (particularly India) as asset class since last two years and will be in short to medium term. Obviously, as a good analyst, I must answer the question why? I also don’t like to be a verbose and wanted to stick to the point & it is: where to invest and why?

In my view, following major reasons should help a reader to understand the flow of money & take right position, in right asset class at right time. Global liquidity and it’s expected flow in Indian Equity market is the focus of this short article.

Global Economic Situation & where India stands:

  • Global growth, now estimated at 3.1 percent in 2015, is projected at 3.4 percent in 2016 and 3.6 percent in 2017. 
  • Global interest rates are at ultra low-level and there seems to be no way out of it or I will say no intention to come out of this addiction. These globally low-level of interest rates have created yield crisis in the financial world.
  • About 30% of all developed worlds bonds about 10-13 trillion US Dollar (USD), yielding negative returns. (Germany, Japan, Switzerland, The Netherlands etc.)
  • Bond prices fall when interest rates rise. And interest rates rise along with inflation. At today’s ultra-low yields, even a small uptick in interest rates will wallop bondholders
  • World central banks primary focus is avoiding deflation, and in my view, will not increase the interest rates in near future. They will keep doing round of QE (Quantitative Easing) under different names, hence there is possibility of Inflation in near to medium term and in this scenario, any sensible investors would not go and buy negative yield bond for pensioners of west.
  • World bank retains India’s growth forecast at ~ 7.5 for 2015-2016.

Hence, if developed world investors just make small shift in their asset allocation from negative yielding bond to Indian equity, it would be around hundreds of billion dollars. Yes, I agree that foreign portfolio investors would not put this money blindly and will expect certain policy clarity from present Government. (like no retrospective taxes, reforms and transparency etc.) and I believe that new government clearly understands it and most importantly working towards it.

Investors should also look at the Geopolitics, (I don’t want to ignore this important point) and that’s where India don’t have any control as one cannot change their neighbour. but now days Islamic terrorism is not only India’s problem but also with Europe & to some extent US. It’s global challenge.

Summary is: We have the developed world where investors are supplied with abundant liquidity, buying bonds with negative yields, and on other side, developing world (particularly India) where huge capital is required for development of Infrastructure & can offer reasonable returns of 7-9% comfortably for next decade. Hence, it’s just matter of time when the money from developed world coming to Indian shores and taking Indian stock market to new highs in next decade.  Only exception would be adverse geopolitical events which also, in my view can only defer the flow but cannot stop it.

 

Strategy to play “Digital Disruption” to strength of the organisation: Carving out “Communication Network Infrastructure Company” from traditional communication service provider

 

Sometime back, I have written on rise of over the top (OTT) companies & its impact on the traditional business model particularly in Banking and Telecom. We discussed about, how these OTT companies making moolah, riding on the underlying core infrastructure of telecom and banking companies. I had concluded my earlier discussion with point that traditional organisations, instead of getting carried away with words like “Digital Disruption” (includes Internet of Things-IoT, Social and Mobile) and venturing out in all the areas without any specific business strategy aligned to the strengths of their company could be futile. I also mentioned about three possibilities for the Telecom companies which will allow them to take maximum benefit with their own SWOT analysis.

  1. To be “Utility players”: Providing basic voice and data services to customer at lowest cost compare to competitors. Low cost operators.
  2. To be “Utility players with differentiation”: It’s particularly “Communication Network Infrastructure Company” with focus on Enterprise & Wholesale. (USP: Unique Selling Proposition is “Best in class network quality”) which can lead customers and OTT players to pay premium for network quality. It can also allow these companies to introduce new products & services around underlying network. (Monetizing their network with M2M services etc.).
  3. To be “Full-fledged service providers”: Presence across the values chain and eco system for retail and enterprise customers. (It’s like combination of earlier 1, 2 + content provider, payment solution with multiple merchant contracts, underlying telecom network, digital apps etc.).

As promised earlier, I would like to discuss on the possibility of being “Utility player with differentiation”, (Above point 2) now onward, I will use the word “Communication Network Infrastructure Company”. We will also see available opportunities for them in today’s scenario.

For any communication service providers, “Network infrastructure” is the most critical and asset heavy area (High Capital & Operational Expenditure). Many telecom incumbents are seating on this infrastructure due to legacy. If these companies are unable to match their excess network capacities with subscriber growth then it makes sense to monetise the network and best way is to become “Communication Network Infrastructure Company”, providing services to Enterprise and Wholesale customers and that too not necessarily own customer’s only. It’s business with high profitability (High EBITDA).e .g.

Taking example of Tata communications, reason is they are positioned as ‘Leaders’ in Gartner Magic Quadrant for Global Network Service providers and have rich portfolio of multiple products in terms of Services and platforms for enterprise & wholesale customers with underlying network infrastructure. (Global sub sea and terrestrial network covering around 700,000 KM, fiber ring around the world with 400 point of presence – PoP’s, on five continents and 1 million Sq. ft. of data Centre with 44 locations across the Globe).

Why it’s possible for them? In my view, “Focus” is the main reason.

  • All resources are focused on developing services and platform with underlying network. Resource term should not be limited to financial resource but also “Time of top executives”, in terms of strategic thinking and execution to finest level.
  • Identifying strength and core area (wholesale and enterprise segment) allowed company NOT to focus on Government policies for spectrum, lobbying for favourable rules & regulations like (Net neutrality etc.). Top executives of full-fledged operators cannot ignore it.

Tata communication also had digressed and moved away from wholesale business by venturing in buying the Neotel (Second largest fixed and broadband operator in SA in 2006 after paying 250 million dollar for initial 56% stake) and later applying all resources in turning around the company, ultimately to sell out as non-core business. These mistakes have caused the company to unperformed for almost last 7-8 years.

I have been mentioning this example just to support the point in earlier post about blindly following the wave. Earlier wave was globalisation, trying to be behemoth present in all segments and now the wave is to go “Digital”, trying to be like OTT companies, or venturing in all areas like payment banks, digital wallets, content providers etc.

In my view Telecom companies can gain a lot by separating out the network infrastructure area and developing the services around it to cater wholesale and enterprise customers. These value added services based on new digital model or technologies (like Big Data Analytics, M2M) can bring in much required high profitability.

 

There are multiple opportunities for the value added services based on underlying network in sectors like Banking, Utility and Agriculture.  Let’s hope to have connected and “peaceful” world.

 

Over the Top (OTT) players, Threat or opportunity to reinvent & transform traditional business models of Telecom and Banking companies?

The secular shift in technology, mobility, social computing and analytics have led to changing consumer behaviour. Some companies have understood it, acted on it and in due course created huge value for their shareholders. Most important point is when these companies are creating values for their shareholders; they are disrupting the existing traditional business models.

Beauty of their business models are being “Asset Light”, they have not invested in the Telecom Network, Banking System. They don’t have pressure of capital expenditure on Network; Non-Performing Assets (NPA’s) and to some extent about government regulations and still on riding over the top (OTT) of these underlying businesses they have come up with unique products and services with highly personalized customer experience at very attractive price points.

Long time, I have been thinking of writing my views on the impact of over the top (OTT) player’s entry and their impact on traditional business models. I have chosen two domains in my circle of competence for the initial analysis, one is obviously my favourite “Telecom” and other is banking. Apart from their relevance to economy, there are many similarities between these domains in terms of operations (B2B – Wholesale, B2C – Retail), their convergence for end users in day today life (e-commerce),  CRM, Campaigns etc. and particularly both domains are impacted by the OTT. They are facing similar challenges posed by new breeds of OTT players on their business models.

Instead of writing my views at length, I will try to put it in terms of question and answers so that it would be easy to contextualize & keeping focus on discussion points. Also later in next posts, I can take up any particular point for further detailing. Overall theme would be around OTT players, their impact on the Banking and Telecom and high level options to counter these threats.

What are the over the top (OTT) players and what kinds of challenges they are posing to Banking and Telecom Companies?

There are too many details available on internet about the OTT companies; hence I would like to highlight their product, services in context of our topic.

OTT companies:

Over the top are the companies who have not created & invested in core operations of banking or telecom industry but they are riding “over the top” of the banking or telecom system. Customers, the payment platform is of banks (in case of banking) & wire-line, wireless Network is of communication service providers (In case of Telecom). All these OTT players have created is application using these network and information to provide convenience to end customer at attractive price point. These unique solutions address particular challenge & offer convenience to customer in their day today life.

Few OTT companies in banking are,

  • Apple pay – provide convenient payment on e-commerce
  • Ali pay, Paypal – Mobile to Mobile payments substituting cash

Few OTT companies in Telecom are,

  • WhatsApp, Skype & many other VOIP (Voice over Internet protocol) messaging companies – Voice calls & messaging over IP (using data services)

Others are not specifically Telecom OTT’s but their services impact the telecom companies in terms of revenue.

  • Netflix, YouTube etc. – Video content providers
  • Facebook  – Social site
  • Tweeter – Micro blogging site

Challenges posed by these OTT players in Telecom & Banking 

Telecom:

  • VOIP services are potential threat to mobile operator’s voice and text messaging revenue. (I will not go in details of losses, approx. figures etc. as those estimates are easily available on internet).
  • Netflix and other content providers cannibalizing telecom operator’s revenue from IPTV/Cable Service.
  • These bandwidth hungry applications (video content providers), putting pressure on the Capex (Capital Expenditure) requirement of Telecom companies in terms of more investment in network capacity.

Banks:

  • OTT players challenge banks dominant position in “Retail payment business” area. Payment technologies are evolving at an unprecedented speed, contact less cards, on-line payments, mobile payment are all becoming more prevalent.

In my view, for Banking and Telecom, currently challenge is not about surviving; it is rather about thriving and maintaining the profit margins. but if not addressed now with correct strategy then it will become future challenge.

At-least in telecom, I partially agree that heavy consumers of video content can put a strain on the operator’s P&L statement since network resources can be disproportionally consumed by video streaming without a tangible revenue offset. So, unless mobile operators embrace and monetize OTT mobile video, it will remain a threat to their current business models. However, mobile video & IP chat services are few most compelling reasons for users to adopt smartphones and upgrade to high-performance service networks like 3G or 4G (LTE). So it’s also true that services and products offered by OTT providers are creating demand for Internet.

It remains to analyse the costing of data to telecom operator (Capex – rolling out new network infrastructure, buying spectrum etc. & Opex – Network operations, spectrum fee to government, IT operations etc.) required to provide high bandwidth to broadband / mobile internet customer holistically. In my view, no telecom providers would go in loss and provide data services to its customers. Hence, the point here is telecom operators trying to get additional high margin revenue which is currently enjoyed by the OTT. OTT’s are profiting with their unique services riding on telecom network without investing in network, spectrum (Capex) & associated headache of operations.

Getting into OTT business model is not that easy for telecom companies, and needs complete new strategy and may be DNA change of traditional organization. This discussion/answer leads to second question,

What are the options to Telecom service providers and banks to counter the OTT?

Telecom
Without any specific business strategy, following crowd will not yield required results. All service providers’ needs to analyze their own strengths, weakness in context of their own organization and also in the market they operate. Broadly, I can think of three options for Telecom companies,

  1. Utility player: become utility player by providing the voice & internet services to their customers – Low margin business.
  2. Utility player with differentiation: Invest in network and become the telecom operator with best in class network service – with better network quality, operator can demand premium from end customer & (in future) OTT player also.
  3. Full-fledged communication service provider with presence across value chain:  Invest in complete ecosystem (Content, Apps – value added services & Network) and being differentiator. (Investment in Big data, Analytics and DNA change of organization is required here).

Second option provides the opportunity to monetize the network (M2M services) and provide few value added services without being presence in complete eco-system.

All these three options can become my next topic of discussions 🙂

Banks

In my view, solution for banks technically would be easy but execution needs changing the culture of the banking organization and it’s little more difficult as compare to telecom companies where employees are traditionally more adaptive to new technologies.

Currently banks have competition from OTT in payment solutions area and immediate impact is on that business line. Share of payment solution is small compare to other non-interest income & interest income, but its importance in terms convenience, future growth (e-commerce) is huge. Also applying cost benefits of technology in other areas will change the cost of doing business for banks & real benefit lies in applying it to other areas.

Required ingredients to have this digital shift is already with leading banks like,

  • Customers
  • Advanced technology in the form of data warehouse and
  • Analytics leading to a better understanding of retail consumer behaviour.

All that is required is to create “Apps” to stitch together the sales, credit and operating processes thereby creating a better customer experience. If cultural shift within organization is little slow then options should be explored to collaborate with leading OTT players, Payment solution companies or telecom companies, but ultimately all banks would need “Digital Strategy” & Execution of it.

Over the top (OTT), Telecom or Banking, The future seems to be very interesting for all of these companies. I’m very curious to see how it unfolds.

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