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Ringing in the rupees

The global telecoms industry is characterised by negative news at the moment. Yet the sector in India seems to be bucking the trend. It is growing at an alarming rate and is also attracting foreign investment, according to VG Kulkarni of the AVCJ.

There seems to be no end of negative news for the Western world's telecommunications industry these days. Worldcom and Global Crossing appear to be taking turns in making depressing headlines every other week. The bottom lines of European telcos are not healthy either. The capacity glut continues and 3G remains elusive.

Contrary to this global trend, the Indian telecom sector is alive and well and growing. About time one may say. Until the mid-1990s, telecom services were a monopoly of the government and one had to wait for more than a year to get a phone connection. In many remote areas there was no waiting time however, because there was no phone service, period.

But all that is history. The entry of the private sector - both domestic and external - into the Indian telecom arena has woken up the lethargic state-owned telcos. No more lining up forever for your turn to get a line; in fact, it has become a buyer's market. Fueling the push, the private sector has brought in sizeable amounts of foreign investment from international telcos, investment houses and private equity funds.

Why the activity? Sachin Mathur, head of CRISIL Research and Informational Services puts it this way: ‘Many of the major global telcos have tied up with Indian partners.' As examples, S Mukundan, telecom analyst at Crisintac, points to various major joint venture or strategic tie-ups: AT&T with Idea Cellular, SingTel with Bharti Tele-Ventures, France Telecom with BPL Mobile, Distacom with Spice Communications and Hutchison Whampoa's Indian alliance with Escotel. Of course, the global handset giants - Nokia, Ericsson, Motorola and Samsung - are there in their own rights.

As expected, the entry of international telco majors was followed by other foreign investment. In the decade to 2002, total foreign direct investment in the Indian telecom sector amounted to $2.4bn, according to government figures. Of this, about half came in during the past two years - reflecting the upsurge in investment. Among the private equity players active in Indian telecom are Warburg Pincus, insurance behemoth AIG, Asian Infrastructure Fund (AIF), International Finance Corporation and Commonwealth Development Corporation. (The investments of Warburg Pincus and AIF in Bharti Tele-Ventures, the country's largest mobile service provider, saw a successful IPO of the latter earlier this year.)

What has brought foreign lucre to Indian shores this time is a combination of market size, its medium-term potential, the willingness of the rulers in Delhi to be investor-friendly and the opportune timing.

Not to mention the growth potential. India probably is the only significant telecom market yet to be tapped fully. China, the number-one market for cell phones in the world, is showing signs of peaking, at least in terms of growth rates; revenues are likely to rise by only 9.5 per cent this year as against 14.4 per cent last year, said information industry minister Wu Jichuan recently.

In contrast, Indian growth rates are gathering steam. Late last year International Data Corp (IDC), a leading IT research firm, did a survey of the Indian telecom potential. IDC Marketing Manager Rita Lee rattled off some of the survey's projections to 2006: 14 per cent CAGR of land lines; 49 per cent CAGR for cell phone subscribers; 27 per cent subscriber CAGR for ISPs; IP telephony traffic growth of 133 per cent and so on.

Or consider this impressive number. Early last year, JM Morgan Stanley estimated the overall Indian telecom services market at $12.8b, growing at 9.4 per cent CAGR to 2006.

More recent projections by the Indian industry (as well as the government) are even more bullish, as the rate of growth has risen especially in the private sector. The share of the private phone companies in the overall size of subscribers grew from 4.7 per cent in March 1999 to 20 per cent three years later. As of March 2003, the number of cell phone subscribers stood at 12.6m, a CAGR of almost 100 per cent since 1999.

The government wants to increase the tele-density of the country to 15 per cent by 2008, up substantially from the current 4.9 per cent. TV Ramachandran, director general of the Cellular Operators Association of India (COAI) projects the mobile subscriber tally ‘to reach 100m by 2008, involving an investment inflow of $11bn.'

To be sure, telecom is one sector that is unlikely to be starved of funds. For one thing, the existing enterprises and their foreign partners have demonstrated a willingness to invest. The known investment plans for the five years to 2007 of major telcos amount to almost $20bn. Between $8bn and $9bn has been budgeted by the private sector companies such as Reliance Group, Tata Group, Bharti, BATATA, BPL Hutchison. The government-backed companies - BSNL, MTNL ands VSNL - will invest $11bn.

The smaller companies aren't being shy either. The Escorts Group will invest $150m in cellular services, with at least half coming from equity finance. World Bank subsidiary IFC is taking 20 per cent stake in Escort Telecom. Recently, Hutchison Whampoa bought up the interests of Hong Kong-based First Pacific Corp in a cellular investment for $30m. US-based Charter Venture Capital plans to invest $30m this year in telecom-related for India in Bangalore-based companies.

The plans of Reliance Infocomm, the group's telco arm, are the most ambitious. It has spent $2bn of the planned $5bn in an attempt to lay 60,000 kilometres of fiber optic cable linking India's 115 cities and towns. The group's chairman Mukesh Ambani told the Indian press earlier this year that he was targeting the ‘80 to 90m Indians owning TV sets' as future clients for his phones.

Tata Teleservices, a subsidiary of the reputed Tata Group, is lining up $1.5bn in the next seven years with the aim of servicing about 70 per cent of the country's voice and data traffic. It is a major partner with the government in VSNL, the nation's premier international carrier and has expansion plans in at least nine of the country's major provinces.

In an ideal investment world, the funds flowing and the ambitious aims of expansion should go to hook up brand new customers. But this is easier said than done. So the fight has mainly come down to gaining market share by poaching customers from competitors. Inevitably this has led to a pricing war, bringing down the cost of phone calls precipitously - in some areas a mere one cent a minute.

As they usually do, prices will stabilise sooner or later. But meanwhile, one wonders if there is room for a score of competitors in the mobile and land-line space. ‘Consolidation is inevitable,' says Subhabrata Majumder, telecom and media analyst at Motilal Oswal Securities in Mumbai.

At a recent telecom industry gathering in Mumbai, Prithipal Singh, chairman and managing director of state-owned BSNL, concurred: ‘Conditions are ripe for M&As in the Indian telecom market.' He also predicted that if outright mergers are difficult, there would be strategic alliances among private operators which have not much going for them in land-line services.

No wonder that talk of alliances, which has been around for sometime, has gained further currency. Speculative reports have persisted that at least four cellular operators - BPL, Escotel, Spice and RPG - are in the final stages of forming an alliance in 12 telecom circles (geographic areas) covering tariff plans, serving each other's subscribers and bulk purchases of goods and services. If so, these four companies are obviously girding their loins against their bigger counterparts: Reliance, Bharti, Tatas and BSNL.

Analyst Majumder goes a step further: ‘In three years so, the Indian telecom field will have about five or six players — Reliance, Tatas, BSNL, MTNL and may be one or two others. All the rest may have to merge.' The telco arms of Reliance and Tatas are privately held; the only listed telcos are state-dominated VSNL and MTNL - the external carrier and the dominant systems in India's four metros respectively - in addition to Bharti Tele-Ventures.

Analysts see Reliance and Tatas waiting for a good market opportunity to list their telcos. There has been continuing market speculation in recent months that Hutchison and Idea Cellular - the latter owned in equal parts by the Tatas, Birlas and AT&T - are serious about an early IPO on the Bombay Stock Exchange.

In addition to IPOs and trade sales among existing service providers, there is plenty of scope for investment in telecom research and development in India. The government has been actively encouraging such investment by offering incentives such as tax holidays.

As of now, foreign investment in telcos, mostly service providers, is limited to 49 per cent of an Indian-incorporated vehicle. Industry and banking lobbies have long demanded that the investment ceiling to be raised to 75 per cent offering majority control to foreign entities. Industry sources are confident that within a year or so after the next general election (due in 2004) and after a couple of telco IPOs, the government might oblige.

Indian finance minister Jaswant Singh and telecommunications minister Arun Shourie are not traditional politicians beholden to narrow domestic interests and are known to be investor friendly. Even a change in government after the next general elections is unlikely to do a volte-face on foreign investment policies. Therefore, over the medium term the pace of foreign investment, including private equity and venture capital in telecommunications, is set to pick up.

Copyright © 2003 AVCJ

VG Kulkarni is a journalist with the AVCJ.

This article first appeared in the Asian Venture Capital Journal, April 2003.

The Asian Venture Capital Journal is the region's leading publication on private equity and venture capital. With readers worldwide, AVCJ provides monthly coverage of fund raising, investments, exits and the people behind them. For more information please visit www.asianfn.com