It's a market where customers queue up for phone connections, and where one new mobile subscriber signs on every two seconds. India, with its explosive rate of growth, has overtaken even China, to become the world's fastest growing mobile market, with 6.5 million new subscribers a month — 200,000 a day.
That means every three months Indian companies add as many mobile phones as Canadian or Netherlands operators have since the industry started.
Little wonder that global giant Vodafone, beset by sluggish growth and saturated markets, is making an $18.8 billion entry into this massive market. In a hotly contested auction Vodafone has bought a controlling 67% stake in Hutch, India's fourth largest telecom company— with 24.4 million subscribers — from Hong Kong-based Hutchinson Telecommunications International (HTIL).
Vodafone's winning bid beat three rivals: Indian telecom operator Reliance; the London-based Hinduja brothers; and Hutch's minority stakeholders, Essar, controlled by the Ruia brothers.
The big question doing the rounds of analysts and market watchers is: Did Vodafone pay too much?
"India is worth a lot more to Vodafone than it is to HTIL," says Tucker Grinnan, senior telecoms analyst at HSBC. Indeed the move to India is in line with Vodafone's larger strategy of exiting from stagnant subscriber markets such as Belgium and Switzerland — where it sold its minority stakes last year — and investing, as the company outlines, "in higher growth emerging markets" with the aim of increasing the company's EBITDA from what it calls EMAPA — or Eastern Europe, Middle East, Africa, Asia Pacific and affiliates. The target increase in EBITDA is "over a third by FY 2012".
India, with its investment-friendly policies, clearly fits this billion dollar bill. Government regulations permit up to 74% foreign investment in telecom, compared with Vodafone's 3.2% stake in China Mobile.
The UK based telecom operator has been trying for the last four years now to enter India, settling two years ago for a 10% stake in market leader Bharti Airtel. Now, buying 67% ownership of Hutch has given it management control in the world's hottest market, a market where penetration rates are still as low as 13%.
Sunil Mittal, head of Bharti Airtel — former collaborator and soon-to-be competitor — told the Daily Mail during 3GSM in Barcelona: "In Vodafone's place I could have spent a couple of billion dollars more. In my place, probably $3 billion-$4 billion less."
Still, as analyst Harit Shah of Angel Broking points out, "eventually what Vodafone is paying for is for growth".
Explosion in capex
And what growth: "There's an explosion in capex, there's an explosion in numbers of base stations," says HSBC's Grinann. "Bharti has announced the construction of 20,000 base stations in the next year alone. A market like Korea has 8,000 base stations in all. Even Vodafone's total tally of base stations in the UK is only 30,000."
So what changes will Vodafone bring to the Indian market? Certainly, its entry is being greeted as a major event by all sections of the Indian economy, including the media.
After Vodafone's successful bid Arun Sarin, the group's Indian-born CEO, arrived in Delhi and Mumbai to a red-carpet reception.
"There's a new ring master in town" yelled the headlines of the country's largest daily, The Times of India, "and he says rates are going to fall further". Indeed Vodafone announced a whole host of goodies, from low-priced handsets — from its procurement agreement from Chinese manufacturer ZTE — to lower tariffs and better coverage, through savings in opex and capex through infrastructure sharing deal with Bharti Airtel.
Here's where Vodafone encountered its first road block. Not everyone proved equally ecstatic with these offerings. Vodafone's minority partners, the Ruia brothers, whose Essar company holds 33% in Hutch, were reportedly miffed by Sarin's triumphant announcement of an infrastructure sharing deal with Bharti.
What followed was weeks of wheeling and dealing, as the Ruias sought to bargain for more operational control and a higher value on their "put" option — their ability to sell out their minority stake, if at any time in the next five years they should choose to. Questions were raised in parliament about the legality of the amount of foreign investment in this deal. A lobby group, Telecom Watchdog, filed an objection with the Delhi High Court. That now seems to be sorted out.
Vodafone will pay Essar $415 million extra and grant it a put option to buy back its shares in three to four years of operation for the amount of $5 billion, leaving Vodafone free to get on with the business of slugging it out in the Indian market.
It's a market that is looking clearly at growth. "It's a marathon which is not anywhere near its close — it's a little beyond the start," says K A Chaukar, managing director of Tata Services, the promoter company for Tata Indicom.
Six big telecom operators and several small ones have made this market unusually competitive. Tariffs, at one or two cents a minute, are the lowest in the world. "Mobiles have become a grocery item," exclaims entrepreneur and telecom consultant Amit Bose, who points to SIM cards selling for 90 rupees ($2.07) — "less than a bottle of Horlicks", he notes. Mobile recharge cards are less than the price of a Coke.
Average use runs at 187 minutes a month and declining, while ARPU is $7.60 a month and also declining. But Indian operators continue to report healthy EBITDAs of 30% and above.
The secret of their success is volumes. "The market is expected to grow to 400-500 million subscribers in the next 48-60 months," says Bose, and indeed these are estimates echoed by every telecom major.
Mobile money transfer
High growth areas include mobile broadband, as wireless connects remote areas that have never seen fixed-line phones. "We are introducing instant messaging and also money transfer through mobile phones,", says TV Ramachandran, chairman of the Cellular Operator Association of India. "With up to $22 billion being repatriated to India by the migrant population, GSM systems would be much more cost effective than the current £8-£10 pound surcharge by banks on a money transfer of £50."
Now with the imminent allocation of 3G spectrum, such value added services will receive a fillip, and operators are lining up in droves.
Historical underinvestment in telecom networks and capacities has made the country a more flexible area in terms of technology standards. It has also made the market an opportunity for a whole host of technology providers such as Ericcson, IBM, Motorola and Alcatel-Lucent.
"Unlike other emerging markets like Korea and China, where the government tells the operator what technology to deploy, the operators here are able to choose their own technologies, making India an even more attractive emerging market," explains Grinann at HSBC.
So which are the telecom titans that Vodafone must now tussle with, in its quest to be market leader?
Bharti Airtel — nurtured by owner Mittal to the number one position with 34 million subscribers — is in a sense its biggest competitor. "We are an organization with entrepreneurial DNA," says company president Manoj Kohli, "and we have always welcomed competition."
Indeed Bharti, which will lose a collaborator once Vodafone sells out its stake and will probably experience a setback in its 3G programme, has reaped some benefits both from its infrastructure sharing deal and its status for three years as Vodafone's preferred vendor for national long distance and leased line services.
Its biggest strength however remains its first mover advantage, as it grabs high-ARPU customers along with high market share in regions hitherto unexposed to any telecom at all.
Then there is state-run BSNL with its 25 million mobile subscriber base, and its 34 million fixed-line subscribers. Numbers come easy to this concern, the best network in rural areas. "We are present completely all over India," says chairman and managing director A K Sinha.
Broadband subscriber target
BSNL has the advantage of an extensive existing landline penetration and is targeting five million broadband subscribers in the next three years, up form the current sector total of 2.1 million — aside from subscriber additions in basic mobile connections.
Voice ARPUs, especially in the rural sectors, are among the lowest in the world, and BSNL by bundling broadband with existing fixed line connections is hoping to maximize revenues.
Sinha is unperturbed by Vodafone's imminent entry: "For us it doesn't matter so much. In the last five years we have gained considerable experience, we will continue to price ourselves aggressively," he says.
Reliance Telecom, the largest CDMA player and the third largest telecom operator in the market, also counts in the numbers game. It was a late entrant into the Indian telecom market, but it dug deep into its pockets for petrochemical cash to achieve critical mass very quickly.
The company launched with an offer of 501 rupees ($11) for handset and connection, suddenly making the mobile phone a mass-affordable communications device. Its mobile subscriber base is now 31 million.
Last year Reliance announced a strategic shift to provide GSM services as well. But its unsuccessful bid for Hutch has been a major setback in its ambitions of achieving number one position.
Value added services
Tata Indicom, promoted by the $17.80 billion Tata Group, also uses CDMA technology and has a 7.2% share of the mobile market with a subscriber base of 10.7 million. It also has 4.7 million fixed line and fixed wireless subscribers. Its focus on value added services is buttressed by the acquisition of former state-owned telecom services company VSNL.
In a sector where rapid growth is going to lead to major spectrum shortages, Tata Indicom plans to emphasis its superior quality, especially for value added services, as compared with the existing 2G GSM providers. "Technology gives us the competitive edge," says K Chaukar, managing director of Tata Services. "We have a superior combination of data and voice on a CDMA spectrum efficiency."
Idea Mobile, promoted solely by the $12 billion Aditya Birla group, has 13 million mobile subscribers and 8.7% of the total market. It recently had a successful IPO to fund its ambitious expansion programme; planning to invest about $2 billion in services over the next few years as well setting up national long distance networks.
So that's the market in which Vodafone must achieve its declared target of 25% market share by 2012. What it has is the Hutch brand with 24 million subscribers, its nationwide network and an experienced management team led by CEO Asim Ghosh, widely credited for making Hutch what it is today.
Vodafone seems to have a lot going for it despite its history of reverses in Japan and parts of Europe. It has the advantage of being the only international brand in the Indian market, giving it the ability to leverage its vast global experience. It has access to international technology and procurement and it has deep pockets to fund cap ex on much needed network development.
Ghosh, CEO of the company, soon to be renamed Vodafone Essar, sums it up: "There will be more penetration. There will be more investment. We'll get our share of the growth." GTB
Appeared in the March April issue of Global Telecoms Business
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