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BW Businessworld

Sardana Bets On GSM

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In June 2009, Tata DoCoMo started a price war in India's telecom market when it launched its one-paisa-per-second tariff. Since then, the joint-venture between Tata Teleservices (TTL) and Japanese NTT DoCoMo has increased its customer base exponentially. In the past one year, TTL had the fastest rate of customer additions compared to its peers. In September this year, its subscriber base crossed 80 million, making it the fourth- largest telecom player in the country in terms of number of subscribers.

Such rapid fire customer acquisition, however, has its flipside: You can never be judicious about who your customer should be. High volumes bring a higher number of low-spending customers. As a result, "Tata Tele has one of the lowest Arpu (average revenue per user) among all the (older) telecom players. It was as low as Rs 125 till a few months back," says Archit Singhal, analyst at Jaypee Capital Services. In comparison, industry leader Bharti Airtel has an Arpu of Rs 230, while No. 2 Vodafone's is about Rs 210.

An increased customer base requires augmented investments in infrastructure. Add to this a low Arpu, and it's a double whammy. The result: TTL, not a listed firm yet, faces the spectre of low Arpus, accumulating debt with huge interest payments and mounting losses. As on 31 March 2009, TTL's revenue was Rs 6,790 crore, while its debt was almost double that, Rs 11,692 crore, according to economy researchers Centre for Monitoring Indian Economy (CMIE). TTL's accumulated losses during the same period were Rs 4,201 crore.

Compare this to the other big players in telecom, and TTL's problems appear magnified. Take Reliance Communications (RCom), for instance. It has 115.3 million subscribers, competes with TTL directly due to its presence in both the CDMA (Code Division Multiple Access) and GSM space.

In 2010, RCom had revenues of Rs 12,512 crore and profits of Rs 479 crore. RCom has a bigger debt pile of Rs 33,000 crore. However, the company plans to sell its towers and dilute 26 per cent of promoters' stake to clear off the debt by 2012-13. "If you take debt after that for your future expansion, it is very well within your means," says Syed Safawi, RCom's CEO of wireless business.

Things seem to have turned around even at Idea Cellular. It is the last of the top five telecom companies and didn't seem to be in great shape till a couple of years back. In fiscal 2010, Idea posted net profits of Rs 954 crore, but carried forward accumulated losses of Rs 504 crore from the year before.

Tata Teleservices is now banking on GSM, after chasing the CDMA
dream for many years
1996: Incorporated and headquartered in Mumbai. Starts telephony services

2002: Acquires Hughes (India) in December. Renames it Tata Teleservices (Maharashtra)

2005: Starts mobility services. Anil Sardana joins as managing director in 2007

2008: In February, ties up with UK-based Virgin Mobile to start niche CDMA services for youth

Ties up with Japan's NTT DoCoMo for global system for mobile (GSM) communications services. NTT DoCoMo holds 26 per cent in Tata Tele

2009: In June, Tata DoCoMo starts GSM services in Chennai. Introduces payper-second tariff, setting off a price war in the country

2010: TTL gets 3G spectrum licence in nine circles after paying Rs 5,864 crore. Crosses 80-million subscriber mark in September

Soul Searching
TTL's current predicament is a combination of factors. First, its original CDMA business did not do too well. Eight years since it began, Tata Tele's CDMA subscriber base is barely 45-50 million of India's about 190 million cellular subscribers. Analysts say that in the past, the Tatas took some decisions late.

For instance, Reliance was quicker to shift focus from CDMA to GSM that it knew had a greater acceptance in India. Tatas too realised the significance of GSM (hence, Tata DoCoMo), but was late. It started offering services six months (a long period in a cutthroat market) after Reliance began selling GSM SIM cards. The market was already overcrowded and the margins had become wafer thin.

"Even though TTL had superior technology, it could not grab consumers. In fact, some traders preferred Tata's CDMA as the congestion over the network was minimal," says Neeraj Jain, director of transaction services at consultancy KPMG. Even its Walky handsets, which too are based on the CDMA platform, did not grab business. The bulky device did some business among traders, who would carry it, but it was not as convenient as a cellphone.

Anil Sardana, managing director of TTL, agrees the uptake was not as good as the company expected it to be. But he has new plans for the revival of the Walky. "We are revitalising the plan. We are bundling a lot of functions. It is a completely different breed," says Sardana.

RCom claims that it has about 60 per cent of the market share in the data market thanks to its wireless broadband dongle, Net Connect. Tata's Photon holds the second position, and is growing fast. But it still has a lot of fight coming up with BWA (Broadband Wireless Access) operators launching their services soon.

TTL's poor run does not stop here. Its tie-up with the UK-based Virgin Mobiles, primarily targeted at attracting the growing youth brigade, failed to take off. Perhaps, because it was on CDMA and it lacked mass penetration. Most of the targeted market had GSM connections. However, TTL doesn't think mass penetration is a problem. Instead, it defines Virgin as a "target niche market brand".

Says Sardana: "Virgin is targeted only at those below 35 years, and is present in about 250 cities." M.A. Madhusudan, CEO of Virgin Mobile India, echoes: "In terms of the number of cities, we will never be able to reach that size."

Winds Of Change
TTL, however, believes Tata DoCoMo (formed in late 2008) is its elixir for all ills. DoCoMo, Japan's largest telco, bought a 26 per cent stake in TTL for $2.9 billion (Rs 12,500 crore) in 2008. Following the subscriber ramp-up, about 30-35 million of its 80 million subscribers are on the Tata DoCoMo network.

"We are on the front foot now, and are going ahead very aggressively, keeping Tata's values and ethics in mind," says Deepak Gulati, president of Tata DoCoMo. GSM-based DoCoMo not only levelled the playing field for TTL, but also gave it a wider portfolio to play on. "They provide more options on the table — CDMA and GSM," says Vinod Sharma, head of research at HDFC Securities.

And one way in which Tata DoCoMo has tried to bring the spotlight on to itself is by being a price warrior. Though industry players accuse TTL of having started a price war, TTL doesn't agree. "We have been differentiating ourselves from the others. But it is wrong to say this has been done on the price front," says Sardana. "TTL has been offering innovative and refreshingly different products and services on both the CDMA and GSM platforms."
TTL hopes that having Japan's largest and innovative 3G and data services player as partner will help it lead the data business. In fact, this is evident as TTL has already announced plans to introduce 3G services on Diwali, the first one to start in the industry.

Thanks to the group's acquisition of VSNL in 2002, Tatas has one of the highest revenue-share coming from data services in India's telecom market, accounting for about 20 per cent of its revenues. However, much of that is on the wireline. Tata DoCoMo hopes to replicate that in the airwaves.

Click here to view enlarged imageThough TTL's data revenues are steadily increasing and are at about 20 per cent of total revenues right now, it is far below DoCoMo's data revenues of over 45 per cent (US and western companies operate at more than 25 per cent data revenues). TTL targets 30 per cent in the next two years.

The Challenges
However, Tata Tele is not the only player eyeing data business. Newcomers Aircel and MTS are expected to give stiff competition. Aircel, which is a small player by comparison, says its value-added services (VAS) revenues are more than 12-13 per cent and is the highest of all the listed telecom companies. "Our pocket Internet product has placed us very high in the VAS segment," says Gurdeep Singh, chief operating officer of Aircel. Bharti Airtel is also ramping up its data business. "We are continuously pushing to build a non-voice market," says Shireesh Mukund Joshi, director of marketing of mobile services at Bharti Airtel.

Sistema Shyam Teleservices (brand name MTS), which is the third CDMA player, has made a strategic and structural change towards building the company around the data play as it continues to trail in subscriber base. "Our data revenues without SMS are about 10 per cent of the revenues and we expect it to be 20 per cent by the end of the year and 40 per cent in the next 2-3 years," says Vsevolod Rozanov, president and CEO of Sistema Shyam Teleservices.

But still a lot of people in the industry believe TTL might have one of the best 3G offerings. Sardana is confident that he will be able to make TTL an EBITDA (earnings before interest, tax, depreciation and amortisation)-positive company by 2011. "Our legacy business is already net positive, and we expect our ongoing business also to be in the black within three years of the launch," says Sardana.

However, like most greenfield operators, DoCoMo too faces an uphill task of grabbing high- Arpu customers. The price innovation got it a foothold in the market, and Sardana says about 75 per cent of their subscribers are a churn from the incumbents.

But is this trend sustainable? "A lot of growth is coming from offering of new schemes which will get impacted in the long run. But since they have the infrastructure they will be lesser affected than other newer players," said Rahul Jain, telecom analyst at Angel Broking.

New operator Uninor has gone ahead and secured Rs 8,000-10,000 crore of debt to build networks. It thinks there is still place in the market and has plans to be EBITDA-positive in three years and cash flow positive in five years. How will they do that? "India is a multi–SIM market. Our focus is to be the primary SIM for the customer," says Uninor's spokesperson.

TOUGH CALL: Like most greenfield operators, Tata DoCoMo, too faces an uphill task of grabbing high-Arpu customersOn the other hand, the GSM incumbents still think new players such as TTL and Uninor don't stand much of a chance. "The top three players (Airtel, Vodafone and Idea) formed two-third of the market then and now. New players are struggling," says Airtel's Joshi.

Currently, Airtel has the highest number of subscribers with more than 139 million, followed by Vodafone, which has more than 111 million subscribers. The 3G services expected to be rolled out anytime early next year. And TTL has already paid Rs 5,864.29 crore as bid amount for 3G spectrum in circles. It will be required to make further investments in services and infrastructure.

The company is expected to have more than Rs 17,000 crore of debt by the end of 2010-11. Moreover, interests and losses are expected to increase. As a result, it may be a long haul for TTL before it is able to report profits, despite an aggressive subscriber addition.

Further, with increasing competition it is imperative for companies such as Tata Tele to have a healthy balance sheet. Analysts expect consolidation to take place soon in the industry since 14 telecom operators cannot survive. As the dust of consolidation settles, it is difficult to say who will be left standing.

Of course, with the Tatas backing TTL, analysts believe funding will never be a problem for the company. But for Tata Tele to continue being in the race, just increasing its customer base is not sufficient, it also needs to get the cash registers ringing.