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Tough Times: New players wait for the tide to turn
The past year has been a turbulent one for telecom operators in India. For fledgling operators like Uninor, Sistema Shyam TeleServices Limited (SSTL), S Tel, Videocon Telecommunications Limited (VTL), Etisalat DB Telecom India and Loop Mobile, which were granted 2G licences in 2007, the year has been particularly exigent.
The 2G spectrum controversy rocked the telecom sector, indicting a large number of industrialists, politicians and bureaucrats. According to the Comptroller and Auditor General’s (CAG) statement, in 2007, most of the licences had been given away for a song to the operators, some of whom did not even meet the eligibility criteria. This not only eroded the credibility of the operators but also put a question mark on the sustainability of their operations.
Heads of companies like Unitech Wireless and the Dynamix Balwas Group found themselves on the wrong side of the law and consequently, their relationship with their respective partners, Telenor and Etisalat, deteriorated. Others like Loop, S Tel and VTL were embroiled in court cases for various reasons, including for being beneficiaries of irregular licence allotments. Moreover, all the new operators were hauled up for not having met their network rollout obligations with the Department of Telecommunications (DoT) threatening to terminate their licences in circles where they were not operational.
The past year thus saw the challenges mount for the new players. Today, with their business viability in question, most are revisiting their strategies. “The 2G case had a huge impact on the industry. Investments in the sector fell, domestic banks stopped lending and the inflow of foreign direct investment (FDI) into the sector stopped because of uncertainty,” says Rajan S. Mathews, director general, Cellular Operators Association of India.
According to Rohan Lobo, associate director, advisory services, KPMG: “The new players’ operating environment has been beset with regulatory controversies, which has diverted the management’s attention. To make matters worse, funding has also become a challenge.”
“In this situation, every operator in India is well advised to consider an exit opportunity, which the National Telecom Policy [NTP], 2011 proposes to offer, through acquisitions, joint ventures (JVs) or alliances,” says Mohammad Chowdhury, partner and telecom industry leader, PricewaterhouseCoopers India. “Some of the new operators have tried to establish themselves in the market and have shown the desire to create a long-term market position. In any circumstance, when you are one of the 11 players in the market, your break-even strategy has to be a long-term one.”
Given the hypercompetition in the sector, the current market structure is clearly unsustainable. It is not possible to have so many players in the market, with all being profitable and having the critical number of subscribers. It is more likely that the situation will change whenever the policies change. The recently released draft NTP suggests a major review of the spectrum allocation, merger and acquisition (M&A), licensing and broadband policies.
Moreover, the proposed M&A guidelines in the NTP make it much easier for the new players to be acquired by the incumbents or for them to pick up stake in the existing telecom service providers in order to scale up operations. This will pave the way for the much-needed consolidation of the market.
Industry analysts expect that the sector will be back on track in 2012 and that the revised telecom policy will play a big role in boosting it.
tele.net takes stock of the performance and plans of the new telecom players…
Uninor’s long-awaited Rs 82.5 billion rights issue was cleared by the Foreign Investment Promotion Board (FIPB) in 2011.
Uninor, a JV between Norway’s Telenor Group (67.25 per cent) and India’s Unitech Group (32.75 per cent), had decided to go in for a rights issue. However, it was challenged by its real estate partner company Unitech Limited in the district court of Gurgaon.
The FIPB clearance has come at a crucial time for the company as it was unable to secure long-term loans from Indian banks due to the prevailing uncertainty in the telecom sector. Now, even though funding from Indian banks will remain difficult, the permission for the rights issue will help it source funds from international banks.
Uninor, despite being caught in the 2G controversy and facing worsening ties with its partner, is the most promising of the new players. According to the Telecom Regulatory Authority of India (TRAI), it had a user base of 36.3 million and a market share of 5.68 per cent as of December 2011, and operates across 13 circles. It is currently the sixth largest GSM player in the country.
By offering differentiated and segmented services, Uninor attracted the maximum number of new users in December 2011, among to both old and new players. Its user addition for the month stood at 2.12 million, compared to Bharti Airtel’s 0.96 million, Vodafone India’s 0.9 million, Idea Cellular’s 2.38 million, S Tel’s 0.013 million, Loop’s 0.012 million and Etisalat’s 0.59 million.
According to Telenor, Uninor’s revenue for the second quarter of 2011 increased by 32 per cent over the first quarter. Its total earnings before interest, taxes, depreciation and amortisation (EBITDA) loss was lower than those in the previous quarter by NOK 54 million due to increased gross margins. At end June 2011, the company’s capex stood at NOK 186 million while it operated 26,623 active sites.
The company’s biggest hurdle today is its deteriorating ties with its partner Unitech Wireless. Early in the year, Sanjay Chandra, former chairman of Unitech, was indicted on the grounds that the company was one of the biggest beneficiaries of the 2G spectrum allotment. Consequently, the Uninor board asked Chandra to step down, leading to a souring of relations between the partners.
But that apart, analysts say Uninor is on a good wicket. It has understood the pulse of the market and successfully marketed its mobile services. Moreover, its parent company Telenor is serious about its telecom business in India and is looking at a long-term stint in the country.
“The company’s better-than-expected performance in the hypercompetitive telecom sector proves that Uninor has managed to play the game a bit differently from the other new players. Going forward, the company may have a few more surprises up its sleeve,” says Dr Mahesh Uppal, director, ComFirst. “So far, Uninor has been able to hold its own, primarily because of Telenor’s strong support.”
Going forward, the company stands firm in its plan of achieving an EBITDA break-even by 2013 and after that, a cash flow break-even within two years.
Rajiv Bawa, chief corporate affairs officer of the company, says: “We will continue to strengthen our services in the circles where they are already launched and gradually there will be commercial launches in the remaining circles too. Overall, Uninor will continue to position itself as an affordable service provider for the mass market and would like to be the best at offering basic services, mass market distribution and being an ultra cost-efficient operator.”
From a single-circle operator in March 2009 to a pan-Indian player today, SSTL has marked its presence in the telecom space under the MTS brand.
A JV between the Shyam Group and Russian telecom operator Sistema, the company was the first among its peers to launch mobile services on the CDMA platform. The year 2011 saw the company provide international data roaming for CDMA prepaid customers, a service that is not yet common in the country. This enabled its customers to utilise roaming services across networks in 231 countries and enjoy high speed downlink packet access services in 114 countries.
Competing aggressively in terms of products and services, the company has established a base of 15 million subscribers (as of December 2011) and a market share of over 1.59 per cent. It ranks second in the pecking order of new players, after Uninor, which has a 5.68 per cent market share. It is followed by Videocon (0.85 per cent each), S Tel (0.55 per cent), Loop (0.51 per cent) and Etisalat (0.26 per cent).
Throughout the year, the operator had been expanding its operations across the country. Early in the year, it signed CDMA expansion and EV-DO upgrade contracts with ZTE for 10 circles. With plans to commercially launch EV-DO Rev. B Phase 2 in the country to enhance the existing service speeds of mobile broadband on its network, SSTL signed a three-year managed services deal with Ericsson for four telecom circles – Uttar Pradesh (East and West), Gujarat and Rajasthan. Under the agreement, Ericsson will be responsible for network optimisation, operation and maintenance (including field operations), and network service assurance.
Another notable development for the company in 2011 was its foray into the smartphone space. SSTL launched two Android-powered smartphones, the MTS MTAG 3.1 and MTS Livewire, in the sub-Rs 5,000 category.
Financially, the company performed well in each quarter of 2011. According to its unaudited consolidated US GAAP financial results for the quarter ended September 30, 2011, its consolidated revenues increased by 18 per cent quarter on quarter to Rs 3,282 million. In comparison, its wireless subscriber base grew by 13 per cent to 13.27 million.
Moreover, non-voice revenues from both data and mobile value-added services for the quarter increased by 32 per cent quarter on quarter to Rs 1,052 million. This segment now contributes 32 per cent to the total revenue.
Blended mobile ARPUs for the quarter also increased to Rs 85 as against Rs 82 in the previous quarter, an interesting contrast to the trend of declining ARPUs in the market.
SSTL’s data card subscriber base for the quarter ended September 2011 increased by 30 per cent to 1.07 million. The company added 0.25 million data card subscribers during the quarter, the highest additions in a quarter so far date.
The capex investments by the company at the end of the third quarter of 2011 stood at Rs 62.43 billion. Consolidated debt from banks and financial institutions at the end of the quarter stood at Rs 68.6 billion.
The one major damper for the company in 2011 was TRAI’s suggestion to DoT to impose a penalty on SSTL or cancel its licences for failure to roll out services within the stipulated time frame. Consequently, SSTL has had to pay around Rs 110 million as penalty in the circles where it was unable to meet the rollout requirements on time.
In the coming year, SSTL is looking forward to acquiring a national long distance (NLD) licence. It is reported that the Department of Telecommunications (DoT) is in the process of issuing a letter of intent to SSTL for an NLD licence as the company has fulfilled the criteria required for holding such a licence, including the 73.95 per cent foreign equity in it, which conforms to the 74 per cent ceiling needed for approval from the FIPB. Besides this, SSTL has submitted its business plan, which highlights its funding arrangements as required under the NLD guidelines.
As a new operator in the telecom space, SSTL has been specific about its strategies. The company derives its strength from its data business and its future plans revolve around the same. Obtaining an NLD licence will definitely give SSTL an edge over its peers.
Loop Mobile (formerly BPL Telecom), which operates in 16 circles at present, had a subscriber base of 3.23 million and a market share of 0.51 per cent in December 2011.
The company came under the Central Bureau of Investigation’s (CBI) scanner for its alleged role in the 2G controversy. Loop, like some of its peers, is alleged to have been a beneficiary of the 2G spectrum scam. Its licences came under the scanner of the CAG, which stated that the company should not have been awarded licences in the first place as it did not meet the selection criteria. The CAG also stated that at the time of its application, the company’s memorandum of association did not include its telecom business and its authorised share capital was only Rs 52 million as against the required Rs 1.28 billion.
That apart, Loop is facing trouble for allegedly concealing its ownership under a complex holding arrangement as part of the Essar Group. The CBI has claimed that the Essar Group holds more than 10 per cent of cross-holdings in Loop Telecom, which is against the existing norms. In the later half of 2011, various Essar Group and Loop officials were questioned in this regard. At present, a special CBI court has issued summons to all the individuals allegedly involved. Loop is also on DoT’s list of companies being issued show-cause notices for not rolling out services on time. This is the second time the company is being examined in this regard. In May 2009, it had paid a penalty of
Rs 27.5 million for failing to meet the obligation of timely service rollout.
This time, it is facing the possibility of having its mobile permits cancelled in the circles where it is yet to roll out services.
Like other operators, Loop has also approached the Telecom Disputes Settlement and Appellate Tribunal (TDSAT) seeking a directive to DoT to release the performance bank guarantee (PBG) it had submitted at the time of spectrum allotment. The operator claims to have fulfilled its network rollout obligation in the circles where it acquired licences and hence expects its PBG to be released.
Thus, a poor pan-Indian presence (except Mumbai), coupled with the 2G controversy and various other issues over which the operator is in conflict with the government have been major impediments to the company’s growth. Analysts believe that consolidation is the only way forward for the operator.
In contrast to the high degree of enthusiasm it showed in 2010, S Tel, a JV between the Siva Group (formerly the Sterling Infotech Group) and the Bahrain Telecommunications Company (Batelco), maintained a rather low profile in 2011.
A late entrant in the Indian mobile space, the company acquired unified access service licences in 2008 to operate in six Category C circles – Orissa, Bihar, Himachal Pradesh, Northeast, Assam and Jammu & Kashmir. It quickly rolled out its services across five circles.
S Tel also participated in the 3G spectrum auctions in 2010 and emerged as the only new player to acquire 3G spectrum in the Bihar, Orissa and Himachal Pradesh circles. Thereafter, according to reports, it has planned to pump in an investment of Rs 7 billion for its 3G services.
However, despite beginning well, the 2G controversy and the subsequent probe into the company took the wind out of its sails. Today, the operator has put its plans of rolling out 3G services on the back-burner. It is also reportedly facing problems with its vendors, who began disconnecting services on account of non-payment of dues. In August 2011, Tech Mahindra, the company’s main IT vendor, discontinued its call centre and managed services without any prior intimation, leaving the operator to handle the outsourced functions on its own. This was bad news for the company as it was already cash-strapped.
In fact, S Tel believes that it may not be able to serve its subscribers as it has been facing a severe liquidity crunch due to negligible funding from the sanctioned term loan facility by the banks. Further, Shamik Das, chief executive officer (CEO), S Tel, left the company to join Reliance Communications as joint president and CEO of its wireless business.
Today, despite offering a host of interesting services like the passport pack (priced at Rs 99), which allows customers to make international calls to Tibet, China, the US, Canada and the UK (fixed lines), and to mobile numbers in Hong Kong and Singapore at Re 0.01 per second, the company is in bad shape. It had a mere 0.55 per cent market share, as of December 2011 with a subscriber base of 3.54 million.
In this scenario, it is believed that S Tel is likely to exit the telecom business once the M&A laws are relaxed. Batelco is reportedly already considering options like selling a part of its stake in S Tel.
VTL (formerly Datacom) launched services in the Tamil Nadu circle and is currently operating in 16 circles. As of December 2011, it had a market share of 0.85 per cent and a subscriber base of 5.44 million.
For most of 2011, the company made headlines for all the wrong reasons. It came under DoT’s scanner with regard to the 2G spectrum case for allegedly furnishing false information to obtain telecom licences in 2008. However, recently, the CBI clarified that it found no evidence supporting any undue advantage given to VTL during the allocation of spectrum.
The operator also received a show-cause notice from DoT for failing to meet the stipulated rollout norms. In January 2011, DoT directed the company to pay a penalty of Rs 124.5 million on these grounds.
With the initial enthusiasm fading, the Videocon Group is reportedly in talks with various foreign entities to sell its 26 per cent stake in VTL for around Rs 150 billion.
Though the company failed to win 3G licences, it is looking forward to the introduction of long term evolution technology in the country. It is targeting revenues of over Rs 14 billion by 2013, and has been preparing strategies for customer retention and acquisition in order to achieve this target.
The past one year has been a rough one for Etisalat DB Telecom India (formerly Swan Telecom), a JV between Indian realty major the Dynamix Balwas (DB) Group and Abu Dhabi-based Etisalat Telecommunications.
Although the company has licences for 15 circles, it failed to launch services or meet its rollout obligations in the first year of operations. In December 2010, Etisalat DB paid a penalty of Rs 99 million to the government for the same reason.
In July 2011, the Enforcement Directorate imposed another penalty of Rs 71 billion on the operator for alleged violation of the FDI and foreign exchange norms. Reportedly, Etisalat had indirectly increased its share in the company to 49 per cent by acquiring a 5 per cent stake through Genex Exim, a financial services company, which the authorities believe is parented by Etisalat. This was allegedly carried out without prior approval from the FIPB.
Moreover, the DB Group had also filed a complaint against Etisalat with the Company Law Board for the alleged failure of the latter to undertake satisfactory operations management.
In 2011, DoT issued show-cause notices to 16 companies including Aircel, Etisalat and Loop for failing to fulfil their rollout obligations. Having deposited 100 per cent liquidated damages that were imposed by DoT for the alleged delay in the rollout, operators took their battle to TDSAT, asking for a revision in their PBGs. In Etisalat’s case, the request was to release the Rs 1.6 billion PBG on the grounds that it had completed network rollouts in 11 circles within the stipulated time frame. In response, TDSAT asked DoT to clarify its stand on the issue; however, there was no further progress on the matter.
The operator has been embroiled in the 2G spectrum issue on multiple fronts, including being a recipient of irregular licence allotment and allegedly being a front company for the Anil Dhirubhai Ambani Group.
After acquiring licences in 2008, the DB Group sold a 45 per cent stake to Etisalat for $900 million. The CAG found the valuation too high for a company that did not have a network or a subscriber base at the time of the stake sale.
Further, in September 2011, plans to offer international long distance telephony services was stalled by the country’s intelligence agencies, citing security concerns. When the operator was granted a licence in October 2008, it was expected to establish a gateway before October 5, 2011. However, unable to do so, it is hoping that DoT does not encash the PBG submitted by it.Performance-wise, Etisalat has yet to make a mark in the Indian telecom sector. As of December 2011, it had a subscriber base of 1.67 million and a market share of 0.26 per cent, a small fraction of the country’s 866 million subscribers. Currently, the company has stalled all expansion plans, preferring to wait and watch. However, while Etisalat has not shown any signs of exiting the telecom business, it hopes that the government will consider the investments made by foreign players before taking any decision on the 2G spectrum case.
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