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Future Tense: Can NTP 2011 change the game for the new players?

November 30, 2011
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They were considered the fortunate few. In 2007, six companies were awarded 2G licences to offer mobile services, disappointing the 500-odd national and global aspirants who had rushed to grab a share of the world’s fastest growing telecom market. These were Uninor, Sistema Shyam TeleServices Limited (SSTL), S Tel, Videocon Telecommunications Limited (VTL), Etisalat DB Telecom India and Loop Mobile.

The stakes were high. The new players knew they would have to take on competition from strong incumbents like Bharti Airtel, Vodafone Essar, Bharat Sanchar Nigam Limited, Idea Cellular and Tata Teleservices Limited. But then, the prospects were promising too. High on confidence, these operators drew up smart strategies and ambitious rollout plans.

A year later, in 2008, they received spectrum but failed to roll out services in most circles. Despite a non-existent subscriber base and network, a few managed to sell stake – and for a whopping amount; Unitech Wireless sold stake to Telenor, Swan Telecom to Etisalat and Shyam Telelink to Sistema.

In 2009, some operators started delivering services, though under tremendous pricing pressure from the incumbents. Uninor and SSTL even managed to acquire a significant subscriber base.

In 2010, the 2G graft scandal broke, rocking the telecom sector and indicting a large swathe of industrialists, politicians and bureaucrats. According to the Comptroller and Auditor General’s (CAG) statement, 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.

Since then, the challenges have  mounted for the new players. Today, with their business viability in question, most are revisiting their strategies. According to Rohan Lobo, associate director, advisory, KPMG, “The new players’ operating environment has been beset with regulatory controversies, which have 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,” observes Mohammad Chowdhury, partner and telecom industry leader, PricewaterhouseCoopers India. “One or two 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 this structure will change whenever the policies change. The recently released draft NTP 2011 suggests a major review of spectrum allocation, merger and acquisition, licensing and broadband policies.

In fact, industry analysts find that the draft NTP 2011 favours new players. According to Kunal Bajaj, partner and director, Analysys Mason, the telecom policy on spectrum puts new players at an advantage. While all players stand to benefit from spectrum sharing, the incumbents would lose from spectrum re-farming and excess spectrum pricing whereas new players stand to gain.

Moreover, the proposed M&A guidelines in NTP 2011 make it much easier for new players to be acquired by incumbents or for new entrants to pick up stake in existing telecom service providers in order to scale up operations. This will pave the way for the much-needed consolidation of the market.

tele.net takes stock of the performance and plans of the new telecom players...

Uninor

Despite being caught in the 2G controversy and facing a relationship breakdown among its partners, Uninor is by far the most promising of the new players that were awarded mobile spectrum in 2008. Currently operational in 13 of the 22 circles for which it has licences, Uninor, the JV between Norway’s Telenor and India’s Unitech Wireless, has garnered nearly 25 million subscribers in the 20 months since service launch.

In September 2011, the company raced ahead of its peers, incumbents as well as new operators by adding 1.92 million subscribers. In comparison, other new players like Etisalat DB Telecom India and S Tel added less than 100,000 users while VTL lost 113,000 users.

Analysts say Uninor is on a good wicket. It has understood the pulse of the market and has 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 engagement 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 the strong support of its international parent. Telenor is one of the largest operators in the world.”

In the recently released financial results for the quarter ended September 2011, Uninor appears to be on its way to improving its earnings before interest, taxes, depreciation and amortisation (EBITDA). The EBITDA loss stands at NOK 849 million for the quarter ended September 2011 as compared to NOK 1.115 billion a year ago. The Telenor Group has noted that it now expects Uninor’s annual EBITDA losses to be in the range of NOK 3.5 billion-NOK 4 billion as against the earlier estimated loss of over NOK 4 billion. In the third quarter, the company’s revenues rose to NOK 837 million from NOK 214 million in the previous quarter.

Telenor, in a statement, recently noted that revenues were up 5 per cent during this period. The operator’s capital spending of NOK 198 million led to the addition of 682 new sites in the third quarter, taking its total number of sites to 27,305 across the country.

“Uninor aims for a 15 per cent market share in terms of customers and revenues. And we have been able to achieve that over the past year. This quarter, we reported a revenue growth of 22 per cent as compared to the second quarter, and increased our subscriber base by 14 per cent. We are on the right track towards becoming an ultra-low-cost operator and we continue to maintain our EBITDA break-even target of 2013,” says Rajiv Bawa, chief corporate affairs officer, Uninor.

The sticky point for Uninor, however, is the worsening of its ties with partner Unitech. Early in the year, Sanjay Chandra, former chairman of Unitech Wireless, which has a 32.75 per cent stake in Uninor, was indicted on the grounds that the company was one of the biggest beneficiaries of the 2G spectrum allotment. The case is currently being heard by the Supreme Court. In light of this, Telenor asked Chandra to step down. “It is of vital importance that the business of our Indian operation is not hampered,” read a company statement at the time.

Now, with the business saddled with a $1 billion debt, in October 2011, the board of Telenor agreed to raise $1.8 billion for Uninor through a rights issue. However, Unitech has resisted the rights issue at every stage, including appealing to the Supreme Court and, recently, to the Company Law Board.

With funding for the sector drying up and thus making refinancing of Uninor’s debt difficult, Telenor is in a fix. It is reportedly looking at inducting another partner for its Indian operations if Unitech “does not meet its obligations”.

“We had envisaged a peak funding of around Rs 155 billion and this hasn’t changed. The Telenor Group has already invested Rs 61.3 billion through equity and we have also taken short-term loans of around Rs 50 billion. We are now looking at a long-term funding solution through a rights issue, and shareholders will be invited to invest further equity in the company,” says Bawa. The Foreign Investment and Promotion Board has cleared the company’s rights issue, subject to court approval.

Uninor is yet to receive spectrum for the Delhi circle; however, it hopes to roll out services across the country by 2012. It also aims to grow its subscriber base significantly, riding on innovative tariff schemes. “Uninor is present only in the prepaid segment, and that is where we will be in the immediate future. We will not offer highly complex and high-end services like 3G and advanced value-added services (VAS). Instead, we will aim to be the most affordable mobile service provider for mass market needs. If a customer uses the phone for calls, SMS, basic internet and music, Uninor must be the number one choice,” says Bawa.

SSTL

SSTL, in which Russian telecom operator Sistema has a majority stake, has been slowly but steadily increasing its footprint in India. The operator acquired a pan-Indian telecom licence in 2008 through its JV with the Shyam Group. From operating in just one circle in March 2009, the company has come a long way and is now present across all the 22 circles, offering services under the MTS brand. As of September 2011, SSTL’s subscriber base stood at 13.27 million.

The operator was the first amongst its peers to launch mobile services on the CDMA platform and has recently provided international data roaming for CDMA prepaid customers, a service that is not yet very common in the country. This will enable its customers to roam across networks in 231 countries and enjoy high speed downlink packet access services in 114 countries. SSTL has decided to use MACH’s interstandard roaming solution to facilitate these services.

The operator recently raised debt of $200 million, with ICICI Bank and Barclays Bank lending $100 million each. The amount, received in a single tranche, will be used to scale up operations. The company had expressed its intention of coming out with an initial public offering to raise funds. However, no concrete plans in this direction have been made yet.

For expanding its operations, SSTL has awarded CDMA expansion and EV-DO upgrade contracts for 10 circles to ZTE. The company plans to commercially launch EVDO Rev. B Phase 2 in India, which will enhance the existing service speeds of mobile broadband on SSTL’s network. It has also 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. The contract also includes the management of fibre transport and wireline networks in Rajasthan as well as network service provisioning, customer problem management and spare parts management. As part of the deal, 200 employees of SSTL in Rajasthan will join Ericsson India. This is the second such contract to be awarded by SSTL to Ericsson. In September 2010, the operator awarded a three-year managed services contract to Ericsson for managing its multivendor wireless networks in Delhi and Haryana. Further, in October 2011, the operator launched two Android smartphones. Priced in the sub-Rs 5,000 category, the handsets run on Android 2.2 Froyo and come bundled with free talktime, SMS and data usage.

Financially, the company has done well in every quarter. In the April-June quarter of 2011-12, SSTL’s revenues rose to Rs 2.78 billion, up 164 per cent from Rs 1.05 billion during the same quarter of the previous fiscal. According to company officials, SSTL’s overall revenues have consistently risen by over Rs 400 million per quarter over the past four quarters. “In spite of the continued challenges faced by the telecom industry in India, SSTL is on track to successfully execute its data-centric, voice-enabled strategy,” stated Vsevolod Rozanov, president and chief executive officer, SSTL.

Non-voice revenues from both data and mobile VAS for the quarter were up 36 per cent quarter on quarter at Rs 796 million, contributing 29 per cent of the company’s total revenue. However, the operator reported a net loss of Rs 6.57 billion during the same quarter, which is marginally less than the net loss of Rs 6.61 billion posted during the corresponding quarter of the previous fiscal.

In mid-2011, unlike the incumbents and other players, SSTL did not succumb to pressure and hike tariffs. Its strength has been its data card business but now GSM operators that have won 3G spectrum are also offering data cards, posing a threat to the operator.

In fact, it has not been smooth sailing for SSTL. It is amongst the players that have been notified by the Department of Telecommunications (DoT) for service rollout delays. As a result, the company has had to pay Rs 50 million to Rs 110 million as penalty in various circles. It currently faces the threat of its licences being terminated in a few circles on this account.

Going forward, it remains to be seen whether the operator will be in a position to hold its own in a market that is heading towards consolidation.

S Tel

S Tel Private Limited, a JV between the Siva Group (formerly the Sterling Infotech Group) and the Bahrain Telecommunications Company (Batelco), forayed into the telecom sector in 2008, winning licences and spectrum in six circles – Orissa, Bihar, Himachal Pradesh, the Northeast, Assam, and Jammu & Kashmir. It quickly rolled out services in all these circles, except the last.

The response was encouraging and by mid-2010, S Tel had notched up 1.64 million subscribers. It also became the first amongst the new operators to achieve financial closure for its telecom project with an outlay of Rs 20 billion.

Keen to offer 3G services, S Tel participated in the 3G spectrum auctions in 2010 and became the only player from the new brigade to win 3G licences in Bihar, Orissa and Himachal Pradesh. Optimistic about its 3G network rollout, the operator announced an investment of Rs 7 billion in May 2010. Of this, Rs 3.88 billion was used to cover the cost of acquiring spectrum while the remaining was set aside for network deployment. S Tel had a subscriber base of 3.5 million as of September 2011.

However, despite beginning well, the 2G graft controversy and the subsequent probe into S Tel has taken the wind out of its sails. Today, the enthusiasm is clearly missing. The operator has put its plans of rolling out 3G services by mid-2011 on the back burner. The company is also reportedly facing problems with its vendors who have started disconnecting services on account of non-payment of dues. For instance, 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 all these outsourced functions on its own.

This is not good news for the company, which is 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 non/negligible funding (of the sanctioned term loan facility) by the banks.

Analysts believe that given the current scenario, S Tel is a likely contender for exiting the telecom business once the merger and acquisition (M&A) laws are relaxed. Batelco is reportedly already considering several options for selling 30 per cent of its current 49 per cent stake in S Tel.

Etisalat DB Telecom India

Etisalat DB (formerly Swan Telecom) is a JV between Indian realty major the Dynamix Balwas (DB) Group and Abu Dhabi-based Etisalat Telecommunications. The company has telecom licences for 15 circles – Andhra Pradesh, Bihar, Delhi, Gujarat, Haryana, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Mumbai, Punjab, Rajasthan, Tamil Nadu and Uttar Pradesh (East and West). However, the operator failed to launch services or meet its rollout obligations within the stipulated one-year period.

The second half of 2010 proved to be a tough period for the operator. It got involved in the 2G spectrum controversy on multiple fronts, one of them being the irregular allotment of licences. After acquiring licences in 2008, the DB Group sold a 45 per cent stake to Etisalat for $900 million. The CAG found that the company did not have a network or a subscriber base at the time of the stake sale.

The operator is now facing possible termination of licences as its applications were found to be ineligible. Moreover, it is allegedly a front company of the Anil Dhirubhai Ambani Group.

In December 2010, Etisalat DB paid a penalty of Rs 99 million to the government for failing to roll out 2G services on schedule. In July 2011, the Enforcement Directorate imposed another penalty of Rs 71 billion on the operator for alleged violation of foreign direct investment (FDI) and foreign exchange norms. Reportedly, Etisalat had indirectly increased its share in the company by acquiring a 5 per cent stake through Genex Exim, a financial services company which the authorities believe is parented by Etisalat. The transaction increased Etisalat’s holding in the venture to 49 per cent, but no approval for this was obtained from the Foreign Investment Promotion Board. This was followed by the DB Group filing a complaint against Etisalat with the Company Law Board for alleged failure of the latter to undertake satisfactory operational management.

As of September 2011, Etisalat DB’s subscriber base stood at 1.52 million, a fraction of the country’s user base of 866 million. As far as future investments are concerned, the operator has adopted a wait-and-watch policy and all expansion plans have been stalled for now. While Etisalat DB 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.

VTL

VTL, the telecom arm of Videocon Industries, was awarded mobile licences for 21 circles in 2008, but its service rollout was delayed on account of promoter-related disputes. In March 2010, the operator finally rolled out mobile services in Tamil Nadu. It has since launched services in 16 circles and, as of September 2011, had a subscriber base of 6.27 million.

VTL has had a bumpy ride through most of 2011. The 2G graft scandal has taken its toll on the company’s operations and future plans. It has been under the scanner for allegedly furnishing false information to obtain telecom licences in 2008. However, the Central Bureau of Investigation (CBI) recently clarified that it found no evidence supporting any undue advantage being given to Datacom (now VTL) during the allocation of spectrum.

Meanwhile, VTL has also been penalised for failing to meet its rollout obligations. In January 2011, DoT directed the operator to pay a penalty of Rs 124.5 million on this ground.

With the initial enthusiasm fading, the Videocon Group is reportedly in talks with 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 India. VTL 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.

Loop Mobile

Loop Mobile (formerly BPL Mobile) is currently operational in 12 of the 22 circles for which it was awarded 2G licences. The operational circles are Assam, Bihar, Haryana, Karnataka, Kolkata, Madhya Pradesh, Maharashtra, Mumbai, Northeast, Orissa, Punjab and Rajasthan.

The operator, like its peers, is alleged to be a beneficiary of the 2G scam. Its licence award came under the scanner with the CAG stating that the company should not have been awarded the 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.

Further, though Loop Mobile was among the first of the new players to soft-launch its mobile services in some circles in May 2009, it did not commercially roll out services in most circles. It has had to pay a penalty of Rs 27.5 million for failing to meet the obligation of timely service rollout. It is also facing the possibility of having its mobile permits cancelled in circles where it is yet to roll out services.

Loop is likely to face further trouble when the CBI decides to charge-sheet it for concealing its ownership under a complex holding arrangement as part of the Essar Group. In August 2011, the Enforcement Directorate issued a show-cause notice on the company for alleged violations of the Foreign Exchange Management Act. According to a senior Enforcement Directorate official, Loop Telecom and Loop Mobile had received a total FDI of Rs 3.64 billion. The two companies are alleged to have not properly followed the Reserve Bank of India’s FDI guidelines.

Loop did not participate in the bids for 3G spectrum. However, it is looking at various options, including tying up with other operators, to provide 3G services for its subscribers in Mumbai circle.

As of September 2011, the operator had a subscriber base of 3.2 million. Of this, Mumbai circle, in which the company has been operating for the past 15 years, accounted for 99.9 per cent. 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, has been a major impediment to the company’s growth. Analysts believe that consolidation is likely to be the only way forward for the operator.

 
 
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