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The clash of the telecom titans

The big boys of Indian telecom just can’t have enough of a booming market for wireless services. That’s why they plan to pump billions in putting up more infrastructure and expanding into new areas in the fiscal year ahead. Meantime, a clutch of pretenders has ambitions of gate-crashing the Great Telecom Party.

Krishna Gopalan | Print Edition: March 9, 2008

Leading the pack (L-R): Bharti Airtelís Sunil Bharti Mittal, R-Commís Anil Ambani and Vodafoneís Arun Sarin
Sunil Mittal, Anil Ambani, Arun Sarin
Take the fastest growing mobile telephony market in the world, consider a still low penetration rate of 21.2 per cent, add to that the fact that India will account for 15 per cent (it is at around 7 per cent today) of all global mobile users in a few years, and what do you have? A clutch of telecom operators—Indian and global—that is pulling out all stops to ensure that they’re able to grow on the back of the cellular revolution that’s well under way in the country.

There is little sign of this unrestrained boom faltering. That’s because on a population base of 1.1 billion, currently mobile phone users number a little over 230 million, a growth phase made possible thanks to falling costs of handsets and call rates. What’s more, a whopping eight million new users are being added every month. By all counts, this is a market that should be able to touch the 500-million mark by 2010.

Operators are now gearing up for the next phase of growth by announcing huge capital expenditures to put up more infrastructure and venture into uncharted territories. Industry experts expect the coming financial year to witness the highest ever investment in the Indian telecom sector.

  A busy line

A host of promoters from unrelated sectors fancy their chances.

The wireless story in india telecom could not have got more exciting. Apart from the existing players, the market for mobile phones will now witness the entry of a host of newer players—a few of whom are absolute strangers to the world of telecom. Take, for instance, the Unitech Group, which is looking to start operations in as many as 22 circles.

The group’s primary business is real estate. Says Sanjay Chandra, Managing Director, Unitech: “We feel there is place for more operators.” Chandra defends his group’s decision to enter the sector, stating that he is in talks with various global partners and is in the process of firming up plans. “We will remain long-term investors in the business,” he says categorically.

The Videocon Group is another conglomerate that’s been seduced by telecom. Says Chairman Venugopal Dhoot: “We have just 220 million subscribers in India today and there is a huge opportunity.” The group, through a subsidiary called Datacom Solutions, is looking to invest $3 billion for a pan-India GSM presence. “We are looking to commence services over the next few months,” adds Dhoot.

Essar Group company BPL Mobile, through a subsidiary called Loop Telecom, is a case of a player looking to expand operations. Today, the company operates in just one circle—Mumbai—though the plan is to take the brand to another 21 circles. S. Subramaniam, Director & CEO, BPL Mobile, speaks of an investment of $2 billion to kick-start operations. He adds that BPL Mobile is examining all options like raising equity, a public listing and debt. Incidentally, the Essar Group holds a 33 per cent stake in the Vodafone-Essar joint venture.

The Hinduja Group, too, is looking to re-enter the sector, one-and-a-half years after it sold its 5 per cent holding in Hutchison-Essar (now Vodafone-Essar). It has outlined an investment of $3 billion for a proposed pan-India presence. Group President (Finance) and CFO, Prabal Banerji, says it is a little premature to talk about the group’s plans and describes the growth story in the sector as just “the tip of the iceberg”. “We are looking at it as a long-term game. We have an advantage since we already have a well-established cable business,” he adds. Clearly, every new player thinks he has a chance in this high-growth sector. How many of them really do will, of course, be a totally different matter.

The top three private operators— Bharti Airtel, Reliance Communications and Vodafone-Essar—between themselves will pump $10.5 billion (Rs 42,000 crore) into expanding existing networks, adding infrastructure and entering new circles.

If they are willing to splurge that kind of money, these service providers obviously expect the robust annual growth rates of 55-60 per cent (in the subscriber base) and 30-35 per cent (in earnings) to hold out for a while. “I think a growth of eight millionsubscribers per month is completely sustainable,” says Akhil Gupta, Joint Managing Director, Bharti Airtel. As a standalone operating company, Bharti Airtel is expected to make investments of $2.5 billion during fiscal 2008-09. “If the tower business is included, we will be investing around $3.5 billion,” adds Gupta.

The biggest chunk of the $10.5 billion will be accounted for by Reliance Communications (R-Comm), which will be deploying $6 billion in the coming fiscal.

The company has already paid Rs 1,650 crore to the government to kick-start its pan-India GSM operations.

Today, the company uses the rival CDMA technology and operates across the country. Under the umbrella of R-Comm are other businesses like Enterprise Solutions and the undersea cable operation, FLAG Telecom. In a recent conference call, Anil Ambani, Chairman, Reliance-Anil Dhirubhai Ambani Group (R-ADAG), said there would be an investment of $2 billion in the tower business (in a company called Reliance Infratel). “We will invest another $1.3 billion in our GSM business,” he said. The GSM rollout will extend to 23 circles from eight circles today. All this is expected to fructify during 2008-09, a year in which the number of towers is expected to more than double to 60,000 from 25,000 today.

Vodafone-Essar has a presence in 16 circles and will make an investment of $2 billion in the coming fiscal.

The focus will be on greater presence in the rural market. For the next three years, the total investment in the Indian telecom market will be to the tune of $6 billion. Vodafone is relatively a new entrant to the Indian market; it acquired Hutchison Telecom’s stake in Hutchison-Essar last year. To Vodafone, the Indian market is extremely strategic.

“India is already Vodafone’s largest market by subscribers. In the next five years, it will become one of our largest and most important markets,” a Vodafone spokesperson had recently told BT.

Whilst the top three will jostle for leadership position, the rest of the field is ensuring that it isn’t left behind. The smaller operators, too, will be making substantial investments (although they would be less significant in comparison).

The AV Birla Group-owned Idea Cellular will invest around $1.25 billion in expanding its operations across its existing 11 circles. That number could increase significantly if it launches operations in more circles. Having a presence in a large number of circles is crucial in today’s context and this is what accounts for this kind of capital expenditure.

Malaysia’s Maxis, for instance, which acquired the C. Sivasankaran-promoted Aircel in Chennai and Tamil Nadu, is also looking to be a pan-India player. “We are looking to invest $3.5-4 billion in calendar years 2008 and 2009. This will be a healthy balance between the expansion of current operations and fresh rollouts in other circles,” says Sandip Das, Director on the Board of Aircel Group of Companies, and CEO, Maxis Group.

From nine circles today, Maxis is looking to have a presence in 16-17 circles by the end of 2008. “From around 10 million subscribers today, we intend doubling that figure by the end of 2008,” adds Das. CDMA player Tata Teleservices, which hopes to have 25 million subscribers by March 31, also has some big plans. “In the coming fiscal, our investment will be $2.5 billion. This will include the planned rollout of our GSM services on a pan-India basis. In the current year (till March 31, 2008) our investment will touch $1 billion,” says Anil Sardana, MD, Tata Teleservices.

 
Click here to enlarge
But even as virtually every player on the wireless telephony landscape is keen to step on the gas (including a host of new entrants—see A Busy Line), a nagging concern is the falling average revenue per user (ARPU), which is down from Rs 356 for the January-March 2006 quarter to Rs 308 in the April-June 2007 quarter (the latest period for which data is available) for GSM players.

That explains why although India is the largest market for Vodafone in terms of subscriber numbers, the domestic operations rank seventh among all subsidiaries in terms of turnover. That close to 80 per cent of new users every month are in the pre-paid category does not really help the situation. These are typically referred to as the “marginal users” who do not spend very much.

  Big is beautiful

Investments in the telecom sector in 2008-09 by the major players.

Reliance Communications

Investments:
$6 billion
How the money will be spent: Expanding infrastructure and for the rollout of a pan-India GSM operation

Bharti Airtel

Investments: $2.5 billion*
How the money will be spent: Increasing the number of base stations and enhancing coverage in rural India

Vodafone-Essar

Investments: $2 billion
How the money will be spent: Having a greater presence in rural India. The money will also be invested in infrastructure and for expansion of tele-density

Maxis

Investments: $2 billion
How the money will be spent: Expanding existing operations in nine circles and for fresh investments in new circles

*If the investments in the tower company is included, the total investment will be $3.5 billion

The falling ARPU levels have a direct impact on the EBITDA (earnings before interest, taxes, depreciation and amortisation) that is considered a good indicator of the soundness of a telecom operation. Bharti’s consolidated EBITDA (it was the only listed company in 2005) for the third quarter of 2005-06 was at 40.2 per cent, while it is at 43 per cent for the third quarter of 2007-08. For a player like Idea, it was at 33.55 per cent for 2006-07 and is at 34.87 per cent for the third quarter of 2007-08. “There is certainly pressure on the EBITDA margins and the question is how innovative can an operator be. That apart, the rates on a per minute basis in India are among the lowest in the world,” points out Romal Shetty, Executive Director (Telecom), KPMG.

Bharti Airtel’s Gupta isn’t too fazed by falling ARPUs and EBITDA margins. He maintains there are other areas that need to be looked at. “More relevant measures are the revenues, operating expenses as a percentage of revenues and capital productivity,” he says. Yet, one way to maintain margins is to rein in costs. Sharing infrastructure is one way to do that. “The existing players have passive infrastructure and new players can get to use this. This brings in more revenue for the existing players,” points out Shetty.

The billion-dollar question today is how long will the operators—existing as well as new—take to get a return on their big-ticket investments. It may take longer than projected if there’s another round of tariff cuts around the corner—which industry trackers anticipate. And it’s the new entrants who will have their task cut out.

“The new guys have to be radically different in terms of what they can offer. Overall, there could be place for 5-6 operators. There is bound to be consolidation beyond that stage,” thinks Shetty. “Over time, the market will find it difficult to accommodate so many players.

Consolidation is inevitable,” adds Tata Tele’s Sardana. As things stand, the journey for the next 250 million subscribers is underway. In the process, revenues from data will have to increase to reduce the dependence on voice. On an average, data accounts for about 8 per cent of an operator’s revenues. “This is really the first day for the rest of the 250 million subscribers. As an operator, we are looking for a democratic share of that,” states Maxis’ Das. Most players will be looking at what more could be done with the mobile connection. “It will not be just about mobile communication but extending frontiers of what mobility can do,” sums up Das. The bottom line, of course, is how much of that will translate into higher revenues and fatter margins.

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