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31 August 2008

TELECOM SECTOR : ANOTHER UPDATE

Since the last post (now that sounds grim !) the telecom sector has been abuzz with a lot of news flow. Primary amongst them is the permission granted by TRAI for Voice Over IP (VOIP) within India. It begs a question – what is the likely impact on the telecom since providers.

OWN ASSESSMENT : VOIP
VOIP is not a new phenomenon. Having been around for a while, it has been unable to replace the landline, primarily because of Quality of Service (QOS) issues. Coupled with the fact that a VOIP provider would have to be an Internet Service Provider (ISP) and pay the various regulatory fees to include interconnect charges, it doesn’t seem to offer any distinct advantage over the humble land line. If there is any tariff arbitrage available, it remains to be seen. In any case VOIP cannot offer an alternative to mobile telephony. Also telephony services, by going mobile, are moving up the value claim and converging the Internet with it. In that sense, VOIP is a retrograde step. Last but not the least, let us not forget the low broadband penetration in India, which stands at a total of only 4.57 Million as on Jun 2008 (Compare this to the over 9 Million mobile connections added every month in the country!).

3G : DEMYSTIFIED
You know the scariest place to be in ? It’s a Telecom Regulatory Authority of India (TRAI) briefing room. The number and kinds of adjectives and terminologies flying around are mind boggling! MVNO, ISP, UASL......the list goes on! One such issue which bogs the old cranium is 3G. Let us try to wipe away some of the mist here.
3G in a broad sense permits a telecom services provider to launch the next step in integration between voice and data, towards achieving convergence. Hence theoretically a player can have a 3G license without 2G (the current) services. However that would leave the existing 2G customers out of the loop, forcing them to upgrade their handsets. As the radio frequency (RF) for 2G & 3G is different, switching from 2G to 3G i.e. transfer of signal etc and change of handsets will escalate the price further. Critical will be deployment of supporting network infrastructure i.e. base stations and transmission networks and acceptance of 3G-based mobile devices. Spectrum is a costly entity, which coupled with the cost of deploying infrastructure, will raise the bar for entry.
Hence the ideal proposition would be for an existing 2G operator to shell out an initial fee of Rs 1650Cr for a Unified Access Service License (UASL) for 3G and for that kind of money the operator will get only 5 MHz of spectrum. 3G is currently functional in over 25 countries with countries like Korea and Japan attempting a 3.5G before migrating to 4G.

MERGERS AND ACQUISITIONS (M&A)
This is a true ‘babus’ or bureaucrat’s delight – a veritable den of rules, sub-rules, by-rules and what have you.
India is a growing market for mobile telephony thus raising the interest level of the foreigners. Huge entry barriers in the form of licences, spectrum allotment, capital requirements for roll-out and subsequent implementation are pushing newer players towards Acquisitions. Smaller players are opting out, teaming with foreign investors/bigger indian telecom companies.
South Asian companies particularly from Singapore and Malaysia are showing keen interest in the Indian market. Some such M&A activity undertaken are the Vodafone stake in Bharti Televentures and Hutch, Maxis stake in Aircel, Telekom Malasiya stake in Spice Telecom and Temasek stake in Tata Teleservices.
A large number of Indian telecom firms are also looking for private equity funds to expand e.g. Hutch Essar, Reliance Communication, Idea Cellular etc. However not all M&A end up amicably like the ongoing tussle in Datacom principals Videocon and M/s HFCL.

GOVT/REGULATORY ISSUES IN M&A
Telecom licencees have to seek prior govt approval for M&A.
No M&A is allowed if the no of service providers in a circle are less than four consequent upon M&A.
Also all dues of the merged entity has to be cleared before merger.
The combined market share of merged entity should not be greater than 40% either in terms of subscriber base separately for wireless as well as wireline subscriber base or adjusted gross revenue (AGR).
Merger of licence is restricted to same service area. Excess spectrum is to be returned to govt, if any. Annual licence fee and spectrum charges are to be paid as a percentage of ADR.
10% or more equity holding by any indiviual/company in more than one licence in same service area not allowed.
Permission of merger is given only after completion of three yrs from effective date of licence.
Pace of growth is also restricted by delay in allotment of spectrum. M&A is likely to be the norm since permissible FDI in telecom is 74%.Less foreign players are likely to bid directly due to :
-Initial fee of Rs 1650 cr for UASL with no spectrum in 2G
-3G operators can not acquire 2G operators before 3 yrs period
-Spectrum not likely to be given beyond 5 MHz
-Administrative issues like No of blocks / circle, timing of auction rules on transfer and sharing of spectrum. However these issues are likely to be resolved in due time
Contributed by Sumeet Shahi, our telecom expert

16 August 2008

An IDEA Can Change Your Life

Till date I kick myself for the biggest investment blunder made by me. Back in 2001-02 I invested in Bharti at Rs 30 per share, banking solely on the technology being launched. However, soon the trader in me took over and I sold the stock at a grand profit of Rs 15 per share. Thereafter I was an observant spectator of the meteoric rise of indian telecom industry in general and Bharti(most sadly) in particular.Watching from the sidelines for so long has now paid dividend. I now observe another shining star,an IDEA whose time has come.....

I can give a lot of numbers which say why one must invest in Idea Cellular Ltd; like its over 71 % growth y-o-y in subscribers, 50 % growth in revenue, doubling of net profit and a rise in ARPU(Average Revenue Per User)(in an era when other ARPU souffles are deflating!).However in this case one must take a call on the business.

Promoted by Kumar Mangalam Birla, a part of the Aditya Birla Group, Idea Cellular boasts impeccable management pedigree. It operates in 11 circles with a subscriber base of 24 million(compared to Bharti's 64 mn). With a market cap of about Rs 26,000Cr IDEA is a good option since it is a pan India player with an existing UASL and is already providing 2G services.


IDEA has a subsidiary called Aditya Birla Telecom Ltd which operates the Bihar circle. A private equity player Providence has invested $640 Mn or Rs 2780 Cr for a 20% stake of ABTL, valuing it at Rs 13700 Cr. The market capitalisation of IDEA is Rs 26000 Cr. So for the balance Rs 12,300 Cr($2.86 Bn) one gets to buy - Punjab, Delhi, HP, UP(West),Uttrakhand, Rajasthan, MP, Chattisgarh, Mumbai, Goa, Karnataka, AP, Tamil Nadu including Chennai and Kerala. Quite the mouthwatering treat it is!The topping on the cake is the 16% stake in Indus Towers valued at Rs 37 per share, a Unified Access Service License (UASL) and a 3 G licence. Thus if I were an FDI player or an FII, $ 3 Bn is all I need to have the cake and eat it too.


But before you all start ordering the cake,a few words of caution- the FDI/FII player would need deep pockets - to roll out services in six out of eleven circles where IDEA is holding a license and for pan India 3G services. And not to forget the stiff competition being offerred by Bharti, Reliance, BSNL(dont laugh!) and Vodaphone, all of whom are similarly placed.


However with telecom penetration at 22%, well below the developed market levels, there is scope for improvement and co-existance of 7-8 pan-India operators.


So go ahead and buy with a time horizon of 2-3 years for a multibagger.To paraphrase a popular jingle - 'This IDEA can change your portfolio'

05 August 2008

TELECOM : A 3G PRIMER

India is the fastest growing telecom market next only to China.

It can be divided in a total of 22 telecom circles with major pvt players such as Vodafone,Idea,Aircel,Airtel,Reliance, Tata etc. All these companies have a pan India licence for 2G spectrum in 900,1800 MHz band i.e.they have a Unified Access Services Licence (UASL) and hence a substantial customer base, with infrastructure and interoperability aspects catered for. These companies already have 2G spectrum of minimum 4.4 MHz each.

Foreign Players
India being a high growth area in terms of mobile telephony MNCs are obviously keen to enter the market as can be seen from Vodafone - Hutch merger, Aircel tie up with Maxis Telecom, Idea (merger of Spice) and tie up with Telecom Malasiya, and the efforts between MTN and Airtel & Reliance on tie up. Mergers and acquisitions would also be the norm as indian companies try to grow to become competitive at a global level. Rural India and small towns and cities hold a lot of promise in terms of growth.
The Third Generation
The Govt of India has announced guidelines for 3G spectrum. It will initially release spectrum in 2.1 GHz. Each circle may have initially upto 5 players, while Delhi and Mumbai may have only 2 to 3 players each. This may go up to 10 companies subject to availibility of spectrum. Defence Services would be vacating some spectrum as per the agreement worked out between the Ministries of Defence and Telecom. Besides the existing Indian players, there are some new players which have UASL like Swan, Videocon & Unitech. However, these companies as of now are greenhorns with no infrastructure or experience and will need tie ups for any creating worthwhile business options. 3G guidelines have opened doors for foreign players. However,it is still inclined towards the existing UASL holders. New players will need to pay more for UASL with no guarantee of the 4.4 MHz start up spectrum(ie for 2G operations). 2G spectrum with 3G will be essential for a viable business model since 3G services will have immense competition with upto 5 payers in a telecom circle. 3G will bring in more user satisfaction in this high technology arena where people do not want to be limited by technology.
Next week we look for some companies to invest in against the backdrop of 3G launch and the likelihood of M&A.

This post has been contributed by my associate - Sumeet Shahi, who is a telecom expert.

DISCLAIMER

This blog should not be construed as investment advice, either on behalf of particular stocks or in regard to overall investment strategies. It is a site aimed at understanding competitive advantages and valuing businesses. The information provided here comes from publicly accessible sources, but errors in these sources and in transcription may occur. Any investment decisions you make should be based solely on your evaluation of your financial circumstances, investment objectives, risk tolerance, and liquidity needs.