India Telecom: Foreign Interest Still StrongNandini Lakshman
On Jan. 12, India's Telecommunications Dept. announced that it was postponing yet again a planned auction for 3G licenses until at least next month—or even later. This was the second delay in less than a month for 3G in the country. Explaining the latest postponement, the Indian government said that because the Finance Ministry wanted to double the minimum bid price of a single 3G license to around $1 billion, the telecom department wanted a legal opinion on whether it was possible.
The news disappointed both foreign and local telecom operators, but it hasn't soured them on the hot Indian market. Belying the downturn facing many other industries like autos, finance, real estate, and retail, telecom in India is still attracting investors. The latest example: On Jan 19, Batelco, or Bahrain Telecom, along with Dubai's Millennium Private Equity paid $225 million for a 49% stake in Chennai-based S Tel, which has licenses in six states in northern and eastern India. In a statement released from Dubai on Jan. 18, Batelco CEO Peter Kaliaropoulos said "the acquisition provides significant growth opportunities for Batelco in the fastest-growing mobile market in the world."
While foreign institutional investors pulled $13 billion out of the Indian market in 2008, foreign investments in telecom continued to pour into the country. In 2008 alone, companies including Japan's NTT DoCoMo (DCM), Norway's Telenor, the United Arab Emirates' Emirates Telecommunications, also known as Etisalat, and Russia's Sistema Telecom together invested around $5 billion in the Indian market to acquire or increase their Indian telecom investment.
Foreign Investors Return
Indian companies are eager for the foreign infusions. New Delhi does not permit foreigners to hold more than a 74% stake in telecom entities, so joint ventures have become the norm and Indian partners, who are largely stretched thin and short of cash, are aplenty. Foreigners are also keen to invest. Many came to India in the first wave of telecom liberalization a decade ago but left after finding the market difficult to penetrate. Some stuck around, though, and benefited from the fast-growing market. Singapore Telecommunications invested with India's largest player, Bharti Airtel. Vodafone (VOD), too, saw the opportunity, and in 2007 paid $11.1 billion to buy out Hutchison's 67% stake in Hutchison-Essar, making Vodafone the second-largest telecom operator in India. With 61 million subscribers, India is Vodafone's largest operation worldwide today.
That success has caused other foreigners to take a second look—and they like what they see. Top among the returnees is AT&T (T), an early entrant to India which left in 2004 after it was bought out by Cingular Wireless. AT&T has licenses for international and national long-distance telephony, and has been hunting for a wireless partner. The newbies aren't slouches, either. South Africa's MTN Group and Egypt's Orascom Telecom are both looking for local partners, say Mumbai investment bankers. Ironically, two major Indian operators, Bharti Airtel and Reliance Telecom, had tried to take over MTN last year.
Low-Cost Telecom Model
Moreover, cash-strapped companies in real estate have been using their idle licenses, acquired last February, to generate cash after not attempting to acquire customers or develop any telecom infrastructure. In October, Telenor spent $1.24 billion for a 60% stake in Unitech Wireless, the telecom arm of real estate firm Unitech. Announcing the deal in New Delhi, Unitech Chairman Sanjay Chandra said he was happy to get the much needed capital. A month earlier, Swan Telecom, the telecom offshoot of another real estate player, Dynamix Balwas, sold 45% of its equity to Etisalat for $900 million, even as it acquired a telecom license for $322 million. Total profit for Dynamix? $578 million.
Clearly, India is emerging as one of the most competitive and compelling telecom markets in the world. For overseas interests, having an India play in their portfolio is a necessity. The reason, says Vsevolod Rozanov, CEO of Indian operations for Russia's largest private-sector conglomerate, Sistema, is because India "is a role model for efficiency" in telecom globally thanks to its low-cost, high-quality networks and innovative marketing. Sistema is the market leader in many Asian countries, including Armenia, Belarus, Turkmenistan, and Uzbekistan, all developing markets in which India's low-cost telecom model could work well. "People here work hard to minimize costs, which we like. It will help us run an efficient Indian operation," he says. Sistema entered India in September 2007 by buying a 10% stake in a small north Indian operator, Shyam Telelink, for $11.5 million. In 2008 it gradually increased its stake, first to 50% and then to a majority 74%. Sistema now plans to spend $5.5 billion over the next four years expanding its current 200,000 subscriber base to other states and building new telecom infrastructure such as towers for transmitting and receiving signals.
While all the foreigners want to bid for 3G licenses, some newcomers aren't rushing in. Sistema, for instance, says basic telecom is still a big market on which it wants to concentrate. Apart from helping to entrench new entrants on the ground, a gradual scaling up provides an opportunity to learn the idiosyncrasies of the Indian market. Alok Shende, principal analyst at Mumbai-based Acsendia Consulting, an IT and telecom advisory firm, explains the strategy: "If you don't have a basic wireless business model, then a standalone 3G business is not viable," he adds.
As for the delay in 3G licenses, it isn't that worrisome for the players. They have plenty of work at hand, and, as one foreign telecom exec says, it's an added cost. "With the higher bid price, we need more time to work on the transaction and raise funds," he says. Even major players like Vodafone say a pricey 3G rollout will help them stay on top of the game, but will "put pressure on us," says managing director Asim Ghosh. Still, everyone's been investing in telecom infrastructure for a while now, and explains Shende, "Most of what is up is almost 3G-compliant."