India turns Global telecom playground

A Corporate Radar excluisive

Why is the Indian telecom market becoming such an active playground for foreign investors? What is the reason for such an inflow of FDI, despite the global financial crisis? Corporate Radar asked Mr. Bundeep Singh Rangar, Chairman of IndusView Advisors Ltd, for his views. IndusView advises multinational companies on business opportunities emanating from India’s fast growing economy. Mr Rangar’s response:

1. Post Etisalat etc., do you think more FDI will flow into Indian telecom?
Ans: The current dynamics of the Indian telecom market should be seen from two perspectives, which also explains the evolutionary cycle the sector has seen over the last two decades:
• A very basic realization among the masses about the need to remain connected – The first phase
• To remain connected and also harness the immense potential of the value added services and innovative applications – The second phase

While the first phase has seen the tele-density of the country jump from less than 1% in the '80s to about 30% now; the second phase is witnessing the numerous applications and value added services like music and movie clips downloads, innovative ring tones, among others.

But, that is not enough ... there is still a large population that needs to be offered the benefits of the basic communication services – that is how the target of achieving a tele-density of about 45% is set for the next five years by the government of India. The service providers – both the state owned and the private sector – would be aiming to surpass that target and garner the maximum possible chunk of that potential subscriber base.

The race among mobile telecommunication service providers translates in to a growing opportunity estimated at more than 700 million by 2012 from the current 300 million, at a CAGR of 21%.

Apart from the vanilla voice and sms services that the mobile services are widely associated with, the advent of next generation platforms like 3G and progressively 4G, will exponentially accelerate the possibilities of innovative applications that can be bundled on to the networks and delivered at the subscribers' finger tips in the hi-tech mobile handsets.

Such subscriber growth targets and evolving technology landscape calls for corresponding high capital investments which is pegged at about $73 billion over the next five years. And, a major chunk of the investment is expected to be realized through Foreign Direct Investment (FDI), particularly in the area of mobile communication.


2. Why do you think Indian telecom market is becoming so attractive for foreign players?

Ans: As mentioned above, the incumbent mobile telecommunication service providers in India currently add more than nine million subscribers a month with a potential of taking the total tally of subscribers up to 700 million in the next five years. In terms of expected revenues that translates in to overall mobile services revenues likely to be more than $37 billion by 2012 growing at a CAGR of 18%. Such growth potential in the segment offers enough incentive to overseas service providers to vie for their share of the pie. And investor friendly regulations by the government, allowing up to 74% stake holding in a domestic entity by foreign player is an icing on the cake.

The potential of a profitable exit opportunity is another reason. For instance, the stake of 26% in Tata Teleservices by Japanese telecom services provider NTT DoCoMo at $2.7 bn (Rs 12,770 crore) values Tata Teleservices at Rs 50,270 crore. Even in the current market conditions the valuations are still moving north. In early 2006, Temasek picked up a 9.9% stake in Tata Teleservices for Rs 1,500 crore valuing the company at around Rs 15,000 crore. The NTT DoCoMo deal values Tata Teleservices at more than three times that in less than three years.

3. Given current global crisis, do you think the telecom market, particularly in india, will withstand the turmoil and witness the same pattern of growth as seen in the recent times?

Ans: The recent string of investments in Indian telecom companies, including, Tata Teleservices Ltd by NTT DoCoMo, Inc; Unitech Telecom, the telecom arm of India's second largest real estate developer Unitech Ltd by Norwegian telecom firm Telenor ASA, world's seventh largest telecom service provider at $1.36 billion; and Swan Telecom, a start-up GSM telecom service company of a Mumbai-based real estate developer Dynamix Balwas Group by Dubai-based Emirates Telecommunications Corp (Etisalat) at $900 million; or, South Africa's largest telecom company MTN Group's attempts to enter the Indian market are examples of overseas companies that have exhibited confidence in the potential of the Indian market.

Communication is a necessity. The related costs of owning a handset and usage charges (tariffs) in India are among the lowest in the world. To add to that, the service providers are offering innovative tariff packages even while touching the lowest band and are willing to further lower the packages to bring new subscribers in to their fold.

Such customer friendly posture will go a long way in ensuring the market remains an active playground.