Slowdown be dammed. Prior to April 2001, an unprecedented growth continued unabated in the telecom services sector globally. Service providers were spending huge amount of money in infrastructure expansion, firmly settled in the belief that an upward spiral had become the order of the foreseeable future. According to an estimate, between 1996-2001, banks worldwide lent $890 billion through syndicated loans, while $415 billion was raised through debt provided by bonds and another $500 billion through private equity and stock market issues. It’s then that the downturn entered the party to play the spoilsport.

Sure, things have not been the same since the slowdown set in. All sectors have been affected and telecom has been no exception, talking generally. Globally, it seemed earlier that the sector would revive by the first quarter of 2002, but the 11 September attacks poured cold water on such hopes. However, while the telecom markets in the US and Europe are moving towards saturation, the Asian market is behaving differently. Forget slowdown, it’s in fact booming with countries like India and China spearheading the march. Both countries provide immense opportunities in basic as well as cellular markets, and as far as the growth rate is concerned, India scores over China. In basic services, India is projected to grow at a compounded annual growth rate (CAGR) of 17.3 percent whereas China is expected to grow at a CAGR of 11.3 percent. On the cellular front, India is projected to grow at a CAGR of 73 percent whereas China is expected to grow at a CAGR of 35.6 percent. That India is way behind China in terms of penetration is a different matter.

New Land of Opportunities

India’s basic and cellular penetration is way behind the developed and some of the developing economies of the world. At present, the country has a basic penetration of 3.7 per 100 people and in cellular it is around 0.5 per 100 people. This shows that we have a significantly low tele-density, but it also means that there is a huge opportunity for service providers both in basic as well as cellular. More importantly, the opportunity is for real. According to NTP ’99, India has a tele-density target of seven by 2005 and 15 by 2010.

In terms of foreign direct investment, telecom stands next to energy sector in India. In telecom, cellular contributes a maximum FDI of around 48.5 percent whereas basic services contribute around six percent. With the increase in number of basic and cellular service providers in numerous circles one is likely to witness an increase in FDI inflow.

Initially, there were too many players on the services front. There were companies like British Telecom, Bell Atlantic, Telstra, Shinawatra, Telekom Malaysia, Sanmar, Nynex, Bell Canada, Jasmine International, and Swisscom AG. But for the last two years, the cellular turf has been undergoing consolidation, often through acquisitions. Only the more serious players, with long-term business commitment have stayed back while others have left the scene. Some of these serious players are SingTel and Warburg Pincus in Bharti Televentures; Hutchison in Delhi, Mumbai, Kolkota and Gujarat; and First Pacific in Haryana, Kerala, and UP (West), among others.

Much of the consolidation has taken place on the cellular front, which now has four major players namely, Hutchison, Bharti, BPL BaTata, and Escotel in the fray. Bharti and Hutchison have acquired new circles and consolidated their operations in the country and are providing coverage on an all-India basis. Escotel has further consolidated its operations by bagging a good number of circles on the fourth cellular front.

Bharti Group has acquired a lot of circles too, and its dream of providing a pan-Indian coverage is becoming a reality. The company has already taken a 100 percent stake in Spice’s Kolkota operations, 74 percent equity in Andhra Pradesh and Karnataka from JT Mobile, and 94.8 percent stake in Chennai from Skycell. But the company has an intention to have 100 percent equity in Andhra Pradesh and Karnataka, and Chennai. The Group has further consolidated its position on the cellular front with bagging the fourth cellular contracts for Mumbai, Maharashtra, Gujarat, Madhya Pradesh, Haryana, Uttar Pradesh (W), Kerala, Tamil Nadu, and Punjab. Reportedly, the company is planning to start operations in the new circles by mid-2002.

On the other hand, Hutchison has consolidated its cellular operations and is operational in Kolkota by buying Usha Martin, in Gujarat by buying Fascel, and in Delhi by buying Sterling Cellular. Hutchison has further consolidated by bagging circles like Chennai, Karnataka, and Andhra Pradesh on the fourth cellular front. There has been consolidation with the coming of BPL Mobile, BPL Cellular, Birla AT&T and Tata to form a consortium called BPL BaTata (BPL, Birla AT&T, and Tata) operational in Mumbai, Tamil Nadu, Kerala, Gujarat, and Andhra Pradesh. Birla AT&T, as part of the consortium, has bagged the Delhi circle as a fourth operator. Escotel too has grown from its existing operations in Haryana, Kerala, UP (W) and has bagged the Rajasthan, Punjab, HP and UP (E) circles as the fourth operator.

After the consolidation, the cellular market in India has been doing exceptionally well with a monthly addition of around 250,000 subscribers for the last six months. With the coming of BSNL as a third operator and Bharti, Reliance, Barakhamba (a part of the Hutchison Group), Escotel, and Birla AT&T as fourth operators, the cellular market is becoming more competitive and one can hope to see lots of innovative services due to the intense competition. Only those companies which have good financial muscles will survive in the long run.

Although cellular services are in a consolidation and acquisition stage, basic services are still in the initial stages and players are busy laying networks and deploying services in new circles and new cities. At present, there are only five private service providers and with the award of new licenses there has been an increase in the number of service providers. Since basic services is a game of deep pockets, we have majors like Bharti, Reliance, and Tata which are very aggressive and are planning to launch services at the earliest. Bharti is planning to start services in Haryana and Delhi in January 2002, Reliance is planning to begin operations in March, and Tata by mid-2002.

Strategic investors haven’s exhibited the same enthusiasm for basic telephony that they expressed for cellular services. HFCL and Shyam, for instance, have been looking for strategic investors for a long time for faster expansion of their services in Rajasthan and Punjab but haven’t been successful so far. To start with, Reliance and Tata will not go for a strategic investor initially but may explore the possibility at a later stage.

Companies like Reliance and Bharti are completely funded and Hutchison is looking for funds for fourth cellular operations in the country which is achievable. Most of the companies have started showing profits and have consolidated their market shares, especially after the consolidation in the cellular space. For basic services, it will still take a couple of years as service providers have to cover vast areas and because revenues are still not cost-based.

Funding Needs

India needs a huge investment to achieve the tele-density objectives of NTP ’99. According to Arthur Andersen, the country needs an investment of $45–50 billion by 2010, which translates into $3–4 billion per year. Where is this money going to come from?

Be it promoters, international strategic investors, international financial investors, or lenders, the private sector has traditionally been the primary attraction. Of late, this has been particularly true of telecom companies. The attraction is likely to continue with fourth cellular operators and the new basic service provider entering the scene. However, the entry of private investors will depend on factors such as market size, growth potential, attractive business models, investment climate, and regulatory environment.

In the past, Indian service providers have also displayed the capability to raise funds at internationally competitive rates with the backing of international agencies. They have also got good support from vendors in terms of vendor financing. However, the slowdown has made them more selective in their approach and it is getting difficult to get finances.

Pramod Saxena, country head, Motorola India, said, "Clearly, nobody can afford to work only on 100 percent finance projects. For new opportunities, no long-term financing is offered by us anywhere. Well, earlier we used to do it selectively but we are now more restrictive. We did offer financing for certain projects but now we are cautious."

Sanjay Mehta, Arthur Andersen India, said, "More or less, funds are committed as most of the investors are well known. We will see three to four dominant players and they will make sufficient investment in the respective circles."

Telecom being the capital-intensive industry it is, a finance shortage can create problems in the short run for service providers. On the basic services front, there are incumbents like BSNL and MTNL, private players like Bharti, Reliance, and Tata, which has a very aggressive rollout plan. MTNL, the borrowing arm of Department of Telecommunications has borrowed around Rs 12,000 crore from the market since its inception which has been utilized by DoT (now BSNL). With the corporatization of DoT, BSNL can now borrow directly and the budgeted amount for 2001-02 is Rs 5,233 crore. "The company may not borrow the complete amount but depending on the situation we may borrow part of it by issuing bonds," SD Saxena, senior DDG, BSNL, says.

Companies Mull IPO route

Bharti had a plan to list in the Indian and foreign market for a long time but in view of the economic slowdown and consequently low sentiments at bourses, it kept postponing the public issue. The company has filed the documents with the SEBI and is awaiting a clearance. Once Bharti gets the clearance, it will have one full year to list at the Indian market. In all probability, it seems the issue will come out at the end of fiscal 2001. Bharti Tele-Ventures is planning to come out with a public issue worth 185,336,700 equity shares of Rs 10 each.

Bharti requires a funding of around Rs 5,000 crore for basic, cellular, and DLD. Till 31 March 2002, the company requires an estimated funding of Rs 3,450 crore, of which Rs 2,097 crore is for new cellular circles, Rs 480 crore for new basic circles, and Rs 873 crore for domestic long distance.

Commenting on the investment climate in telecom, Akhil Gupta, joint managing director, Bharti Enterprises, said, "Telecom is an attractive sector and we believe it has a good potential for investment presently. Even moving forward, it will remain attractive to the investors."

Private equity has been the primary vehicle for investment in the telecom for a long time and one has seen large private equity funds being invested. The public sector funding is presently nil and it is primarily open to cellular companies. According to Arthur Andersen, the private sector will contribute around 35 percent of the investment whereas the remaining 65 percent will be raised through public sector funding.

Sanjay Mehta of Arthur Andersen opines, "In infrastructure projects, one has to have equity first and in a country like India where business risks are higher equity is the best mode."

Reliance Infocom, however, doesn’t have plans for an IPO soon. Instead, it’s planning to get funds from its promoter—Reliance Industries. The company has already injected around Rs 2,600 crore for laying the backbone network. The total cost of Reliance project is to the tune of Rs 25,000 crore, so the company will look at public investments or strategic investors in future.

Tata, which is developing infrastructure for four basic circles, is also jumping into the DLD space. Total investment on the project is to the tune of Rs 7,000 crore. The company is looking at the debt market but is yet to initiate talks with institutions. Escotel is looking for strategic investment in its fourth cellular operations and things will be finalized soon.

The equity capital market route has not been explored till date by cellular service providers in the country and is yet to make a beginning, though on the basic services front, Hughes Tele.com was the first to get listed on Indian bourses. The issue, however, was undersubscribed. Due to the general slowdown and September 11 attacks, things have taken a back seat in terms of listing and we might see a lot of listing in the Indian and foreign market once the market stabilizes and sentiments starts picking up.

"As the sentiments are down, the telecom companies are not able to get their true worth. After stabilization, the valuation will pick up next year," Anil Virmani, chief financial officer, Escotel Mobile Communications, says.

Recently, MTNL got listed at NYSE on November 8 and was the second PSU after VSNL to do so.

After listing on NYSE, the Global Depository Receipts have been converted into American Depository Receipts as only ADRs can be traded on the NYSE. The MTNL scrip traded for the first time at a price of $5.9 whereas the scrip closed on the Bombay Stock Exchange at Rs 138.15 on the listing date (one ADR is equal to two shares). In other words, the scrip traded at a marginal premium of Rs 3.45 or 2.5 percent on the NYSE. MTNL would have performed well if they would not have postponed the NYSE listing for a good numbers of time. With the postponement, MTNL lost the most valuable time and could not list when the market was bullish.

There were talks in the industry that even Hutchison is planning to come out with a public issue. Seeing the success of Bharti they might think of pushing the issue at the earliest as they have got good bottom-line. Apart from this one might see some more IPOs in two years time as cellular industries are moving towards it.

"The success of any IPO will depend on vision, direction of the company, and cash positiveness of the company," Mehta opines.

Financing Hurdles

The success of telecom investment in the country will pave way for achieving the targets of NTP ’99, but are we moving in the right direction?

Singapore, which has a basic telephony penetration of 48.45 and cellular penetration of 58.5, was able to achieve this because it moved in a holistic way to attract foreign direct investment in the country. "We have developed a Singapore Inc approach where different government agencies were responsible for different areas. We look towards updating those areas that comes under our purview and how they can contribute towards a conducive environment to attract investors," William HIOE, senior director, Infocom Development Authority of Singapore, says.

Investors have a finite amount of resource, so when they look at where to invest, obviously they ponder over issues such as safety of their investments and the returns. Thus, even though a market may appear attractive in terms of returns, but if investors have a feeling that the money is not safe or the banking system is not sound enough, they are reluctant to invest. Also, if the government policy keeps changing or there is no transparency, investors hesitate from making investments.

In India, there has been lot of problems on the regulatory front which acts an obstacle for foreign investment in the country. Issues like interconnect, cost based tariff, calling party pays, limited mobility have been going for a long time and are yet to be resolved. The regulator lacks foresight and there is no timeline or blueprint which says in which direction we are moving. There is no timebound settlement of disputes, which worsen things.

"One of the key regulatory feature that most of the players would like to see is a non-discriminatory, transparent and interconnect regime. But, we are unable to do so because of tariff rebalancing and USO," Mehta says. "If the regulator works to a timeline and it is accountable we will see a significant increase in the confidence of investors," he adds.

On the interconnect front, there is no clarity and the interconnection rules are not spelt out. The service providers can negotiate on a mutual basis with the incumbent which leaves a lot of room for disputes, and delays the rollout of services by private players. The regulator has been very slow on the CPP front and things have been in discussion for the last two years without any concrete outcome till date. No decision has been taken on the limited mobility front and presently the case is with TDSAT. One may expect that on the limited mobility front, a final decision will come from TDSAT by the end of this year.

Other measures also need to be undertaken to increase investors’ interest in the telecom sector. For example, companies in the power sector are classified as industrial undertakings whereas telecom industry does not fall under the same category. SD Saxena, senior DDG, BSNL feels that the telecom industry should also be equated to the power sector as it as important as any infrastructure.

Companies, on their behalf, need to focus on issues like better business models. "Earlier, the hype in telecom helped service providers in fetching good funds, but in future, the commerce of the business will be important," Virmani of Escotel Mobile says.

Improving their bottomlines can go a long way in helping companies get good valuations at the share market. The cellular industry is growing and there is lot of latent demand. Cellular service providers have to target different segments so that they can see an increase or maintain the growth level. With the increase in competition, raising capital will be more challenging as service providers will have to come out with business models that pay in the long run. They will also need to focus on such new technologies and services that help increase average revenue per user.

Pravin Prashant