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India Business Frontier

India Frontier Advisory


September 2009 Research & Strategy in and beyond emerging markets

Growth Prospects of the Indian Telecommunications Sector


Simba Mswaka - Junior Analyst, Frontier Advisory

Contents: The mobile telephone industry has taken the number of urban mobile users and
Growth Prospects of the the world by storm over recent years rural users.
Indian Telecommunications and India has not been spared. Mobile
Sector.......................................................1-3
phones have become a necessity and India has the second largest population
India Inc in Africa........................................4 part of everyday life. The Indian mobile in the world at 1.1bn people, it has the
Indian Multinationals: phone market is now the second fastest largest middle class in the world and the
Consolidating Domestic Growth with growing market in the world behind China country has been experiencing healthy
Cross-border Mergers and Acquisitions
..................................................................5-7 and this growth looks set to continue economic growth of over 6% per annum
regardless of the global recession. The for the last six years. This represents an
Frontier Advisory Profile............................9
telecommunications industry, particularly opportunity for growth in the telecoms
the mobile industry, has still managed to industry as more and more individuals
add around 8-10m new subscribers every move from the “lower class” towards
month. This illustrates the huge growth “middle class” status, changing not only
potential of the Indian mobile market, their purchasing power but also tastes
which currently consists of about 415m and lifestyles.
subscribers and counting. India has a
mobile penetration rate of about 43% and India also has a positive population
an annual growth rate of close to 50%. growth rate that could make it the most
These figures could be a lot higher, but populous country in the world within the
are limited given the large gap between next 40 years. This bodes well for mobile

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September 2009 Research & Strategy in and beyond emerging markets

service providers looking to invest in India, given that there are going to be more
potential customers as the years go by. This means companies wanting to invest in
Indian telecommunications can take a very profitable long-term view of the country
and make sure their service is exceptional, in order to lure new customers to their
business.

A major potential growth hotspot is particularly the rural part of the population,
which is generally under-serviced. The rural population makes up the majority of
India’s population and is currently prohibited from engaging in the benefits of mobile
communication, because of the high prices of cellular phones and the reluctance of
mobile operators to build infrastructure in areas that will not garner large profits for
them.

Cellular phones have become a necessity in most parts of the world and they are no
longer just used for simple voice and messaging communication, but can be used for
various multimedia functions, business tools, data and web-related activities. India is
poised to take up these opportunities and any mobile service provider who can make
these functions work effectively and efficiently, will have a competitive advantage
over their competitors because Indian mobile operators have only been able to
effectively run messaging and voice calling services. A firm that can go that extra
mile, will become a market leader. Initially there will be a slow uptake because of the
scepticism that individuals not familiar with the technology yet may have; but as the
service becomes more reliable and trustworthy, more individuals will make use of it.

In India there are nine large mobile service providers and many small mobile service
providers. The four biggest providers are Bharti Airtel, Vodafone Essar, BSNL and
Reliance Telecom. Together they own over 60% of the market and they are located in
all major cities across the country.

Due to the higher costs of branded mobile handsets, many Indians often opt for
cheaper and unbranded mobile phones. This has helped increase the number of
mobile subscribers in India. The Indian Department of Telecommunications (DoT),
however, has directed mobile phone service users to disconnect the usage of
unbranded mobile phones that do not have International Mobile Equipment Identity
(IMEI) numbers. This move could potentially suspend 30m (about 8% of mobile
phones in India) mobile phones and make the purchase of these cheap phones
unviable and reduce subscriber growth.

In contrast to the rapidly increasing mobile sector, India has a small fixed-line industry
of only 40m subscribers. This segment has been dominated by two firms, Mahanagar
Telephone Nigam Limited (MTNL) and Bharat Sanchar Nigam Limited (BSNL).
With the liberalisation of this section of the industry, there is an opportunity for other
companies to provide a superior service that will increase the penetration of fixed
lines. Along with a low penetration of fixed lines there is also a very sluggish uptake of
broadband internet. Most Indian internet users are still using dial-up connections and
this is an opportunity for large ISPs (Internet Service Providers) to enter the country
and convert the 80m internet users into broadband users. Faster and better internet
will improve company services and new technology such as WiMax, and can be used

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September 2009 Research & Strategy in and beyond emerging markets

in remote areas to bring internet to the majority of the country.

Although there is an opportunity for fixed-line operators to increase market


penetration, there is a large preference by Indians and the rest of the world towards
mobile communication due to lower costs and greater flexibility than fixed-lines.

To encourage FDI in the whole telecommunications industry, the Indian Government


has set a target of 45% tele-density (mobile and fixed line density) compared with the
current level of 31.5%. The government has estimated that the telecoms sector will
need US$73bn during the next five years to achieve the target of 45% tele-density,
and a major chunk of the required investment is expected to come through Foreign
Direct Investment (FDI) inflows, which have reached US$1.261bn in 2007/08 from
US$478m in 2006/07.

The Indian government also has plans to roll out third generation (3G) technology and
this will be done via an auction for 3G licenses. This further bodes well for the future
of the Indian mobile industry.

A preferred method for a foreign telecoms firm to enter the Indian market and
succeed would be to acquire a stake in an existing company that has knowledge of
the Indian market. A good example of this is the partnership between Vodafone and
Essar. Vodafone acquired 67% of Hutchison Essar in 2007 at a value of US$11.1bn.
This symbiotic relationship has allowed Vodafone to use its large brand name to
garner more subscribers in India.

Another such deal is the Bharti and MTN deal, which is still in the pipeline and looks
likely to go ahead. Both sides hope to gain from becoming partners and the South
African government has backed the deal which could make the deal more likely to
happen in the near future. Bharti also hopes to be able to operate in conjunction with
MTN in emerging markets that it is not currently operating in, such as the Middle East
and parts of Africa. MTN on the other hand is using this partnership to make inroads
into India.

MTN’s higher ARPU (Average Revenue Per User) of US$13 makes the merger a very
attractive deal for Bharti as India has the lowest mobile rates in the world and hence
the ARPU is much lower at US$6.50. Bharti therefore relies on large volumes to make
massive gains.

Jointly the two companies will be able to increase their global subscriber base
making Bharti MTN the third largest mobile operator in the world. Bharti is the largest
cellular network provider in India and the 7th largest in the world, with an estimated
subscriber base of 88m Indians. This represents 21.4% of the Indian customer
base. MTN is the 2nd largest cellular network provider in South Africa and one of the
leading providers in Africa. Together they could have an entity that consists of more
than 200m subscribers. If the merger proceeds, it would result in Bharti Airtel getting
a 49 per cent stake in MTN while the South African telecom entity will receive a 36
per cent “economic interest” in Bharti Airtel. The future is bright for both of these
companies and a merger will solidify their market dominance.

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September 2009 Research & Strategy in and beyond emerging markets

India Inc in Africa


Frontier Advisory tracks India’s commercial movements in Africa. This section provides an overview of key investments in the
last few months.
Ghana Ethiopia
ONGC taps Citi for Kosmos Ghana stake Indian paper investment in
bid Ethiopia
India’s leading oil producer ONGC has hired Anmol Products has opened
Citigroup to advise it on a bid for Kosmos a US$5m paper factory, at
Angola Energy’s stake in an oil field in Ghana for a Ginche, 80km west of Addis
Angola and India in talks over deal that could be worth between US$3bn Ababa. The new factory has
$60m loan and US$5bn.Private equity-backed Kosmos, the capacity to produce 15,000
Angola and India are finalising a which has received a total of US$800m from tonnes of paper annually.
US$60m loan for the supply of Blackstone and Warburg Pincus, has hired
rail equipment, locomotives and Standard Chartered and Barclays Plc to sell Karuturi Global signs
passenger coaches. The amount its stakes in the offshore Jubilee oil field. agreement in Ethiopia
is in addition to a US$40m loan In early June, Bangalore-based
from India in 2006 that was also Karuturi Global Ltd signed an
used for machinery, transport agreement with Ethiopia to grow
coaches, rails and training for palm trees (for oil), rice and
engineers at the Angolan railway sugar cane on some 300,000ha
company, Caminho de Ferro de of land. Karuturi’s Gambella
Mocamede. Agriculture Project, launched
jointly by Ethiopia’s agricultural
India finances railway in Huila minister Abera Dersea and
province Indian ambassador Gurjit Singh,
India is to provide US$40m is expected to provide direct
for the building of a railway and indirect employment to over
between the cities of Lubango 25,000 locals over the next 3-5
and Matala in the province of years.
Huila. The project will be carried
out by Indian state-owned Rail Kenya
India Technical and Economic
Services (RITES). Essar Oil acquires 50% stake
in Kenya Petroleum Refineries
Essar Oil acquired a 50%
Namibia stake in the Kenya Petroleum
India gains access to uranium Refineries (KPRL). The stake
Yes Bank’s US$150m India was bought from global majors
and Namibia have signed an – Shell, BP, Chevron and BP
agreement according to which Africa Ltd, who have been
Namibia will sell its uranium associated with the refinery for
to India. In addition to this the past 50 years. Essar will
agreement the countries also invest US$350m-US$450m
signed a MOU on cooperation in to upgrade and expand the
geology and mineral resources. refinery.

Tanzania
South Africa Yes Bank sees 1st Africa farm
Essar Group acquires BPO firm project start 2011
Essar Group of New Delhi’s business process Indian bank plans SA agro-park
Yes Bank’s US$150m
outsourcing and technology arm, Aegis Ltd, Yes Bank has announced plans to create
Tanzanian rice and wheat
has acquired CCN Group PTY Ltd, a South an agro-park with spatial integration of
project is expected to reach
Africa-based BPO firm, for around US$30m. production, processing, trade and the logistics
full production by 2011.This is
Aegis plans to invest US$60m in South Africa supply chain in South Africa. At a cost of
the first of several large African
in the next 3 years, creating about 5,000 jobs about US$200m per park, the bank is looking
farms the Bank is funding.
there. to roll out a similar park in Mauritius.

Softpro acquires 100% stake in SA firm Indian company gets South African coal
IT solutions provider Softpro Systems has Jindal Steel & Power, part of the Jindal Group,
acquired a 100% equity stake in South Africa- has acquired the Kiepersol thermal coal mine
based Cura Risk Management software for in South Africa – an underground mine which
US$19m. Softpro will pay US$16m upfront produces mid-low volatile thermal coal.
and the rest in the next 3 years based on
performance of the acquired company.

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September 2009 Research & Strategy in and beyond emerging markets

Indian Multinationals: Consolidating Domestic Growth


with Cross-border Mergers and Acquisitions
Jamie Robertsen – Junior Analyst, Frontier Advisory

Recent years have seen the rise of M&As are also made possible by the fact
Indian multinationals, and with this a that they are made by companies that are
steep increase in the number of mergers more often than not part of a bigger group
and acquisitions (M&As) between these and therefore have more assets to leverage
multinationals and foreign companies. As when seeking a loan. This fact would not
Indian companies have grown domestically, ordinarily separate them from their Western
they have sought to consolidate this growth counterparts, but with the current economic
by becoming globally competitive. M&As climate and Western banks becoming
have brought them a considerable distance more regulated, Indian multinationals
in achieving this goal as well as providing have greater access to finance. Aegis, for
entry into profitable high-margin markets in example, is part of the Essar Group and
the developed world, while at the same time has used this position to finance its 12
allowing them to retain their low-cost bases M&A deals in the last three years. These
in India. companies are also usually run by powerful
families and individual stakeholders and
The recent colossal growth in India’s as a result decisions can be made quicker
outbound M&As has been attributed and with less regard for shareholders.
to a number of factors. These include This is in contrast to Western companies
extraordinary domestic economic growth; who are more risk averse for fear that their
less restricting regulation with regard to shareholders will abandon the proverbial
investing abroad, as well as the 2004 policy ship at the earliest sign of uncertainty.
change that allowed Indian companies to
borrow abroad. This policy change was The approach to M&As by Emerging Market
swiftly followed by Hindalco using overseas Multinationals – and specifically Indian
institutions to finance a US$3bn acquisition multinationals – is considered unique in
of Novelis, as well as Tata Motors’ US$3bn that the goals of these deals are to acquire
acquisition of Jaguar-Land Rover. India’s a brand, technology, customers and

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September 2009 Research & Strategy in and beyond emerging markets

complementary competencies. Tata Steel’s deal with Corus, for example, resulted
in Tata Steel owning a new company and 80 US patents. This approach differs to
the M&As by Western, or even Japanese companies in that these companies rarely
look past the quantitative factors, such as operating costs and the level of domestic
demand, in a potential merger or acquisition. In contrast to Western-led M&As, Indian-
led M&As are characterised by a low turnover of the acquired company’s executive
and slow-moving integration.

Figure 1: India’s Outbound Deals in US$ Billion


100

90

80

70
US$ Billions

60

50

40

30

20

10

0
2000-2001 2001-2002 2002-2003 2003-2004 2004- 2005 2005-2006 2006-2007 2007-2008 2008-2009
(estimated)
Source: IBEF

2001 saw outbound investment by Indian companies reach a meagre US$1bn, but
by 2006 this had reached US$10bn, and for the first time in Indian history outstripped
inward investment into the country. From this point, as shown in Figure 1, India’s
outbound deals increased exponentially to the point that Indian foreign investment
between March 2006 and March 2007 was greater than foreign investment by Indian
companies between 1947 and 2005. The first 11 months of 2008 saw 433 M&A deals
worth US$31.95bn with deals in the month of November of that year alone worth
US$3.4bn, compared to US$850m in November 2007. Notable Indian acquisitions
during this period include Apollo Tyre’s US$66m acquisition of Dunlop; Ranbaxy’s
US$70m acquisition of Be-Tabs Pharma; Godrej’s Consumer Products’ US$33.2m
acquisition of South Africa’s Kinky hair products; TCS’ US$505m acquisition of
Citigroup Global Services; HCL Technologies’ US$672m acquisition of Axon – a UK
SAP consulting firm, and Tata Communication’s 30% stake in South Africa’s Neotel.

Globally, there has been a 35% slump in M&A deals as a result of the recession which
has made credit more and more difficult to acquire. Banks now require between 50%
and 90% of the acquiring company’s core assets before considering a loan. India’s
M&As currently stand at US$19.9bn, of which inbound deals were valued at US$12.3
bn and outbound deals were valued at US$7.6 bn This is the lowest level in 3 years
and down 33% from the same time last year.

On the positive side, India’s M&As appear to be on the rise again with March of this
year enjoying nine times as many deals as February of this year, but still much less
than the same time in previous years. In terms of sectors, the most number of deals
have been in the Finance sector, but the Telecommunications has seen the deals of

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September 2009 Research & Strategy in and beyond emerging markets

the largest value. The sector is also prone to be worth even more if India’s Bharti
Airtel and South Africa’s MTN Group finalise a merger that would see Bharti
owning 49% of MTN and MTN owning 36% of Bharti in a deal that is estimated to
be worth US$23bn and result in 200m users in 21 countries.

Table 1: Notable Acquisitions by Indian Multinationals


Date Indian Company Acquisition Cost
2006 Apollo Tyre Dunlop (South US$66m
Africa)

2006 Ranbaxy Be-Tabs Pharma US$70m


(South Africa)
2008 Godrej’s Consumer Kinky Hair Products US$33.2m
Products (South Africa)
2008 TCS Citigroup Global US$505m
Services (USA)
2008 HCL Technologies Axon (UK) US$672m
2009 Soft Pro Systems Cura’s Risk US$19m
Management
Software (South
Africa)
2009 Tata 56% Stake in Neotel Undisclosed amount
Communications (South Africa)
Source: Various newspapers

Some notable M&As in 2009 include the acquisition of Pharma Dynamics,


South Africa’s 6th largest pharmaceutical company, by Lupin; Soft Pro Systems’
acquisition of South Africa’s Cura Risk Management Software; Aegis’ US$30m
acquisition of the South Africa’s CCN Group; HCL Technologies’ US$7.7m
acquisition of South Africa’s UCS Group and the Essar Group’s acquisition of a
majority stake in Kenya’s Econet Wireless.

Figure 2: Number of Indian Outbound Deals, 2000-2008


2009
Year to Date

2008

2007

2006
Years

2005

2004

2003

0 50 100 150 200 250 300


Number of Deals
Source: Economist

While the recession may have been a bump in India’s M&A journey, it has also
given rise to many opportunities as companies become financially vulnerable
and more open to India’s advances. We expect this trend to continue as Indian
companies extend their influence to all corners of the globe, while – as Tata’s
adage goes – maintaining their spirit of “benevolent capitalism and intensive
community involvement”.

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