The Indian telecom sector has come a long way since it was opened up around 1995-96. Till then, the telecom services in the country were controlled by the government, either directly (through DoT) or through public sector units (MTNL and VSNL). These state entities used either internally generated resources or budgetary support to fund telecom investments in the country, resulting in a low linear growth rate in the sector.
Today, India is the second fastest growing mobile market in the world in terms of absolute numbers, next only to China.The Indian mobile market recorded a year-on-year growth of 77 per cent resulting in an addition of 39 million mobile subscribers in the financial year ended March 31, 2006. At a cumulative subscriber base (fixed line and mobile) of 140 million, the teledensity stands at a respectable, though low, 12.7 per cent.
In the initial years, the telecom operators rolled out their networks circle by circle. The funding of such rollout was also in the traditional form, with promoters putting in equity, and raising rupee loans from banks and financial institutions. As a part of the 1999 policy change, the government mandated a move to a four-player market. It issued third mobile licences to incumbent fixed line telcos across the country and auctioned a fourth mobile licence for each service area in mid-2001. Some of the operators were not able to cope with the increased competition and a need to incur huge capital expenditure, leading to an erosion of market share. The situation was aggravated by constraints on serviceability of debt by these telcos due to under-achievement of revenue targets.
While some companies were more adept at raising funds to finance the rollout of their operations and were therefore able to ride through the rough phase, others continued to face problems. Some went into CDR for restructuring of loans while others opted for refinancing of their loans on more than one occasion. In some cases, the strained liquidity position of the companies led to a phase of consolidation with smaller companies merging with larger and better-managed companies.
The telecom sector has seen both strong promoter-backed companies as well as new entrants who tied up with foreign strategic investors. So while Reliance Infocomm and Tata Teleservices were backed by big corporate houses, Bharti, which grew with the growth of the sector to become the industry leader, tied up with strategic partners like British Telecom and Singapore Telecommunications, and financial investors like E.M. Warburg & Pincus, AIG and others, to keep raising its equity capital.
A significant amount of equity infusion has also helped lower the gearing level of these companies, aiding them in raising debt at lower rates. Apart from raising rupee loans from the domestic market, these companies have also frequently tapped the international market in a variety of ways, such as external commercial borrowings (ECBs), foreign currency convertible bonds (FCCBs), and finance of import equipment through support from export credit agencies (ECAs). Both FCCBs and ECA funding are low-cost funding options for the companies. ECAs essentially support telecom equipment suppliers from their respective countries; Nortel and UTStarcom in the case of the Export Import Bank of the US (US Exim) and Export Development Canada (EDC); Ericsson in the case of Sweden’s EKN; and Nokia in the case of FinnFund.
FCCBs benefit the company in a twopronged manner ?? they are either zero coupon or carry a very low coupon rate and are likely to get converted before the maturity date. So the company benefits asa result of low interest outgo and low to nil redemption at the time of maturity because of conversions between the issue date and the maturity date.
Bharti raised $354 million of ECA funding from Swedish ECA EKN and Finland-based FinnFund for funding its network expansion and rollout plans. This was just a year after it had raised $115 million through FCCBs in April 2004.Reliance Infocomm raised $1,050 million in the international market through a mixture of routes ?? $300 million of ECBs and $750 million of support from ECA ($500 million from the US Exim and $250 million from EDC).
Tata Teleservices (Maharashtra) Limited (TTML), the smaller of the two Tata group telecom companies with operations in Mumbai and the rest of Maharashtra (including Goa), too raised $125 million through the FCCB route in June 2004.
Of late, companies have been increasingly opting for the long-tenor letter of credit (LC) route to fund their capex. In this route, the companies tie up with various equipment vendors for import of equipment against LCs with usance period of up to 36 months. This defers the actual outflow on account of capex till a later date, by which time the operations are expected to start generating higher cash flows which can support the LC repayments. This benefits the companies in terms of lower interest cost and the balance sheet becoming less leveraged as the quantum of funds required in the initial years of network rollout becomes less.
With an eventful decade of privatisation of telecom industry gone by, India is now at the threshold of a rapid and sustained growth in telecommunications, especially in the mobile segment. Indian teledensity, presently hovering around the 13 per cent mark, is the lowest among the BRIC countries (Brazil, Russia, India and China) and significantly lower than the world average of 40 per cent. Driven by affordable tariffs, cheaper handsets, aggressive network rollouts by most operators and a greater variety and usage of valueadded services, mobile subscribers are expected to grow in excess of 50 per cent in the foreseeable future. The government has set a target of 250 million telecom users (fixed line and mobile) by 2007. This will entail an estimated investment in excess of $9 billion in the next couple of years, a large part of which will be borne by the private players. Even at this targeted subscriber level, India’s teledensity at 22 per cent will be lower than the current world average of 40 per cent and China’s current teledensity of 50 per cent.
The large requirements of funds will encourage companies to find innovative ways to fund their proposed capex as the internal accruals would be insufficient to meet the large requirement of funds in the medium term. Moreover, the rollout of fresh networks in the time to come will cover the less lucrative and therefore less penetrated smaller cities and towns and rural areas in Category B and C circles. As more and more marginal customers come on board, the average revenue per user (ARPU) will continue to reduce from the already low current levels of less than Rs 400 per month. Lower ARPUs will mean a longer payback time on investments.
The liberalisation of the financial sector has allowed a multitude of fund raising options to telecom companies, apart from normal balance sheet financing discussed earlier. Thanks to a booming equity market, fresh infusion of equity either by dilution of shareholding in favour of private equity players and international telecom companies or through initial public offerings is increasingly becoming the preferred option. Global telecom companies like Singapore Technologies Telemedia, TM International, Vodafone, Deutsche Telekom, NTT DoCoMo, AFK Sistema of Russia, Egypt’s Orascom and China Telecom have all evinced interest in this fast growing market. Foreign operators are willing to pay a premium to get a toehold in the Indian mobile market. This is in stark contrast to yesteryears when most of the foreign partners of Indian telcos had exited the country.
Some deals in the recent past include Vodafone’s investment in Bharti, Temasek’s investment in Tata Teleservices, Maxis Communications’ takeover of Aircel and Telekom Malaysia’s buyout of Spice.This trend is expected to gain further momentum pursuant to the raising of the sectoral cap for FDI in the telecom sector from 49 per cent to 74 per cent. Other players like Hutch and Idea have already declared their intentions to tap the IPO market in the near future. The public listing of Reliance Communication Ventures Limited (RCoVL), the telecom arm of the Anil Dhirubhai Ambani Group, witnessed good investor interest from domestic as well as international investors. The interest of international investors and their appetite can be gauged from the fact that the FCCB offering of RCoVL was fully subscribed by international investors within a few hours of its opening.
Besides, a bigger entity with consolidated operations across a number of circles is likely to be better placed to raise the necessary resources. Smaller regional operators will find it increasingly difficult to compete with the larger operators in the fast growing market. For the above reasons, the consolidation process is considered a vital factor for success in rapidly growing markets. The last couple of years have witnessed the culmination of a few M&A deals, like the acquisition of Hexacom by Bharti, acquisition of Escotel by Idea Cellular and the buyout of BPL by Essar, which was subsequently bought out by Hutch.
To conclude, changes in financing techniques in the telecom industry are keeping pace with the change in industry dynamics.The skill then is to change with the times and come up with financial innovation and techniques that can provide cheap, dependable and substantial funds in the shortest possible time. All the top players in the telecom sector today have deep pockets and are here to stay. Ultimately the survivors in the telecom sector would be those who can raise large amounts of financing in the shortest possible time at the least possible cost and for a reasonably long period.
