Interview: Sistema Shyam Keen to Acquire or Merge in India

NEW DELHI --Sistema Shyam Teleservices, which controls about 1.29% of India's 826.93 million-user telecom market, is looking to buy or merge with another operator in an effort to boost business.

"Sistema is definitely eager to take a step" but it has to wait for the government to finalize new regulations, said Chief Executive Vsevolod Rozanov.

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Sistema Shyam Teleservices

Chief executive of Systema Shyam Teleservices Vsevolod Rozanov.

He didn't sound very optimistic, saying that "I think we are very far from this," but this is the first time in recent months that a telecom operator has said it is interested in buying out or merging with another.
"Consolidation" is a key word these days, with intense competition hurting profits in the world's fastest-growing telecom market.
The competition grew due to the entry of new players in 2009, which led to call tariffs plunging to as low as half a cent a minute.
India now has up to 14 operators in most telecom service areas, and analysts say consolidation is inevitable.
Federal Telecommunications Minister Kapil Sibal, while unveiling the broad contours of a new telecom policy earlier this year, said the new rules expected later in 2011 will pave the way for consolidation, leaving about five-six operators in the country.
Mr. Rozanov thinks this will be difficult, but he too feels that India will be left with six operators--five private and one state-owned.
He said Sistema Shyam is open to buying or merging with an operator which offers services under the more popular global system for mobile communications, or GSM, technology. More than two-thirds of India's mobile subscribers use GSM phone services.
Sistema Shyam--which is 56.68% owned by Russia's Sistema JSFC (SSA.LN), 17.14% by the Russian Federation and the rest by India's Shyam Group--provides services on the less popular Code Division Multiple Access, or CDMA, technology, competing directly with Tata Teleservices and Reliance Communications.
Sistema Shyam has licenses to provide services in all of India's 22 service areas and offers telecommunications services under the MTS brand.
Commenting on a recent company decision to delay a planned initial public offering, Mr. Rozanov said "there is limited opportunity for us to realize value for our shareholders."
Apart from volatile market conditions, Mr. Rozanov also cited ongoing federal investigations into the alleged rigged sale of licenses and bandwidth in 2008, which have dampened sentiment in the sector.
IPO aside, Sistema Shyam has enough cash to meet its capital expenditure target of over $200 million to expand its business in 2011, hesaid.
The expansion plan includes a contract to ZTE Corp. for upgrading its networks to a newer technology.
The new technology, called Evolution-Data Optimized Revision B, offers better connectivity for data services such as multimedia.
The company plans to start offering services on this new technology in the July-September period.
Sistema Shyam's plans to expand its wireless broadband capability come after initial success for its high revenue data services, which now contribute about 25% of its overall revenue. The company, which follows a January-December financial year, reported revenue of 2.36 billion rupees in 2010.
Its average revenue per user--a key gauge of profitability for wireless telecom companies--for its mobile internet services was 250 rupees and 600 rupees per month for its prepaid and post-paid users, respectively. Its voice average revenue per user was 82 rupees a month.
Market leader Bharti Airtl's revenue per user is 194 rupees for the January-March period, with 15% coming from data services.
To push up its mobile internet revenue, Sistema Shyam is in talks with global computer makers to introduce tablet computers in the country later this year, Mr. Rozanov said.
And, despite the regulatory overhang and the intense competition, the company is still bullish on the sector, given that the country is adding more than 15 million new users every month, and that only about 33 of every 100 people living in rural India use mobile phones so far.
Sistema Shyam added about 800,000 new users in May, with about 88,000 being wireless broadband subscribers.
Combined with the expectation that call rates won't drop further, Sistema Shyam's plans to break even at the operating level by 2013 remain "on track," Mr. Rozanov said.
"We are on a risky track, a very harsh track... but on track," he said.

Sistema’s India operations losses widen Rs 663 crore

DELHI: Mobile phone company Sistema said losses from its Indian arm widened by 63% to Rs 666 crore for the three months ended March 31 and attributed the fall to rising cost of operations and additional capital expenditure to expand services to new regions in the country.


"The decrease in margin is on account of increase in operational costs due to further scale up operations across all circles. Additionally, the circles of UP East, West and Gujarat, were launched in the latter part of 2010, hence the impact of their launch was felt in Q1 2011," the telco, in which the Russian government recently picked up close to 20% stake,said in a statement. India's Shyam group has a minority 26% stake in the teleco.

Sistema Shyam's results are a pointer that expansion costs, interest payouts for thousands of crores in loans for putting up networks in new areas and lower usage by new additions outside metros and big cities will continue to squeeze its profits and margins of all new entrants that are struggling to make in mark in the ultra competitive 14-player market.

The company's consolidated debt stands at Rs 5,584 crore.The telco's losses widened despite its sales jumping three-folds to Rs 236.2 crore during January-March quarter of FY'11, as against Rs 78.6 crore in the same period last year.

For the first time, our revenue growth during the quarter was faster than our growth in wireless (voice and data) subscribers, the company said.The company's results however have two key pointer that indicate that underlying trends are still positive.

First, its blended Average Revenue Per mobile User (ARPU) for the quarter remained consistent at Rs 82, as against a declining trend in the market. But, this is still low when compared to incumbent GSM operators such as Bharti, Idea and Vodafone, whose ARPUs are close to the Rs 200 mark.


Next, against an industry average of 10-15%, Sistema said its data services offerings accounted for a quarter of its revenues. "Non voice revenues from both data and mobile value added services for the quarter (was) up by 33% Q-o-Q to INR 588 million (Rs 58.5 crore) which contributes 25% of total revenue and the same has increased by 2 percentage points for the quarter," the company added.

It also said that at the end of Q1 2011, the company had expanded its mobile data services to 130 cities in India, including all five metros. The number of data subscribers increased by 36% over Q4 '10 to 580,000. Currently, MTS' HSD services are present in over 150 cities, its statement added.

Sistema defers listing

Sistema defers India listing on bourses till 2G probe is over

Sistema Shyam TeleServices (SSTL), a joint venture (JV) of Russia-based Sistema and the Russian Federation, and India's Shyam Group that offers telecom services under the MTS brand, has deferred plans for listing the company on the bourses till the completion of the 2G probe .

"The company wants to go public by listing on the Indian bourses. But in this kind of environment, I would say we would definitely have to see what the outcome would be of the various investigations," SSTL president and chief executive officer (CEO) Vsevolod Rozanov said. "One has to see the rules of the game. We have to look at the outcome of these investigations, the rules of the proposed new telecom policy and the spectrum issue. We definitely need to wait until regulatory clearance arrives," he added.

In 2010, the Russian government invested Rs 2,698.8 crore in SSTL with additional finance to help it to rapidly expand its highspeed data network across India. The Russian Federation holds a 17.14 per cent stake in the firm, while Sistema holds majority stake with 56 per cent participating interest and the remaining stake rests with its Indian promoters.

The firm will complete three years of Indian operations in October with a total investment of $3 billion by the end of this year. Sistema has arranged $3 billion for overall commitment from the group on various operations, out of which around $2.5 billion has already been invested and the rest will be realised by the end of this year, Rozanov said.

"Our network is present in 20 circles out of total 22 circles in the country. We will launch the last two in a few days in J&K and North East," Rozanov added. The firm has over seven lakh data subscribers. Including voice services, it has more than 11 million customers. India's telecom sector that majorly contributes to the country's gross domestic product (GDP) has come under a probe late last year after it found a presumptive loss of over Rs 1.76 lakh crore due to the sale of 2G spectrum in 2008 by former telecom minister A. Raja at 2001 rates.

The matter is being investigated by various agencies, which led to the arrest of Raja last year, along with his party and ministerial colleague Kanimozhi besides other corporate honchos involved in the scam.

India Moves to Revamp Telecom : WSJ

NEW DELHI—India is finalizing an overhaul of its telecommunications policies to address criticism that regulations are wrecking one of the nation's hottest industries by fostering price wars, degrading service quality and blocking much-needed consolidation.

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Bloomberg News

'India's cellphone rates have plunged in the past several years. Above, a mobile phone shop in Mumbai.

Kapil Sibal, India's minister of communications and information technology, said in an interview that the new policies, which will be in place by September, will relax restrictions that have prevented mergers and will aim to consolidate the wireless industry to only six carriers per market within India, down from 12 or 13 in many markets now. He also promised to free up radio spectrum, the airwaves that carry wireless signals, and allow companies to share spectrum.

In an interview with The Wall Street Journal, Kapil Sibal, India's telecom minister, gave the outlines of a major revamp in telecommunications policy expected to be unveiled by September. WSJ's Paul Beckett and Amol Sharma discuss what's at stake.

India's cellphone rates have plunged in the past several years in a hypercompetitive environment. Averaging about seven-tenths of a U.S. cent per minute, the rates are among the world's lowest. That has helped to bring mobile phones to the masses and turn India into the world's second-largest wireless market, after China, with more than 800 million subscribers.
The industry's rapid growth over the past decade is frequently cited as one of modern India's greatest success stories and has attracted billions in foreign investment.
But the setup has battered cellphone companies, whose revenue and earnings have declined sharply.Average revenue per user per month at Bharti Airtel Ltd., the nation's largest wireless carrier, dropped to just over $4 in the quarter ended March 31 from about $10 four years ago. Other carriers have reported similar drops.

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Carriers have pulled back on capital investment, which dropped 42% from 2008 to 2010 to $7.2 billion, according to Prashant Singhal, head of the India telecom practice at consulting firm Ernst and Young. That has raised fears that operators aren't nurturing their networks for the next phase of telecom development, the rollout of wireless Internet services. While India is in the early stages of introducing such third-generation services, the U.S. and many other developed markets are upgrading to 4G.
The government's new rules will go a long way toward determining whether India's telecom revolution sparks anew or fizzles over the next few years.
Mr. Sibal, a Harvard-trained lawyer who was appointed telecom minister in November when his predecessor resigned amid a corruption scandal, is trying to strike a balance in the telecom rules. Current call rates are unsustainable, he said, but the new policies must not put telecom services out of reach of India's poor.
"Ultimately, technology is meant to serve a public purpose, so that objective cannot be lost," Mr. Sibal said. "At the same time, the operator must get a return on his investment that is attractive, and the industry must prosper."
Telecom firms complain that strict merger rules, such as a stipulation that a carrier can't have more than 40% of the revenue or subscribers in any market, have headed off deals between midsize and large carriers and left the industry with far too many players, fueling price wars.

Operators also say they are desperate for the government to make more airwaves available. A sluggish bureaucracy and the reluctance of government ministries to give up airwaves have meant that Indian carriers have a small fraction of the spectrum that their counterparts have in the U.S. and Europe.
"There is an artificial scarcity of spectrum in India, which is holding back Indians from getting world class telecom service," said Nick Read, chief executive for Africa, the Mideast and Asia Pacific for Vodafone Group PLC, a major player in India.
Kunal Bajaj, a telecom consultant with Analysys Mason in New Delhi, estimated that under current levels of spectrum, carriers will be able to provide reliable broadband service to only 117 million users in 2015, even though there will be demand for a further 65 million connections.The amount of lost potential revenue to the industry would be equivalent to 0.7% of gross domestic product, he said.
Mr. Sibal said the government will move swiftly to sell more spectrum through a "market-based" mechanism that will ensure that prices are fair to carriers. He said the sale wouldn't necessarily be through an auction but wasn't more specific. Prices skyrocketed in last year's 3G auction, forcing companies to shell out several billion dollars apiece to cover just a portion of the country. "The big companies who have deep pockets only want an auction because they can snuff out everybody else," Mr. Sibal said.
In a shift, operators that aren't using all of their spectrum also will be allowed to rent portions to other companies, who could then offer wireless service. A common practice in many developed markets, including the U.S., this would put spectrum to more efficient use, Mr. Sibal said. "We want the regime to be far more flexible than it's ever been before," he said.
Still, there will be some major constraints. Mr. Sibal said companies will have to pay a one-time fee for any spectrum they hold over a specified limit, a move big carriers like Vodafone and Airtel oppose because it could cost them billions of dollars.
Mr. Sibal said spectrum availability and the number of players in the market also could be affected by a lawsuit that alleges that the government sale of 2G frequencies in 2008 was corrupt. The case, which is being heard by the Supreme Court, could result in some companies having their licenses revoked or having to return spectrum to the government.
Shifting and unpredictable regulations have put further stress on operators. After several companies finalized offerings of video calling on their nascent 3G networks late last year, the government said they would need a special security clearance.
"You can't launch a service and then be told after the fact that you need some new permission," said Srinivasa Addepalli, senior vice president for corporate strategy at Tata Communications Ltd. "It leads to uncertainty in the market and a waste of resources."
Regardless of what regulators do, Mr. Sibal said, operators and their investors shouldn't be concerned about a meltdown. "India is a market that cannot be snuffed out. There's no way in the world that will happen."
Write to Amol Sharma at amol.sharma@wsj.com