Despite unclear spectrum road map, there's no risk to our expansion plan: Vsevolod Rozanov, CEO, SSTL
Vsevolod Rozanov, president & CEO, SSTL
Sistema Shyam TeleServices Ltd (SSTL), a joint venture between Sistema of Russia and Shyam Group of India, has invested over $2.2 billion (around 9,900 crore) in India so far, but accounts for a mere 10 million of the country's 750 million mobile connections. A new entrant, SSTL which retails its services under the MTS brand, is betting big on being a data-centric operator since current broadband penetration level is less than 1% compared with 55% in voice services, but lack of clarity on additional spectrum allotment may derail its plans. SSTL president and CEO Vsevolod Rozanov said his management has asked the promoters and investors to keep their funding plans on hold until there is clarity on the regulatory and policy framework. In an interaction with Joji Thomas Philip, Rozanov talks about the challenges the CDMA operator faces in India and its expansion and IPO plans. Edited excerpts:
As per the direction of the courts, are you not supposed to carry out the listing of Sistema Shyam this fiscal? When will the IPO happen?
The court has only ordered that we do an IPO. It has not directed a specific timeframe for it. The process has already been initiated and we will specify its status by the end of this financial year. We will soon appoint bankers for the proposed listing. But, at the current market conditions, we will not command valuations at which the Russian government had picked up stake in Sistema Shyam-the stake sale valued us at over $3 billion. We understand that the minority shareholders want to exit, but they will not benefit if we go in for an immediate listing. While there is a legal case, an IPO must also have a financial case too, else it will lead to value destruction for all shareholders. I am sure that minority shareholders will understand this.
The Russian government picked up less than 20% in Sistema Shyam. Has the money come into the company? There have also been reports of the company raising funds for expansion.
The investment of $600 million from the Russian government has already come into the company. This will take care of our funding requirements for this calendar year and also some part of next year. The funds will be used to finance the development of the company, particularly to strengthen its position in the wireless broadband market. The funds will also be used to expand the branded retail network in existing circles and accelerate the launch of operations in new ones.
New entrants, including Sistema Shyam that were given mobile permits under controversial circumstances by former telecoms minister A Raja, have all been issued show-cause notices seeking cancellation of those permits? What is your response to these notices?
We were required to pay only 11 crore as liquidated damages for failure to roll out services in some circles and we have done so. Sistema Shyam was not among companies that were sent notices for allegedly submitting doctored documents the 2G scam.
Is Sistema worried about the lack of clarity and road map for spectrum allocation? Is the current regulatory and policy framework a concern for your shareholders and investors? Will this impact your expansion plans?
While the spectrum road map is not clear, there is no immediate risk to our expansion plans for this year and the next. Yes, there is no clarity on how and when the new entrants will be given additional airwaves. We have just 2.5 MHz of airwaves across the country, the lowest amongst all mobile phone companies. We will need additional airwaves, especially to service our wireless data customers. We are committed to the government's vision of a national broadband plan and already have over 0.5 million wireless broadband customers. As the spectrum crunch increases, we can increase the number of towers, but that is not a cost-efficient way to offer mobile telephony services.
As per the direction of the courts, are you not supposed to carry out the listing of Sistema Shyam this fiscal? When will the IPO happen?
The court has only ordered that we do an IPO. It has not directed a specific timeframe for it. The process has already been initiated and we will specify its status by the end of this financial year. We will soon appoint bankers for the proposed listing. But, at the current market conditions, we will not command valuations at which the Russian government had picked up stake in Sistema Shyam-the stake sale valued us at over $3 billion. We understand that the minority shareholders want to exit, but they will not benefit if we go in for an immediate listing. While there is a legal case, an IPO must also have a financial case too, else it will lead to value destruction for all shareholders. I am sure that minority shareholders will understand this.
The Russian government picked up less than 20% in Sistema Shyam. Has the money come into the company? There have also been reports of the company raising funds for expansion.
The investment of $600 million from the Russian government has already come into the company. This will take care of our funding requirements for this calendar year and also some part of next year. The funds will be used to finance the development of the company, particularly to strengthen its position in the wireless broadband market. The funds will also be used to expand the branded retail network in existing circles and accelerate the launch of operations in new ones.
New entrants, including Sistema Shyam that were given mobile permits under controversial circumstances by former telecoms minister A Raja, have all been issued show-cause notices seeking cancellation of those permits? What is your response to these notices?
We were required to pay only 11 crore as liquidated damages for failure to roll out services in some circles and we have done so. Sistema Shyam was not among companies that were sent notices for allegedly submitting doctored documents the 2G scam.
Is Sistema worried about the lack of clarity and road map for spectrum allocation? Is the current regulatory and policy framework a concern for your shareholders and investors? Will this impact your expansion plans?
While the spectrum road map is not clear, there is no immediate risk to our expansion plans for this year and the next. Yes, there is no clarity on how and when the new entrants will be given additional airwaves. We have just 2.5 MHz of airwaves across the country, the lowest amongst all mobile phone companies. We will need additional airwaves, especially to service our wireless data customers. We are committed to the government's vision of a national broadband plan and already have over 0.5 million wireless broadband customers. As the spectrum crunch increases, we can increase the number of towers, but that is not a cost-efficient way to offer mobile telephony services.
Your strength lies in data card business. But, with GSM operators now having 3G spectrum, they can easily challenge MTS in the wireless broadband space. So, going forward, you stand to lose out in this space too.
My opinion is that GSM operators will be spectrum-constrained. Their smartphone customers will use data services that will use up their 3G spectrum. India apart, there's only one country (Austria) in the world, where telcos have less than 10 MHz of 3G spectrum. Besides, none of the GSM operators here has pan-India airwaves. Hence, they will have to share this resource to have a national 3G footprint. So, the congestion will come in faster in the 3G space. Their (GSM telcos') focus, therefore, may not be on the data card segment.
But we hope that new M&A rules will allow operators to have more spectrum. Currently, with so many players, the airwaves are divided into narrow bands and, therefore, cannot be used efficiently.
The price wars in the telecom space have sent revenues and profits of all operators plunging. Can Sistema Shyam meet its targets for profitability under the current scenario?
We stand by our earlier guidance that we will be EBIDTA positive by 2013 and cash positive by 2015. These are extremely aggressive ambitions considering the current telecoms market in India.
Being a CDMA operator, are you not at a disadvantage. The GSM ecosystem is better and offers more choice of operators and handsets. Besides, the initial results of mobile number portability indicate that customers are opting out of CDMA. If the M&A rules change, will you buy a GSM-based telco to become a dual-technology operator like Reliance Communications and Tatas?
I don't think we are disadvantaged because CDMA has a narrow ecosystem. MTS is the only operator that is focusing on CDMA in India. In the handset space, a lot more models are coming in. The challenge in India is that our competitors who offer CDMA-based mobile services may be focusing more on their GSM operations as they offer services on the dual-technology platform. This may have had an impact on the CDMA ecosystem here. Yes, our competitors may have lost CDMA customers after mobile number portability has been introduced, but this does not apply to MTS. We are net positive in terms of customer additions under MNP. Even under a new M&A regime, it is unlikely that we may buy a GSM operator. But that is for the shareholders to decide. At Sistema Shyam, we made a conscious decision to be a CDMA player and we stand by that.
Your average revenue per user (ARPU) is far below the industry average. Will you break even in India with such low revenues per customer?
Our ARPU is 80 per month, and while this is below the national average, you must take into account that most of our customers are new users. We are doing okay if one were to consider the national average for incremental ARPUs. Our data card customers are giving us about 700 per month. We are counting on the data ARPU, not voice. Our ARPU is increasing by 4-5 every quarter, led by increased data offtake and we are happy with that.
GSM operators are all advertising their 3G offerings. While CDMA can offer the same speeds, how do you get the message across? Besides, CDMA has a problem on the handset side too? Will bundling help?
It took us about nine months after the launch of our data cards to get the business model right. Moving to 3G will not be smooth for any operator. I don't think GSM operators are in a position to offer 3G dongles. They will rather concentrate on moving their high-end mobile customers to the 3G platform. Therefore, our position in the data card segment will not be impacted much.
Most CDMA users have low-end phones. Convincing customers to move to smartphones is a huge challenge. Actually, for us the smartphone segment began only after September 2010. We have been successful in selling data cards and we will use this expertise to sell smartphones. We started with a low-end base, and earlier there were not many handset models for our customers to upgrade to. But this is changing. The open market initiative where CDMA customers can use the same handset across operators on the same technology platform is helping. While bundling may not have taken off in India, on the global stage most of the high-end handsets are sold like this. While there are risks associated with bundling in India, we feel that by controlling the channel, we can minimize them. We have introduced a Android-based HTC touch screen handset, called MTS Pulse, which costs about 18,000. Customers need to pay 1,500 a month for which they are given a host of freebies, including SMS, data downloads and free minutes. Our target is to have 30 million customers.
Indian telcos traditionally have outsourced most of their core functions. What about MTS?
Our outsroucing strategy is different from that of other telcos.
For instance, we have outsourced the management of our networks to Ericsson, ZTE and Huawei, while for IT, we have about five different partners. We feel that this is a more efficient model.
My opinion is that GSM operators will be spectrum-constrained. Their smartphone customers will use data services that will use up their 3G spectrum. India apart, there's only one country (Austria) in the world, where telcos have less than 10 MHz of 3G spectrum. Besides, none of the GSM operators here has pan-India airwaves. Hence, they will have to share this resource to have a national 3G footprint. So, the congestion will come in faster in the 3G space. Their (GSM telcos') focus, therefore, may not be on the data card segment.
But we hope that new M&A rules will allow operators to have more spectrum. Currently, with so many players, the airwaves are divided into narrow bands and, therefore, cannot be used efficiently.
The price wars in the telecom space have sent revenues and profits of all operators plunging. Can Sistema Shyam meet its targets for profitability under the current scenario?
We stand by our earlier guidance that we will be EBIDTA positive by 2013 and cash positive by 2015. These are extremely aggressive ambitions considering the current telecoms market in India.
Being a CDMA operator, are you not at a disadvantage. The GSM ecosystem is better and offers more choice of operators and handsets. Besides, the initial results of mobile number portability indicate that customers are opting out of CDMA. If the M&A rules change, will you buy a GSM-based telco to become a dual-technology operator like Reliance Communications and Tatas?
I don't think we are disadvantaged because CDMA has a narrow ecosystem. MTS is the only operator that is focusing on CDMA in India. In the handset space, a lot more models are coming in. The challenge in India is that our competitors who offer CDMA-based mobile services may be focusing more on their GSM operations as they offer services on the dual-technology platform. This may have had an impact on the CDMA ecosystem here. Yes, our competitors may have lost CDMA customers after mobile number portability has been introduced, but this does not apply to MTS. We are net positive in terms of customer additions under MNP. Even under a new M&A regime, it is unlikely that we may buy a GSM operator. But that is for the shareholders to decide. At Sistema Shyam, we made a conscious decision to be a CDMA player and we stand by that.
Your average revenue per user (ARPU) is far below the industry average. Will you break even in India with such low revenues per customer?
Our ARPU is 80 per month, and while this is below the national average, you must take into account that most of our customers are new users. We are doing okay if one were to consider the national average for incremental ARPUs. Our data card customers are giving us about 700 per month. We are counting on the data ARPU, not voice. Our ARPU is increasing by 4-5 every quarter, led by increased data offtake and we are happy with that.
GSM operators are all advertising their 3G offerings. While CDMA can offer the same speeds, how do you get the message across? Besides, CDMA has a problem on the handset side too? Will bundling help?
It took us about nine months after the launch of our data cards to get the business model right. Moving to 3G will not be smooth for any operator. I don't think GSM operators are in a position to offer 3G dongles. They will rather concentrate on moving their high-end mobile customers to the 3G platform. Therefore, our position in the data card segment will not be impacted much.
Most CDMA users have low-end phones. Convincing customers to move to smartphones is a huge challenge. Actually, for us the smartphone segment began only after September 2010. We have been successful in selling data cards and we will use this expertise to sell smartphones. We started with a low-end base, and earlier there were not many handset models for our customers to upgrade to. But this is changing. The open market initiative where CDMA customers can use the same handset across operators on the same technology platform is helping. While bundling may not have taken off in India, on the global stage most of the high-end handsets are sold like this. While there are risks associated with bundling in India, we feel that by controlling the channel, we can minimize them. We have introduced a Android-based HTC touch screen handset, called MTS Pulse, which costs about 18,000. Customers need to pay 1,500 a month for which they are given a host of freebies, including SMS, data downloads and free minutes. Our target is to have 30 million customers.
Indian telcos traditionally have outsourced most of their core functions. What about MTS?
Our outsroucing strategy is different from that of other telcos.
For instance, we have outsourced the management of our networks to Ericsson, ZTE and Huawei, while for IT, we have about five different partners. We feel that this is a more efficient model.
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