September 27, 2010 03:28 PM
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Yogesh Sapkale
Intense competition, falling revenues and incremental expenditure have affected the balance sheets of all telecom operators. Post 3G and MNP, they will have to either consolidate or diversify in order to survive
With the imminent launch of third generation (3G) network services and mobile number portability (MNP), Indian telecom companies are now gearing up for the next big move. In the first part (http://www.moneylife.in/article/4/9386.html), we saw how the government and telecom industry are preparing for the merger and acquisition games under the exit route policy.
While it is said that some new entrants are easy prey for bigger, cash-rich players like Bharti Airtel, there are incumbents who may be ready to sell their part or complete business. In order to reduce its debt burden, Reliance Communications (RCom) is already talking about a stake sale. Although its tower sale deal with GTL did not materialise, RCom for sure needs to scout for other buyers at the earliest.
Citing RCom management, Ambit Capital Pvt Ltd, in a note said, "The company intends to offload stake in the tower company, which may be followed by strategic stake sale in RCom. Though we believe that the stake sale will result in deleveraging the balance sheet, we prefer to wait until further clarity emerges on the same."
RCom's effort to sell its towers was nothing but an attempt to diversify part of its non-core business. Towers, unless rented out to other companies are nothing but dead assets for any company - especially for mobile operators, it is a huge burden in terms of revenues. In case of RCom, the hiving off of the tower business to another company and then selling it to other parties should be seen in this context only.
The best example of diversification among telecom operators is Bharti Airtel. Long before other companies could wake up to the reality of the tariff war and subsequent intense competition, Bharti started spreading its wings in overseas markets. Once upon a time, both RCom and Bharti were in the race to acquire South African Mobile Telephone Networks SA (MTN), which did not materialise due to various reasons, including last minute changes in regulations in India and South Africa.
While RCom decided to stay away from any acquisition, Bharti continued its search and grabbed the African operations of Kuwait-based Zain for $10.7 billion. The deal, however, led to a huge debt burden of about Rs50,000 crore for Bharti. At present, the company is burdened with a debt of around Rs65,000 crore due to the Zain acquisition and auction and launch of 3G services in India.
Bharti Airtel is planning to sell mobile phone towers of its African operations to its unit Bharti Infratel, in order to raise badly needed cash and taking a big step towards replicating the outsourced business model that has underpinned its growth in India. The value of the towers is expected to be around Rs12,000 crore to Rs15,000 crore.
Kisan Ratilal Choksey Shares and Securities Pvt Ltd, in a research note said, "The move is positive for Bharti considering that it will improve the cash position of the company, significantly reducing net debt position of the company. Debt position of the company is expected to reduce to Rs50,000 crore after repayment of money borrowed for Zain's acquisition. At the same time, by handing over the operation of its phone network, towers and information technology services, the company will be able to focus on its core mobile phone service business in Africa."
While hiving off its non-core business, Bharti is also venturing into the mobile handset business. The business is crowded, with a new company entering the market almost every other day. A number of these companies procure handsets from China and sell it in India using their own label or brand. Despite the stiff competition there is growing demand, especially for handsets in the price range of Rs2,000 to Rs6,000. India's annual shipments for mobile handsets are about 130 million units.
Bharti's group company Beetel has launched eight mobile handsets in the price range of Rs1,750 to Rs7,000. In the first phase, the company is targeting select regions like Delhi, Haryana, UP and Uttaranchal, Rajasthan, Punjab and the seven north-eastern states through its 4,000 outlets.
The company plans to extend its services throughout India by FY11.
Consumer electronics giant Videocon has also entered mobile services as well as the handset business. Although the figures for its mobile handset volumes are not available, during August it added 3.7 million new subscribers.
Sistema Shyam, which operates under the brand name of MTS, has also come out with its own handsets in the CDMA category. Currently there are three operators, RCom, Tata Teleservices (Tata Indicom) and MTS, which offer CDMA mobile services in India. Often, CDMA handsets are sold in a 'locked' status; the same cannot be used with another operator. This may have prompted MTS to offer its own handsets.
Bharti and Videocon offer their direct-to-home (DTH) TV services under a similar brand as that of their mobile services, thus leveraging maximum brand value. RCom and Tata Indicom do not have that advantage as it's not their own brand but sister concerns that offer the DTH services, namely Reliance Big TV and Tata Sky. The DTH venture of Bharti also ratifies its diversification under one brand theory.
On the one hand, telecom players are seeking to de-leverage their balance sheet through sale of their non-core assets (evident from Idea and RCom seeking to sell stake in their tower business). On the other hand, looking at the intense competition in Indian markets, some players are also following the footsteps of Bharti Airtel in diversifying their presence in other regions outside India. Whether diversification of businesses would help the survival of telecom companies, only time can tell.
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