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On a Sticky Wicket: New players under scrutiny

January 21, 2011
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The frenzy for telecom licences in 2007 has given way to anxiety among operators today. New entrants such as Uninor, Sistema Shyam TeleServices Limited (SSTL), S Tel, Videocon Telecommunications Limited (VTL), Etisalat DB and Loop Telecom are all under the scanner for failing to meet their rollout obligations. To make matters worse, the Comptroller and Auditor General (CAG) has stated that most of the licences were given away for a song to operators who did not meet the eligibility criteria. A case in point is Etisalat DB, which was given undue advantage despite its application being ineligible as per the cross-holding norms.

The CAG has found 85 of the 122 licences given to Uninor, VTL, Loop Telecom, S Tel, Etisalat DB (then Swan Telecom) and Allianz Infratech to be illegal as these firms were not eligible for the same.

The Telecom Regulatory Authority of India (TRAI), which pointed out the irregularities in the licence award process, had recommended the cancellation of these licences – in at least 15 circles for Etisalat, 20 circles for Loop, 11 circles for SSTL, 10 circles for VTL and 8 circles for Uninor.

As the government tries to resolve these issues, the operator, have paid penalties to minimise the damage. A look at the performance and plans of these telecom companies…

Uninor 

Uninor, the joint venture (JV) between Norway-based Telenor and India’s Unitech Wireless, launched mobile services in January 2010. With a subscriber base of 16.19 million (as of November 2010) within a year of operations, it is way ahead of its peers.

However, the JV ran into trouble as Uninor incurred operating losses of $556 million in the quarter ended June 2010 and set the alarm bells ringing for Telenor’s investors. The Norwegian company, which has a controlling stake in Uninor, has since been under pressure from investors to exit the India venture, which they fear would not be profitable as the market is overcrowded and survives on ultra-thin margins.

To allay these fears and keep the JV on track,  Telenor has listed a series of corrective measures, starting with delaying the infusion of additional capital till revenues improve.

The operator has been aiming for a market share of 8 per cent; to break even at a core profit level (EBITDA) by 2012; and to become cash positive by 2014. In a presentation to investors, Telenor noted that its Indian operations would record losses of Rs 45-Rs 55 billion in this fiscal year and take a further hit of Rs 65-Rs 75 billion in the next fiscal before breaking even.

However, sector experts say that Uninor is on a good wicket. The operator has touched the right nerve in packaging and marketing its mobile services, and has been continuously updating its marketing campaigns. The Ab Mera Number Hai campaign that came out during its service launch in January 2010 was aimed at the youth. Today, Uninor’s ad campaigns focus more on services and products, including discounts and talktime.

The company seems to be moving in the right direction. With operations in only 13 of the 22 telecom circles, Uninor accounted for nearly 16 per cent of the net pan-Indian subscriber addition of all operators in August 2010, and 21 per cent of subscriber additions in its 13 operational circles.

Though Uninor is yet to receive spectrum for the Delhi circle, it hopes to roll out services across the country by 2011. The operator plans to increase its subscriber base significantly, riding on innovative tariff schemes and discounts. It has introduced the concept of “dynamic pricing”, which offers up to 60 per cent discount on calls across the country.

The company’s immediate focus is on improving operational efficiency. It has identified key areas for improvement and has initiated programmes to increase margins and reduce opex from 39 per cent of sales in 2009 to 35 per cent by 2013, and capex from 13 per cent of sales in 2010 to 10 per cent by 2013.

SSTL 

Russian telecom operator Sistema has been steadily increasing its footprint since its entry into the Indian telecom sector in late 2007. The company acquired a pan-Indian telecom licence in January 2008 through its JV – SSTL – with the Shyam Group.

Competing aggressively in terms of tariffs and value-added services, SSTL has increased its presence from one telecom circle in March 2009 to 15 today.

It was the first among the new players to launch mobile services on the CDMA platform and has a subscriber base of about 8 million, less than half that of its closest competitor, Uninor.

The company also provides mobile broadband services to over 400,000 users in 96 cities under the MBlaze brand. While the operator’s revenues have been growing at a significant rate, its net loss has increased. For the quarter ended June 2010, SSTL posted a net loss of $106.6 million as compared to $22.9 million in the corresponding quarter of the previous year. However, its revenues increased by 200 per cent from $7.2 million to $23.1 million during this period.

In a recent development, the Russian government has paid $600 million to acquire a 17 per cent stake in SSTL. The operator is expected to issue shares to the government during the first quarter of 2011, subject to the successful completion of a rights issue to SSTL’s Indian shareholders and compliance with Indian regulatory requirements. Following this deal, Sistema’s stake in the JV will reduce to 57 per cent, while the Shyam Group will continue to hold a 23.5 per cent stake. The remaining 2.5 per cent is with the public. SSTL plans to use the proceeds from the stake sale to finance expansion and strengthen its position in the wireless broadband market. It will also use these funds to expand its branded retail network and facilitate the launch of operations in new circles.

Meanwhile, SSTL has received a government notice for failing to meet its network rollout obligations. Following which, the company paid between Rs 50 million and Rs 110 million. The company is yet to roll out services in nine circles where it holds licences. It is still to receive spectrum for the Delhi circle.

Going forward, the company is planning to launch its initial public offering (IPO) following the deal with the Russian government. “For regulatory purposes, the capital structure should be frozen before the IPO launch. As soon as the capital structure is fixed after the Russian government’s investment, we can proceed with the IPO,” says a senior company official.

VTL 

Almost two years after receiving pan-Indian licences for mobile services, VTL (formerly Datacom) began operations in March 2010. The operator first launched services in the Tamil Nadu circle and is currently operational in 16 circles. As of November 2010, its subscriber base stood at 6.74 million.

However, the operator has faced several issues of late. VTL is currently under the Department of Telecommunications (DoT) scanner for allegedly suppressing information or furnishing false information to obtain a telecom licence in 2008. The company has been issued a show- cause notice and has been given 60 days to respond. Thereafter, VTL paid a heavy penalty to the DoT for failing to meet rollout obligations.

In fact, the company has had a rocky start. Although it was the first operator to have everything in place for a timely rollout of services, a dispute among its promoters derailed its rollout plans.

The battle between Videocon Industries (which held 64 per cent stake) and the Mahendra Nahata Group-owned Jumbo Techno Services (which held 26 per cent) was resolved when the latter sold its stake to the Videocon Group and exited the venture. But several key officials quit the company during this period.

The past year has been a busy one for the company on several fronts. With customer acquisition and retention being the key focus areas, the company has launched a series of offerings. It has tied up with superbike major Ducati to introduce the V 6200 handset in India. The device offers features such as an e-compass, a thermometer, a barometer and global positioning system, and is priced at Rs 11,995.

Going forward, the company is planning to invest about Rs 140 million in future projects and build a subscriber base of 100 million. By 2013, the operator is targeting revenues of Rs 14.2 billion.

On the product front, the focus is on expanding into rural, and Tier II and Tier III cities with retail outlets in small towns. Besides, VTL plans to launch a series of 3G and Android handsets in the January-March 2011 quarter.

S Tel 

For Chennai-based S Tel, a key advantage of entering the telecom space late has been access to the extensive network infrastructure of the existing operators. “We could position our towers in the manner we wanted. So, our network planning was very efficient,” says Shamik Das, chief executive officer, S Tel.

The company rolled out GSM mobile services in Himachal Pradesh, Jharkhand, Bihar and Orissa in end-2009 without setting up a single tower. Even for later rollouts in Assam and the Northeast, it took the infrastructure sharing route. It signed end-to-end agreements with infrastructure providers for telecom towers, base transceiver stations and a fibre backbone for intercity connectivity.

Today, the company provides mobile services in five of the six circles it has licences for and has a subscriber base of over 2 million (as of November 2010). It is still a relatively small player, offering 2G services in rural areas.

S Tel is a JV between the Bahrain Telecommunications Company (Batelco) and the Siva Group. It was the first among the new operators to achieve financial closure for its Rs 20 billion telecom project.

Keen to tap the vast 3G potential in the country, S Tel is the only new player to win 3G spectrum in three circles – Bihar, Orissa and Himachal Pradesh.

“With a total outlay of Rs 7 billion for offering 3G services, S Tel plans to invest about Rs 3.6 billion in capital expenditure over the next five years to roll out 3G services in Orissa, Himachal Pradesh, and Bihar and Jharkhand. We are considering ways of raising this amount, and are in talks with potential lenders,” says Das.

With the launch of 3G services expected by mid-2011, the company is currently trying to differentiate itself from its rivals. Its focus is on delivering a superior quality of service. The emphasis is also on innovative tariff packages and aggressive distribution. “We aim to provide a congestion-free network with excellent voice quality,” Das says. The service provider expects to start making operating profits by 2013-14.

Etisalat DB 

The year ended on a rough note for Etisalat DB, the telecom venture of Indian realty major Dynamix Balwas and UAE-based operator Emirates Telecommunications Corporation (Etisalat).

In the last two months of 2010, the company was under DoT scrutiny with regard to its 2G licence acquisition. According to the CAG, 2G licences had been awarded to some companies that had doctored the documents required for obtaining licences. Etisalat DB, which was awarded a licence despite its application being allegedly ineligible as per the cross-holding norms, now faces possible termination of the same.

The government has also asked the corporate affairs ministry to determine if Etisalat DB, which has licences for 15 circles, is a front company of the Anil Ambani Group, as claimed by the CAG report.

The report also states that after buying licences cheap, companies like Etisalat DB that did not have any network or subscribers, sold stakes to international telecom majors like Etisalat for a huge amount. In 2008, soon after obtaining spectrum, Swan Telecom roped in Etisalat to buy a 45 per cent stake in the company for Rs 41.4 billion.

Like most of its peers, the operator has failed to roll out services in the stipulated one-year period. Therefore, it is little surprise that damage control has become a key priority for the company. Etisalat DB, which is yet to roll out services, has erected hoardings in Delhi, claiming that it has soft-launched GSM-based mobile services in all 15 circles, including Delhi, in June 2010 under the brand name Cheers. Etisalat’s subscriber base, as per the Cellular Operator’s Association of India, stood at 0.13 million as of November 2010.

Loop Telecom 

Loop Telecom (formerly BPL Mobile) was among the first new mobile operators to soft-launch services, beginning with Tamil Nadu and Orissa in May 2009. So far, it has soft-launched services in six circles and is commercially operational only in Mumbai.

The company was awarded telecom licences for 22 circles in 2007. However, the licence award has come under scrutiny with the CAG stating that the company should not have been awarded these licences in the first place as it did not fulfil the selection criteria. The CAG has stated that at the time of the application, the company’s memorandum of association did not include its telecom business and the authorised share capital was only Rs 52 million against the required Rs 1.28 billion. Facing a possible loss of licence, Loop has paid Rs 27 million as penalty for three circles.

Moreover, the company has failed to roll out services within the stipulated time period. According to the 2G licence agreement, operators were required to launch mobile services in 90 per cent of the service areas in metros and 10 per cent of the service areas in district headquarters within 12 months of receiving spectrum. However, according to TRAI, Loop has a negligible subscriber base in all circles except Mumbai. 

Moreover, there has been speculation that the Essar Group is financially backing the company, despite being a 33 per cent shareholder in Vodafone Essar. The Essar Group, however, claims that it has a mere 9.99 per cent indirect holding in Loop Mobile, which is within the legal limit of holding no more than 10 per cent stake in a second operator.

 
 
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