Indian cellular industry in M&A mode

Shailendra Bhatnagar

NEW DELHI: India's fragmented mobile phone industry is ripe for further consolidation as bigger carriers gobble up smaller players to cut costs and boost their share of the world's fastest-growing major wireless market.

Five deals have been struck in the sector in the past six months and industry watchers expect the competitive, cash-guzzling sector to slim down from 11 firms now to four or five with a national footprint.

"The underlying current clearly is consolidation," said Prashant Singhal, a director at consultancy Ernst & Young. "No carrier wants to have a two-to-three-year gestation period to set up a network and operators do not mind paying a premium (for an acquisition) because the market is obviously exploding."

Mobile users in India are forecast to almost triple from 37 million currently to 100 million next year, one in 10 of the population.

The explosive growth means wireless users are likely by the end of this year to exceed the country's 43 million fixed-line customers, a number that is slowing because of poor infrastructure and prohibitively high expansion costs.

Acquisitions have picked after the previous government introduced unlimited competition last year by scrapping a policy of allowing only four mobile operators in each of the country's 23 operating circles.

The most competitive circles, which are loosely based around cities or states, now have seven players.

LARGEST TELECOMS DEAL

Just last week, Hutchison Essar, the Indian unit of Hong Kong's Hutchison Whampoa Ltd. paid $350 million to buy out Aircel Ltd, the largest ever telecoms takeover in India.

Earlier in June, Singapore Technologies Telemedia Pte. and Telekom Malaysia Bhd. bought a one-third stake in India's fifth-largest operator, Idea Cellular Ltd., a deal an industry source estimated was worth more than $220 million.

"The big will become bigger and the smaller players will find it increasingly difficult to operate," says Kobita Desai, principal analyst at Gartner India.

"By end 2004, the sector will have four to five large full services firms, where the main growth will come from the mobile business."

Analysts expect survivors of the shake-out to include Bharti Tele-Ventures Ltd., state-run Bharat Sanchar Nigam Ltd. and soon-to-list Hutchison Essar, as well as the mobile divisions of India's two largest family-run conglomerates, Reliance and Tata.

That leaves six firms as possible takeover targets, including the unlisted mobile operations of the BPL Group and Spice Telecom.

Bharti, 28-percent-owned by Singapore Telecommunications Ltd., is India's market leader for services using the GSM (Global System of Mobile Communications) standard. Hutchison operates GSM, Reliance and Tata largely use the rival CDMA (Code Division Multiple Access) technology, while Bharat Sanchar offers both.

The allure of the under-penetrated Indian market is also attracting overseas money.

"Carriers in Japan, Singapore and South Korea are increasingly looking at new growth markets like India," Desai said. "And they will not mind paying a premium to enter such markets."

LIFTING CAP

Asset sales would gather momentum if the government lifted its cap on foreign investment in services providers from 49 percent to 74 percent, Ernst & Young's Singhal says.

"There will be more international buyers and you'll see higher valuations and bigger deal sizes," he said.

Fuelling the industry's growth are some of the lowest local call tariffs in the world, an average of one U.S. cent per minute compared with two cents in Hong Kong and more than eight cents in Singapore.

Analysts estimate the Indian industry's sales at running at about $2.5 billion a year, although the closely watched measure of average revenue per user is falling as a result of tariff cuts.

Amitabh Chakraborty, head of research at Kotak Securities Ltd, expects India's razor-thin operating margins will rise once the merged entities are bedded down. "Costs would be under control and there would be fewer players," he said.

Over the past year, carriers have lowered their network expansion costs by striking deals at successively lower prices with global equipment suppliers, who are hamstrung by tepid demand from most Western markets.

Analysts estimate new deals for telecoms gear are being struck in the $70 to $90 per user range, down from $120 in 2003.

"The next 18 to 24 months is rollout time for India as carriers will need to expand to bring in economies of scale and get a national footprint," Desai said.