Waiting to dial in

If you are a telco with ambitions of becoming a global player, then India is one market you cannot afford to ignore. Nowhere else in the world is the market for telecommunications growing as rapidly as in India. Some six million subscribers are coming on board every month and by 2010, if everything goes according to plan, there may be 500 million subscribers compared to the 170 million currently. It's the fastest growing market, even if it isn't the most lucrative. Says Ravi Menon, MD and Co-head (Global Investment Banking-India), HSBC Securities: "There is still room here for new players to enter the market through the inorganic route and consolidate their position by acquiring the smaller players."

Indeed, over the last 12 years of cellular telephony in India, some of the biggest names in the business globally have flirted with the local market. Unfortunately for them, quite a few got in way ahead of the boom and exited for various reasons ranging from revamp of portfolios at their parent companies to the dotcom-led telecom meltdown of 2000. Among the prominent exits were those of Swisscom, at&t Wireless, Telstra, France Telecom, and, most recently, Hutchison Telecommunications International.

Its booming market apart, India is compelling for global players for other reasons. Wireless penetration levels in the developed markets are very high. In Germany and the UK, for example, it is over 80 per cent. Also, unlike in India, most of the revenue in these markets comes from value-added services and not voice. Therefore, it is relatively difficult to grow revenues. That was primarily the reason why British telecoms giant Vodafone was willing to pay a premium to get hold of Hutchison Essar. Interestingly enough, Vodafone was in India until 2003, when it held a 20 per cent stake in RPG Cellular's Chennai circle that it eventually sold to the C. Sivasankaran-promoted Aircel.

For some others like Norway's Telenor, India may be important to complete a South Asia portfolio. Telenor is already present in Pakistan and Bangladesh, and a presence in the vastly bigger Indian market will make a good story for investors. In a communiqué to BT earlier this year, the Norwegian company had said that, "India is an interesting market along with many other markets in Asia and…we are constantly on the look out for opportunities and will be evaluating many interesting prospects".

Apart from Telenor, there has been talk of players like China Mobile and SK Telecom of South Korea wanting an India foothold. Since the country offers two technological platforms-GSM and CDMA-the probability of more global players getting in increases. Japan's NTT DoCoMo, which has been extremely quiet on its plans for new markets, recently spoke of looking at other markets. The company's President Masao Nakamura has been quoted as saying that the service provider is interested in making investments in markets like Vietnam, China and India.

High valuation: entry barrier

Despite India's attraction, setting up operations from scratch will be anything but easy for new entrants. Valuations in India are not getting any cheaper and the Hutch-Vodafone deal, which was struck at just under $11 billion, merely confirms it. At the end of the day, it is India's growth story and nothing else that has caught the fancy of large overseas operators. "Growth rates will sustain for 2-3 years without any difficulty," points out Mahesh Chhabria, Director, 3i India. Other private equity investors seem to share 3i's enthusiasm for the sector. Last year, Temasek acquired a 9.9 per cent stake in unlisted Tata Group company, Tata Teleservices Limited (TTSL), for around $300 million. TTSL is a pan-India player offering a host of wireless offering under the Tata Indicom brand name.

The question really is, how many operators can the Indian market accommodate? Today, there are six to seven operators in each circle and an acquisition-led strategy seems to be the logical choice for a new entrant. "The scenario here would become similar to that of the mature markets, where there are 2-3 mobile operators in a circle," says HSBC Securities' Menon. "Consolidation would follow the current growth phase in the Indian industry and there would be 2-3 major players."

Some operators like Telekom Malaysia have opted to buy a 49 per cent in a small operator like Spice Telecom (some others like Maxis, which has a 74 per cent stake in Aircel, are more transparent about their ambitions). To them, the plus point is that a huge population (85 per cent) is still untapped. "We are very convinced about India as a market for us," says Zul Mustafa, tm (Telekom Malaysia) International's CFO. "India is clearly a long-term story for us and we remain extremely positive about it."

Given that any new entrant would want to hit the ground running, more acquisitions cannot be ruled out. But like Menon says, it's the big boys who are likely to get bigger in the snowballing Indian telecoms market.