Incredible India

A confluence of factors in India’s telecoms sector during 2008 has ignited a frenzy of activity that is changing the landscape irrevocably. With the licensing of 2G spectrum, preparation for the award of 3G spectrum and the floodgates having been opened with respect to foreign direct investment, 2009 and beyond is set to propel India rushing up the table of cellular penetration levels across emerging markets

Confirmation last month that Japan’s foreign investment-shy operator, NTT DoCoMo had acquired a 26 per cent stake in Indian operator Tata Teleservices (TTSL) for US$2.7 billion is arguably one of the most significant investments in India’s frantic telecoms sector. This is so, not because of the financial size of the investment or the percentage stake acquired by Japan’s top operator, but because of the calibre of the investor.

DoCoMo, despite being a domestic market leader some way, and one of the most, if not the most innovative mobile operator in the world, has been reticent about embarking on an international acquisition trail. Thus for India to be identified by DoCoMo as a foreign market worth venturing into is a significant endorsement of the potential that exists in the world’s second most populous nation.

In August TTSL said it planned to spend INR80 billion (US$2 billion) over the next two years on its new GSM network and existing CDMA operations, in a bid to grow its subscriber base six-fold by 2011 to 155 million.

Approximately INR60 billion is to be spent on a new GSM network, which the operator’s managing director, Anil Sardana, expects will garner 55 million users within three years.

The remaining INR20 billion will be utilised to upgrade the existing CDMA network with the view to counting 100 million CDMA subscribers on the network by 2011. TTSL also has plans for the development of a WiMAX network covering 15 cities by 2009.

The merger talks earlier this year between South Africa’s MTN Group with India’s Bharti Airtel and then subsequently Reliance Communications only went to confirm the profile of India’s telecoms sector as one seeking to create value both domestically as well as regionally, with the emphasis of scale being a recurring sub-text.

At the end of October, perennial emerging market investor Telenor announced its acquisition of a 60 per cent stake in Unitech Wireless, an Indian GSM licensee with concessions to roll out its network to all 22 telecommunications circles in India. The cost of the stake was US$1.07 billion.

At the time of the deal it had been suggested that perhaps Telenor had paid somewhat over the odds for the stake especially in light of the state of the global situation. However, in comparison to the US$900 million Etisalat paid just a month before in September for a 45 per cent stake in fellow GSM licensee Swan Telecom, which only has licences extending to 13 of India’s 22 circles, Telenor’s investment looks like shrewd business.

However, the impact of the global economic situation has had an impact on Telenor, and will likely continue to do so on investors looking to raise finance in the near-term.

Telenor is the second largest foreign operator in Asia after Vodafone, and following the announcement to finance the deal through a rights issue, its shares tumbled 15.4 per cent. Shares in Unitech Ltd, the parent company of Unitech Wireless and India’s second-largest listed real estate firm, rose as much as 10 per cent on the day.

Telenor’s CEO Jon Fredrik Baksaas said that India Telenor could “replicate its experience” from Pakistan where it became second largest in terms of market share within four years.

Valuations in India continue to remain fluid, in particular with respect to greenfield opportunities. For example, the GSM licences that the likes of Telenor and Etisalat have participated in were offered at a fraction of the price that they were deemed to have been worth. So much so that earlier this year India’s regulator was accused by the finance ministry of selling 2G spectrum in January at onequarter of the market value, thereby losing approximately INR250 billion (US$5.7 billion) in income in the process.

The Department of Telecommunications (DoT) awarded the pan-India 2G spectrum in January to new licencees at what was alleged to be a price equivalent to the price of the spectrum in 2001amounting to INR16.51 billion.

The finance ministry had earlier opposed the move to sell 2G spectrum below market rates, saying the additional INR250 billion would have relieved as much as 60 per cent of India’s revenue deficit in the 2008 financial year.

“The fact that the companies that were awarded the 2G licences command such high valuations even without start-up spectrum, infrastructure or customer base, nine months down the road, demonstrates the huge error in judgement made by the government,” stated member of parliament, Nilotpal Basu in August.

Datacom Solutions, Unitech, Loop Telecom, S-Tel and Swan Telecom are some of the companies to have bought spectrum at the discounted prices, with Telenor’s acquisition of Unitech immediately valuing the licensee at US$1.78 billion, and Etisalat’s stake in Swan Telecom valuing the licensee at US$2 billion.