A telecom

sector analysis
 Indian
telecom
operators
venturing out of
India? We are well &
truly stumped!

telecom

They are far from done in India, so it seems

f e at u r e inane to risk swimming in unknown waters.
What in the world are they thinking of doing?
by VIRAT BAHRI, SURBHI CHAWLA & NEHA SARAIYA
 Telecome

t h e b & e s e c t o r

He laid down the theory, “Every action has an equal & opposite reaction.”

So as per Newton, if Indian telecom players are expanding overseas, it is a

perfectly logical ‘opposite’ reaction to foreign forays into their market, the

only contradiction being the ‘equal’ clause! B&E presents a report on what

Where’s my phone, Dude? Indian players are attempting globally & the possible fallout of their plans

“I
wish I could go… to the wild!”
When Marty the zebra utters
his ultimate lifelong desire, it
leaves his friend Alex the lion flabber-
gasted, as he exclaims, “The wild? Are
you nuts? That is the worst idea I have
ever heard! It’s unsanitary!” Little does he
know that Marty would very well have his
way. For, several dramatic twists later,
four friends (the two mentioned along
with Gloria the hippo and Melman the
giraffe) do find themselves face to face
with the wild, away from their quiet, re-
laxing life at the New York Central Zoo,
on the shores of Madagascar, which inci-
dentally is also the name of this 2005
animation hit from Dreamworks Anima-
tion LLC.
As expected, Marty realises later that Front-runners on the global trail: Anil Dhirubhai Ambani & Sunil Bharti Mittal
he, along with his friends, are actually ill-
equipped for this new life, which only tion of US currently is a mere 300 million acquire around 51% stake in MTN, which
looked hunky dory from the zoo. And it’s or so. To put it in another perspective, the would help it gain access in a number of
a perfect reflection of life itself. When you only market that is larger than India is lucrative markets in Africa & the Middle
are sitting pretty behind your well estab- China, which has such a closed environ- East, besides expertise sharing. The latest
lished citadels, there is always the tempta- ment that it is difficult to imagine putting statement of the company, however,
tion to break new ground, but what stops your FDI in there. So then, where else counters this speculation by stating that,
you from attempting it is a fear of the un- would you want to be? “The discussions being held are aimed at
known. Overcoming that fear requires a There may not be greener grass on the combining the strengths of the two lead-
certain degree of courage. There is an op- other side, but still, Indian players seem ing ‘emerging markets’ players (Bharti &
portunity cost of not going ahead, and to have found some markets that are MTN) and accordingly veering towards
there are the high stakes involved when ‘green enough’ to make an entry. They possible structures to achieve this objec-
you do take the plunge. have been taking baby steps towards glo- tive.” So it may be more of a merger than
The dilemma that Indian telecom play- balisation, and steadily enough, Indian an outright acquisition. But this has
ers have been facing till recently has not players are now doing much more than brought to the limelight the global plans
exactly been as stark as that faced by it appears from the domestically-focussed of Indian telecom players. Why, indeed,
Marty. After all, their citadel, the Indian media coverage on this front. So in that are they feeling the pressing need to do
telecom market, has been just too com- regard, the ‘hot’ news about Bharti mak- so at this juncture? What do they hope to
pellingly strong to let go, a market every ing a beeline for South African telecom achieve and what are the critical chal-
foreign player is eyeing today. Our cur- giant MTN, should hardly be taken as a lenges that they need to be wary of?
rent subscriber base alone is a huge 250 surprise. As per media reports, the com-
million plus, which is expected, as per pany was proposing to shell out a sum islands of lucre
research and government estimates to that’s upwards of $19 billion (that would The first question, of course, is – which
grow by double to 500 million by 2010. decisively dwarf Tata’s Corus acquisition, are the ‘Madagascars’ that are worth a
Putting that in perspective, the popula- so far the largest by any Indian player) to sojourn for Indian players. The answer to

84 16 may-29 may 2008 business&economy

Source: India Textile
Commissioner Office
 telecom

it’s a whole new world out there

M ajor forays by Indian companies
into overseas markets:
RELIANCE
• Has consolidated its overseas tel-
ecom operations into a new business
unit named Reliance Globalcom, to
manage the consolidated operations
of Flag Telecom, Yipes enterprise Serv-
ices Inc and other global businesses of
the company
• Bought UK- based Wimax opera-
tor and has plans to invest $500 m in
eWave, to launch services in China and other countries.
• Plans to lay a submarine cable system through its arm Re-
liance FLAG and spend $1.5 billion in building a 1,15,000-km
fully IP-enabled optic network to reach two-third of world
population
• Reportedly planning to offer GSM-based MVNO services
across 57 countries
• Acquired Uganda-based Anupam Global Soft (U) Ltd, and
is investing up to $500 million to build a telecom network
in the country
BHARTI AIRTEL
• Currently is in a bid to combine
strengths with South Africa-based
MTN and tap markets in Africa &
Middle East
• Invested $200 million over a time
span of next two years in order to
launch both 2G and 3G services in
Sri Lanka. Present in Seychelles and
Channel Islands too
• Has joined hands with 15 global tel-
ecommunications majors from South
Africa, UK and US to construct a new
high-bandwidth, sub-sea cable system linking UK and India
TATA COMMUNICATIONS
• Investing over $2 billion in the next three years to support
its global expansion plans in Sri lanka, South Africa, China
and Egypt
• Will leverage the Tata Global Network to meet growing de-
mand for IP solutions.
• Expanding its global VPN services to China in a tie up with
China Entercom

that one is pretty straightforward. Indian
companies have consciously chosen to
enter those markets, which are similar to
theirs, in terms of penetration levels,
technology environment, general market
dynamics, et al. And that puts emerging
markets firmly on the radar, primarily in
Asia and Africa, where they have made
most of their sojourns.
Take Bharti’s MTN bid for example.
Sunil Bharti Mittal, in an analyst confer-
ence (to announce the results of Bharti
Airtel Ltd. for the year ended March 31,
2008), quoted, “We also believe that the
business model that we have invented at
Bharti is now ready to be transported
outside India; we would like to now look
at applying our model in some other
parts of the world.” Before the MTN pro-
posal, which would give the company an
additional subscriber base of around 68.2
million across MTN’s 21 operations, there
have been very measured moves by the
company; in markets like Seychelles,
Guernsey and Jersey (Channel Islands),
for they were apparently looking for the
right opportunity. They are operating 3G
in these countries (the only Indian opera-
tor to do so) and are also in the process of
building a 3G network in Sri Lanka,
which would mean an investment of $200
million in two years. As per Madhusudan
Gupta, Senior Research Analyst, Gartner
(Singapore), “Indian operators have not
yet done a commercial deployment of 3G.
So whether they can actually extract
value from it is the question.” Besides the
commercial aspect, these markets then
serve as great testing grounds as well for
Bharti Airtel.
On the other hand, Reliance Commu-
nications has marked its presence in Sri
Lanka & Uganda so far, where it should
be able to start a phased roll out of serv-
ices next year. Reportedly, the company
is also planning to launch Mobile Virtual
Network Operator (MVNO) services
across 57 countries including markets
across Europe, Middle East, Africa, Aus-
tralia and New Zealand. Shushmul Ma-
heshwari, Chief Executive, RNCOS,
opines on the benefits of MVNO, “It will
help to save infrastructure cost as they
only need to focus on marketing aspect.
In addition to subscriber ad-
ditions, Bharti’s forays into
markets like Sri Lanka give it
a breeding ground as well
Various foreign companies have also en-
tered as MNVO in Indian market like
Virgin and Tata Tele Services.” Addition-
al advantages of such a strategy are global
exposure, increase in financial strengths,
spreading costs and risks, improved agil-
ity, and access to new technologies and
customers. Anil Ambani commented in
a conference call while announcing the
Q4 results of the company, “As far as glo-
bal opportunities in MVNO are con-
cerned, we are currently doing work for
a number of geographies and as soon as
we decide something in the near term,
naturally we will make an appropriate an-
nouncement…” The company has not
given an official comment as of yet on

business&economy 16 may-29 may 2008 85

 t h e b & e s e c t o r

been there, faced that

I t’s global acquisition spree may have

transformed Vodafone from a small
UK-focused service provider into a global
telecom giant with interests in over 40
countries, but has also hurt it where it
pinches most – its profits, which have seen
a steady decline over the past few years.
During his tenure as CEO (1997-2003), the
rumbustious Sir Christopher Gent paved
the way for a series of overseas acquisi-
tions, beginning with US-based AirTouch
in 1999. He followed this up with a £101 billion hostile takeo-
ver bid for German firm Mannesmann, subsequently using
Vodafone’s highly-rated shares to snap up more rivals in Eu-
rope and beyond. These dealt a severe blow to Vodafone’s
bottomlines, resulting in staggering losses in 2006-07, total-
ling approximately $9 billion. And while the company has
recovered from the blow this year (registering $6.6 billion as
profits for 2007-08), the pressures on current CEO Arun Sarin
remain just as daunting. On his part, Sarin too, has been ex-
perimenting with Gent-like aggressiveness in acquisitions. He
made a $13.3 billion ambitious bid and lapped up 67% stake
of Hutchison Whampoa in India’s Hutchison-Essar combine,
besides a previous failed bid to pick up
America’s largest wireless operator AT&T.
Presently, he is fighting it out with India’s
Bharti Airtel to pick up majority stake in
South Africa’s MTN. However, despite blitz-
krieg expansions in non-European mar-
kets over the last many years, Vodafone
has been struggling to get desired results
from these markets. While the company
pulled off more than $28 billion in reve-
nues from the European market alone for
the six months ended September 2007, it hardly managed
$5 billion as revenues from emerging markets like Middle
East, Africa and Asia Pacific. Vodafone’s exit from Japan in
April 2006 was also due to a similar situation. So what is the
logic behind Vodafone’s aggressive expansion? According to
a company spokesperson, “Being in all emerging as well as
developed markets gives a lot of exposure to us and also the
experience to roll out separate kinds of products to cater all
these markets. In UK, for example there are more phones than
people so there are many things one can offer in terms of
data… whereas in India, tele-density is far too less compared
to UK so the thrust is to add more and more customers.”

which countries, but if it is as has been
reported, Reliance would actually be do-
ing what most operators would not dare
to venture into. The MVNO route does
help a player to bypass the license regime,
but only players with tremendous mar-
keting ability and financial clout can
make it in foreign markets, especially de-
veloped markets, where the dynamics are
very dissimilar to India. If at all Reliance
is trying it out at such a massive scale, it
would have to be extremely careful, and
also approach every market on a case by
case basis.
Reliance is not new to making ambi-
tious forays. It has already gone ahead
with the acquisition of UK-based
Reliance’s aggressive MVNO
foray looks exciting, but will
require tremendous financial
clout & marketing agility
WIMAX operator eWave World, which
has presence in China, Asia, the Middle
East, Africa and Latin America, through
its subsidiary Reliance Globalcom and is
investing another $500 million in acquir-
ing WIMAX networks globally. Accord-
ing to Anil Ambani (as quoted in the
analyst meet), “When we look at our glo-
bal WIMAX strategy, our approach is
going to be similar in trying to cater to
enterprises, and then track through as
mobility and handsets become available,
then to look at the voice business. Other-
wise it’s pretty much broadband and data,
Internet-access type business.” And the
company has also entered the interna-
tional $20 billion ISD market.
Tata Communications, which already
has a presence in Sri Lanka, has plans to
invest around $2 billion for its overseas
expansions. Comments a spokesperson
from Tata Communications, “Our focus
for this year is to look at emerging mar-
kets and to introduce innovative prod-
ucts.” State-owned MTNL already has
presence in Mauritius & Nepal. Idea,
along with Tata Communications, UAE-
based telecom service provider, Etisalat
and HSBC India, has launched a pilot
project for UAE, which would provide
mobile-based money remittance services.
Essar Communications is working in tan-
dem with Vodafone in India, but has in-
ternationally ventured out on its own. In
January 2008, Essar Communications
Holdings Limited (ECHL) acquired a
49% stake in South Africa-based Econet
Wireless International Limited. And re-
cently in April, ECHL has taken a stake
in US-based Obopay, which takes care of
payments via mobile phones.
A global strategy is more suited to
larger players, as Manoj Mohta, Head-
Research, CRISIL states, “Players with
larger market share normally have mar-
gins that are a minimum of two times
that of players with lower market share.”
With the kind of margins they command,
certainly their plans are expected to be
more ambitious, which explains why Re-
liance & Bharti are ahead of the rest. It is
a basic rule in the telecom world, in fact
for every sector, which may be consid-
ered a tad unfair. The big always do have

86 16 may-29 may 2008 business&economy

 telecom

relatively better opportunities to grow ices, Tata Communications will leverage

bigger, provided they keep thinking on
their feet.
Another area, besides the lucrative
market for voice services, is data. It is a
known fact that the Indian telecom mar-
ket is infamous for providing some of the
lowest ARPUs in the world. A market like
UK, for instance, has ARPUs going up to
£25 (Rs.2,068). In comparison, GSM AR-
PUs in India are around Rs.613 for post
paid and Rs.250 for prepaid. While that
may still be far-fetched, Indian players
can definitely increase their ARPUs, if
they increase their focus on data services,
besides endeavouring to increase the
minutes of usage. As per Mohta of CRIS-
IL, “Voice is primarily based in the do-
mestic market, while data has a flavour
of both domestic and international.” This
trend was boosted domestically by Indian
BPOs, but over time, the requirement for There are indeed some strengths that In-
bandwidth has grown phenomenally. Re- dian companies can replicate, especially
the Tata Global Network, which is one of
the most recent and advanced submarine
cable and IP networks to meet the de-
mand for converged IP solutions. It is in
the process of completing submarine ca-
bles systems connecting emerging mar-
kets in Asia, Middle East and Africa to
Europe to meet the demands of consum-
er broadband and enterprise customers
over the next five to eight years. It is also
expanding its global VPN service to
China through a tie up with China En-
tercom. Lots of small companies are also
in need of data for which a pay per use
model is more economical as compared
to a leased line. This is another market
that needs to be captured by telecom
companies more aggressively.
the rough & the smooth

AD
liance’s acquisition of Yipes for $300 mil-
in the emerging markets. According to
lion in 2007 and Flag much earlier, were Madhusudan of Gartner, the most im-
primarily aimed at gaining a share of theportant is that “they are maintaining ex-
global data market, which would be val- tremely healthy EBITDA margins of
ued at around $25 billion in 2010, an around 40%, despite their low ARPUs,
ultra-healthy CAGR of 28%. Bharti has which is remarkable.” In that sense, they
recently joined 15 global telecommunica- do have an advantage over other com-
tions majors to set up a 15,000 km. un- petitors in global markets. Secondly, they
dersea cable from India to UK. It is the have been working in a tough regulatory
sixth such investment for Bharti, which environment and much higher competi-
will grant it a share as well. tion levels. In India there are normally
With a specific focus on the new world6-8 players per circle. The situation is in
of IP, MPLS, Ethernet and Managed Serv- marked contrast to a country like China,
which does not encourage
Eeny Meeny Miny Mo a lot of companies enter-
Some markets where Indian players have shown interest ing its market; and the

Subscriber Penetration market runs on minimal

Market
growth (%)* (%)* competition, making it
Uganda 16.4% 15.8% very easy for home-grown
operators like China Tel-
Sri Lanka 11.4% 39.0%
ecom, China Mobile and
China 4.7% 40.0% China Unicorn.
Nepal 8.0% 6.8% Thirdly, Indian compa-
United Arab Emirates 11.0% 181.6% nies have acquired sig-
nificant strengths in rural
Mauritius 9.0% 74.2%
markets, which they can
Seychelles 7.4% 126.4% utilise in developing mar-
South Africa 6.1% 98.0% kets. They have done some
Nigeria 9.2% 29.6% unique front ending
schemes for the bottom of
Iran 17.9% 40.8%
the pyramid; like lifetime
Source: UK-based mobile market intelligence specialists “The Mobile World”, *Q4 ‘07

business&economy 16 may-29 may 2008 87

t h e b & e s e c t o r
validity for Rs.199/-, recharge coupons
for as low as Rs.10, et al. Even in terms of
the prepaid versus post paid demarca-
tion, emerging markets are somewhat
similar to India, as prepaid forms a large
part of the subscriber base. Global players
have much to learn regarding our supply
chain management systems – the way
Indian players have promoted their prod-
ucts in every nook & corner of the coun-
try, right from the big mobile stores to the
panwaala shops, where prepaid cards are
available. Mohta of CRISIL feels that “the
Indian market has reached critical mass,
and if these players maintain the quality
of service, have the required coverage and
the brand recognition, they will be able
to extract a significant share of the cus-
tomer pie.” So in essence, there is nothing
really wrong in spreading their wings
globally at this stage in time.
Alternatively, given the rate at which
the Indian market is growing today, play-
ers could soon realise that new customer
acquisitions are becoming increasingly
difficult, especially when the market
touches a subscriber base of 600-700 mil-
lion. If number portability is permitted,
there could be a great shake up in the
domestic market itself. The global strat-
egy might then provide them with a de-
risking opportunity. And for that to hap-
pen, players have now realised that it’s
best to go into other under penetrated
markets at an early stage, since it helps,
more often than not, to have the first
mover advantage and derisk their busi-
nesses. But if they are unable to handle
the challenges of the ‘Madagascars’, they
could end up actually increasing their
risk exposure rather than reducing it!
They say an unknown devil is better
than the known one. Herein lies one of
the main perils of operating in global
markets. You have to be very careful
about the regulatory environment, which
could make life very difficult for you. San-
thanakrishnan, Telecom Analyst at Spark
Capital opines, “Telecom is a very sensi-
tive sector and governments are not very
supportive of companies from other
countries acquiring a stake in a local
company. For example, the Indian gov-
ernment never wanted Etisalat to enter
Understanding customer dynamics is the key
Indian telecom space due to their pres-
ence in Pakistan.” Changes in regulatory
environment can also be very detrimen-
tal. There isn’t much that Indian opera-
tors can add on the technology front, too,
which puts them at a disadvantage as
compared to their western counterparts.
They haven’t got much experience to
show with regard to deploying commer-
cial 3G services, for instance.
Thanks to the large scale roll outs that
Indian companies have had to make in
network expansions in India itself, they
are highly leveraged and cash flow nega-
tive. Bharti is one of the exceptions, as per
an independent telecom analyst, who
opines, “Bharti is under-levered now with
only $1.1 billion as net debt. If Bharti
were to acquire a 50% stake in MTN for
185-191 ZAR/share; i.e. around 20%
higher than current prices, the company
may have to shell out between $24-25 bil-
lion, taking its net debt-market cap ratio
from 3% currently to 70%, which, in our
eyes is manageable.” But for players with
lower margins, it acts as a stumbling
block. Shushmul of RNCOS agrees, “Oth-
er than 2-3 players like Bharti Airtel, Vo-
dafone and Reliance that have the capa-
bility to expand overseas, the market is
flooded with small players that are still
struggling to capture the Indian telecom
market. They don’t have sufficient fund
business&economy
 telecom

from bust to boom

I n terms of VAS, analysts are not normally positive of India-
based services across borders. They feel that these services
are typically successful mostly with the Indian diaspora, like
Bollywood ring back tones. Otherwise there is not much they
can give on the technology front. Nevertheless, Bharti Tel-
esoft has been one company keen on making its mark in the
VAS space pan India as well as globally. It was
a dotcom bust baby born in 2001 after seeing
a disaster written all over it in its initial years,
when it decided to focus exclusively on the
Value Added Services (VAS) space. Since then
they have moved from strength to strength
and even made a mark overseas. One of the
most interesting value additions that they
offered to their customers has been revenue
sharing rather than a straight up fee; which
would have made gaining an entry quite dif-
ficult into a new market. Bharti Telesoft, after
establishing a strong presence among telecom
operators in the high growth markets of SAARC,
Asia Pacific, Middle-East, Africa and Europe is
now eyeing aggressively to foray into newer
markets like Latin America, where there is a
great potential for m-banking and increase services offer-
ings in existing markets like South Asia and Middle East. As
Ambar Sur, Chief Marketing Officer, Bharti Telesoft divulges
“We aim to capitalise our presence in the global market by
continuing to enhance our current portfolio and develop in-
novative offerings.” The evidence of this stands true with
their presence in the top 3 global providers of
integrated VAS solutions, with over 100 mobile
operator customers in more than 60 countries
worldwide. Among other tactical moves, they
have acquired Jataayu Software, rolled out a
mobile banking service with Barclay’s India called
‘Hello Money’ and even entered into an alliance
with AFS. The company fully understands the
benefits of going global even though operating
in India is highly competitive as the VAS business
requires high degree of agility. Also, the R & D
innovation cycle is far less (2-3 years) vis-à-vis tel-
ecom equipment manufacturers. But the major
challenge lies elsewhere, as Ambar admits, “Chal-
lenges faced by VAS industry are not technology
or infrastructure-led, but the lifestyle appeal and
the demand made by consumers.”

raising sources through which they can
initiate an overseas deal.”
Management bandwidth will be an is-
sue too in the course of overseas expan-
sions. Vikram Tiwathia, Chief Informa-
tion Officer, CII, points out to another
critical issue related to the Indian mar-
ket, “The telecom scenario in India is
already challenged with the availability
of good HR to match the pace of domes-
tic growth in telecom and this (with ref-
erence to the tie up between Bharti &
MTN) will draw away currently scarce
Heights of
‘margin’al utility! (45.7%)
EBITDA figures (Rs. billion)
181.8
(42.1%)
113.7 (54.6%)
HR for overseas commitments.” Service
levels could also be a concern, as in how
well can we compete in efficiently pro-
viding customer satisfaction in terms of
service. For instance, the Middle East
presents a different challenge, since pop-
ulation density is low there. So more tow-
ers need to be set up in the Middle East,
as compared to a market like India.
Choice of market is a very critical issue,
depending on player to player. In
general, as Mohta puts it, “You must go
in a market where there may be 4-5
players of similar size, as per balance
sheet and an environment where you can
show your expertise on customer un-
derstanding.” Although few mar-
kets compare to India in terms of
competitive environment,
the key is how well you handle
Source: Company reports
Most Indian companies have
already spent a lot in do-
mestic expansions, which
makes them overleveraged
cape 2 Africa, releasing later this year.
Certainly, that promises more adventure
and more enlightening experiences
for them and for the audiences, apart
from the proverbial happy ending, which
would keep the film producers happy
too. But then, life in the telecom world
is anything but close to a happy go lucky
animation film. When Indian telecom
players take their services to the jungles

102.8 your customers and yet remain of Africa, or to the deserts of the Middle
in business. East, they would do well to ensure
(33.7%) Incidentally, coming back to that they are secure from any potential
22.7
(26%) our good ol’ foursome, Alex, rude shocks. Besides, they have to also
3.35 Marty, Gloria & Melman, they ensure that they are not squandering the
Bharti Idea TATA Reliance BSNL are also headed to Africa in advantages that they have gained in good
Airtel the sequel Madagascar 2: Es- ol’ India. 
Figures in brackets are EBITDA margins Graphic: Kuldeep Singh

business&economy 16 may-29 may 2008 89