Though this story paints a somber note for the domestic market, we feel that such pressures will lead to short term consolidation which will be good for the industry as well as MTS
Telenor Investors Say `Quit India' as Venture's Losses Pile Up
By - Sep 6, 2010 3:31 AM GMT+0530
Telenor ASA investors have a piece of advice for Scandinavia’s biggest phone company: Quit India.
Nine months after its debut in the Indian mobile-phone market, Telenor has accumulated 3.4 billion kroner ($556 million) in operating losses. The Norwegian company spent about $1.3 billion to buy control of its India venture and invested 4.8 billion kroner more on capital expenditure. It has forecast the division will be profitable in three years.
“Most investors don’t apply any value to the Indian operations,” said Jesper Kruger, a fund manager at ATP, Denmark’s biggest pension fund, who helps manage 50 billion euros ($64 billion) of assets including Telenor shares. “Quitting India would certainly help sentiment.”
Telenor’s experience in India, the world’s second-largest mobile-phone market after China, mirrors that of Vodafone Group Plc as more than a dozen operators compete for users, pushing call rates to as low as a penny a minute. Telenor may revise its outlook for India at its annual investor meeting on Sept. 21, said Martin Hoff, an analyst at Arctic Securities in Oslo.
“The average revenue per user in India has collapsed in the last two years to a level below Telenor’s expectations,” Hoff said. “The old guidance of breakeven in three years looks impossible and I expect they will incur pretty large losses every quarter for the next couple of years.”
Indian Entry
Telenor, based in Fornebu, Norway, entered India by buying a stake in Unitech Wireless, an arm of Unitech Ltd., the real estate company controlled by Indian billionaire Ramesh Chandra.
The venture, called Uninor, was designed as a lean operation that could win customers with cheap rates, following Telenor’s successful operations elsewhere in Asia. It strove to keep investment down by leasing tower access from other companies and outsourcing back-office functions.
Telenor, which began accumulating its stake in Uninor in 2009, now owns 67.25 percent of the venture, which it said in February it spent 61.2 billion rupees ($1.3 billion) to acquire from Unitech. Although it can legally own up to 74 percent, it doesn’t intend to raise its stake, Telenor spokesman Glenn Mandelid said by e-mail.
The India operations remain a drain on Telenor, which saw profits increase in the second quarter on growth in Malaysia and Thailand and from its Russian mobile-phone joint venture VimpelCom Ltd. Telenor has risen 16 percent this year in Oslo, making it the seventh best-performing stock in the 33-member Bloomberg Europe Telecommunications Index.
Government Stake
Andrew Hogley, a London-based analyst at Execution Noble, said if Telenor were to quit the Indian market, he would add 15 to 20 kroner to his fair-value estimate of 90 kroner a share. Telenor currently trades at about 95 kroner.
“The market may be getting a bit too optimistic that they may walk away from the project, which isn’t just backed by management, it’s backed by the largest shareholder which is the Norwegian government,” Hogley said. The government is more interested in the company’s long-term strategic position and is prepared to carry losses for many years, he said.
Norway’s Ministry of Trade and Industry manages the government’s 54 percent share of Telenor. The ministry wants deeper ties and trade with India as demand for energy and consumer goods grows in Asia’s third-largest economy, State Secretary Rikke Lind said in an interview last year.
Telenor expects additional losses before interest, taxes, depreciation and amortization this year on Uninor of as much as 2.9 billion kroner and capital investment of about 1.5 billion kroner, according to its forecasts.
Market Share
The company is still targeting positive cash flow within five years of its start-up and earnings before interest, taxes, depreciation and amortization, or Ebitda, after three years as well as an 8 percent market share by 2018, Uninor Managing Director Sigve Brekke said by e-mail last week.
“I didn’t have much expectation for the India venture and it’s been a negative focus all the way,” said Beate Bredesen, an investment manager at Skagens Vekst in Stavanger, Norway, with 2.9 percent of her fund’s 9.5 billion kroner in Telenor shares. “I expect they’ll lose money on the investment.”
Telenor currently has less than a one percent market share as rivals such as Bharti Airtel Ltd., India’s biggest mobile- phone company, pull down prices to squeeze out new entrants.
Indian mobile-phone subscriptions totaled 635.5 million, split among more than a dozen vendors, according to the government, which calculated a market share of 0.95 percent for Uninor with 6.02 million subscriptions. The company reported 3.87 million users at the end of the second quarter, based on a definition of prepaid cards active in the last 30 days.
Consolidation
“There will probably be consolidation in the Indian market as long as the regulator allows it,” Arild Nysaether, an Oslo- based analyst at Fondsfinans ASA. “Telenor will probably participate, one way or another, and be part of a more balanced Indian mobile market.”
Any mergers or acquisitions involving the unit have to wait until 2011 as part of Telenor’s license agreement, Arctic Securities’ Hoff said.
Telenor replaced Uninor Chief Executive Officer Stein-Erik Vellan in July with Asia head Brekke, who drove the venture. It blames Uninor’s slow growth on its offerings, saying it needs to adjust incentives for retailers to improve customer retention.
“In other Asian markets where we operate, Telenor is best- positioned on retail distribution and we want to replicate that in India too,” Brekke said in his statement.
The company wants to focus on basic services such as voice and 2G data, and limit operating costs, he said. The Asian units Brekke oversees, including Pakistan and Bangladesh, account for about a third of sales and profit at Telenor.
Crowded Market
In India, Telenor is a victim of the government’s award of multiple licenses, crowding the market and leaving companies with sliver-thin or no margins. In May, Vodafone booked a $3.3 billion charge for its Indian unit, citing “intense price competition.”
Uninor predicted it would have ARPU “slightly below” an industry average of 245 rupees, Brekke said in December. Telenor hasn’t started reporting ARPU for Uninor and analysts said current billings are likely distorted by introductory offers.
Nine months after its debut in the Indian mobile-phone market, Telenor has accumulated 3.4 billion kroner ($556 million) in operating losses. The Norwegian company spent about $1.3 billion to buy control of its India venture and invested 4.8 billion kroner more on capital expenditure. It has forecast the division will be profitable in three years.
“Most investors don’t apply any value to the Indian operations,” said Jesper Kruger, a fund manager at ATP, Denmark’s biggest pension fund, who helps manage 50 billion euros ($64 billion) of assets including Telenor shares. “Quitting India would certainly help sentiment.”
Telenor’s experience in India, the world’s second-largest mobile-phone market after China, mirrors that of Vodafone Group Plc as more than a dozen operators compete for users, pushing call rates to as low as a penny a minute. Telenor may revise its outlook for India at its annual investor meeting on Sept. 21, said Martin Hoff, an analyst at Arctic Securities in Oslo.
“The average revenue per user in India has collapsed in the last two years to a level below Telenor’s expectations,” Hoff said. “The old guidance of breakeven in three years looks impossible and I expect they will incur pretty large losses every quarter for the next couple of years.”
Indian Entry
Telenor, based in Fornebu, Norway, entered India by buying a stake in Unitech Wireless, an arm of Unitech Ltd., the real estate company controlled by Indian billionaire Ramesh Chandra.
The venture, called Uninor, was designed as a lean operation that could win customers with cheap rates, following Telenor’s successful operations elsewhere in Asia. It strove to keep investment down by leasing tower access from other companies and outsourcing back-office functions.
Telenor, which began accumulating its stake in Uninor in 2009, now owns 67.25 percent of the venture, which it said in February it spent 61.2 billion rupees ($1.3 billion) to acquire from Unitech. Although it can legally own up to 74 percent, it doesn’t intend to raise its stake, Telenor spokesman Glenn Mandelid said by e-mail.
The India operations remain a drain on Telenor, which saw profits increase in the second quarter on growth in Malaysia and Thailand and from its Russian mobile-phone joint venture VimpelCom Ltd. Telenor has risen 16 percent this year in Oslo, making it the seventh best-performing stock in the 33-member Bloomberg Europe Telecommunications Index.
Government Stake
Andrew Hogley, a London-based analyst at Execution Noble, said if Telenor were to quit the Indian market, he would add 15 to 20 kroner to his fair-value estimate of 90 kroner a share. Telenor currently trades at about 95 kroner.
“The market may be getting a bit too optimistic that they may walk away from the project, which isn’t just backed by management, it’s backed by the largest shareholder which is the Norwegian government,” Hogley said. The government is more interested in the company’s long-term strategic position and is prepared to carry losses for many years, he said.
Norway’s Ministry of Trade and Industry manages the government’s 54 percent share of Telenor. The ministry wants deeper ties and trade with India as demand for energy and consumer goods grows in Asia’s third-largest economy, State Secretary Rikke Lind said in an interview last year.
Telenor expects additional losses before interest, taxes, depreciation and amortization this year on Uninor of as much as 2.9 billion kroner and capital investment of about 1.5 billion kroner, according to its forecasts.
Market Share
The company is still targeting positive cash flow within five years of its start-up and earnings before interest, taxes, depreciation and amortization, or Ebitda, after three years as well as an 8 percent market share by 2018, Uninor Managing Director Sigve Brekke said by e-mail last week.
“I didn’t have much expectation for the India venture and it’s been a negative focus all the way,” said Beate Bredesen, an investment manager at Skagens Vekst in Stavanger, Norway, with 2.9 percent of her fund’s 9.5 billion kroner in Telenor shares. “I expect they’ll lose money on the investment.”
Telenor currently has less than a one percent market share as rivals such as Bharti Airtel Ltd., India’s biggest mobile- phone company, pull down prices to squeeze out new entrants.
Indian mobile-phone subscriptions totaled 635.5 million, split among more than a dozen vendors, according to the government, which calculated a market share of 0.95 percent for Uninor with 6.02 million subscriptions. The company reported 3.87 million users at the end of the second quarter, based on a definition of prepaid cards active in the last 30 days.
Consolidation
“There will probably be consolidation in the Indian market as long as the regulator allows it,” Arild Nysaether, an Oslo- based analyst at Fondsfinans ASA. “Telenor will probably participate, one way or another, and be part of a more balanced Indian mobile market.”
Any mergers or acquisitions involving the unit have to wait until 2011 as part of Telenor’s license agreement, Arctic Securities’ Hoff said.
Telenor replaced Uninor Chief Executive Officer Stein-Erik Vellan in July with Asia head Brekke, who drove the venture. It blames Uninor’s slow growth on its offerings, saying it needs to adjust incentives for retailers to improve customer retention.
“In other Asian markets where we operate, Telenor is best- positioned on retail distribution and we want to replicate that in India too,” Brekke said in his statement.
The company wants to focus on basic services such as voice and 2G data, and limit operating costs, he said. The Asian units Brekke oversees, including Pakistan and Bangladesh, account for about a third of sales and profit at Telenor.
Crowded Market
In India, Telenor is a victim of the government’s award of multiple licenses, crowding the market and leaving companies with sliver-thin or no margins. In May, Vodafone booked a $3.3 billion charge for its Indian unit, citing “intense price competition.”
Uninor predicted it would have ARPU “slightly below” an industry average of 245 rupees, Brekke said in December. Telenor hasn’t started reporting ARPU for Uninor and analysts said current billings are likely distorted by introductory offers.
“They’re just not generating revenue, customers aren’t sticking,” Hogley of Execution Noble said. “There is no way they will ever make a return on this investment.”
To contact the reporter on this story: Diana ben-Aaron in Helsinki at dbenaaron1@bloomberg.net 
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