Aggression, scale of operations, speed to market, and king-size ambition. These have been some of Reliance Communications’ defining traits ever since it entered the telecom arena in 2003, all guns blazing, ready to take on competition and aiming straight for the top slot.
“Reliance plays to win,” says telecom analyst Mahesh Uppal simply. “It doesn’t mind being a spoiler in the market. It may not always get its strategy right and its calculations have sometimes come unstuck.” But then, that’s what Reliance is all about.
Soon after storming its way into the mobile market, Reliance knocked down call rates to make India’s tariffs one of the lowest in the world. Rivals like Bharti Airtel, Bharat Sanchar Nigam Limited (BSNL) and Hutchison Essar (now Vodafone Essar) followed hastily to replicate RCOM’s winning price strategy. Subscribers responded enthusiastically, signing up in droves and effectively pushing up the country’s teledensity.
Having virtually “revolutionised” the face of telecom in the country, RCOM then captured and retained the position of second largest mobile operator in the country till 2007. Taking some of the credit for India’s booming telecom industry, Anil Ambani, chairman, RCOM, stated at the company’s annual general meeting recently, “From a small, fragmented, elitist market with unaffordable call rates, India has transformed itself, almost overnight, into a mass market… And for every hour that we spend at this meeting here today, India would have added 20,000 new mobile customers and RCOM another 4,000 subscribers.”
Unfortunately for RCOM, its performance slipped somewhat last year. Its market share dropped from 18.28 per cent in August 2007 to a little over 17 per cent in January 2008. The company also slipped to third position, but then subsequently recovered ground. As of end-January 2008, RCOM with 41.88 million subscribers trailed Bharti Airtel with 57.4 million subscribers and was followed closely by Vodafone with 41.1 million subscribers.
While it may have retrieved its second position, the company’s usual drive and energy have been missing of late. Also missing is the high-profile advertising, branding and retailing which have come to be associated with RCOM since its early years.
But the restraint could be temporary. Company officials claim that over the past year and a half, they have been preoccupied with consolidating and redefining their core businesses. With an array of new players signing up, it has been important for the company to firm up strategies to cope with the expected surge in competition.
The other reason for the uncharacteristic quiet could be that the company was trying to put its house in order after the management changed hands from older brother Mukesh to Anil Ambani. In his speech to company shareholders, Anil Ambani reportedly stated that he had inherited an ownership structure that was a complex maze of non-transparent, sub-optimal cross-holdings, with minority, non-controlling stakes in some key business assets.
The company also faced formidable operational, financial and regulatory challenges, apart from accumulated losses of close to Rs 50 billion. This took time to sort out. In the interest of fair disclosure, RCOM wrote off its debts. It also undertook a comprehensive reorganisation to bring all its telecom-related businesses and assets under one corporate umbrella.
That done, the company began looking at growth prospects. It spent the better part of 2007 applying for and getting approvals from the Department of Telecommunications (DoT) to offer mobile services based on GSM technology.
Having received the approvals as well as start-up spectrum of 4.4 MHz, RCOM’s natural inclination was to make a big splash. Hence, in November 2007, it announced plans to invest over Rs 50 billion in rolling out GSM services in more than 100 cities. In January 2008, it signed a contract for about $8 billion for 80-100 million phone lines with Huawei to roll out its pan-Indian network. The idea is to “offer network coverage to 97 per cent of the Indian population living in 23,000 towns and 600,000 villages by the end of this fiscal year, on completion of the world’s largest network expansion”, notes a senior RCOM official.
Current status
RCOM, now the flagship company of the Reliance Anil Dhirubhai Ambani Group (R-ADAG), was listed on the exchanges about a year and a half ago. It has a market capitalisation of over Rs 1.2 trillion and net worth in excess of Rs 200 billion (2006-07). The company delivers a comprehensive range of integrated telecom services, including mobile and fixed line telephony, broadband, national and international long distance services, data services and a wide range of value-added services and applications.
Rated among “Asia’s top five most valuable telecom companies”, it boasts of a corporate clientele of 1,850 Indians and multinationals, apart from 200 global carriers which use its network.
In terms of infrastructure too, RCOM has made great strides. From 60,000 km of fibre optic when it started, the company today owns and operates one of the world’s largest next-generation IPenabled connectivity infrastructures, with 165,000 km of fibre optic cable systems covering India, the US, Europe, the Middle East and Asia-Pacific.
Financially, the company has improved in every subsequent quarter, a result of business actions taken over the past two years. In the quarter ended December 2007, RCOM registered a 48.5 per cent increase in net profit, from Rs 9.24 billion in the quarter ended December 2006 to Rs 13.72 billion. Net revenues were up 29.8 per cent from Rs 37.55 billion to Rs 48.74 billion. However, on a standalone basis, the company posted a 43.3 per cent dip in profit after tax, from Rs 7.71 billion to Rs 4.36 billion.
During the quarter ended December 2007, EBITDA grew by 53.7 per cent to Rs 15.8 billion compared to Rs 10.29 billion in the quarter ended December 2006. EBITDA margins expanded from 37.4 per cent to 40 per cent, helped by an expansion in the wireless business, which contributes 80 per cent to the total revenue. Wireless business revenues rose by 43.8 per cent, from Rs 27.52 billion to Rs 39.57 billion.
On the international front, RCOM won its first major overseas licence in 2007 after a series of unsuccessful bidding attempts in countries such as Qatar, Kenya and Saudi Arabia. In Uganda, the company bagged public infrastructure provider and public service provider licences, becoming the sixth telecom operator in the country, and invested Rs 8 billion to roll out fixed and mobile telecom networks.
It also acquired US-based data communications company Yipes Holdings in 2007 for $300 million. Yipes will function as a subsidiary of Flag Telecom, Reliance’s undersea cable company. Yipes has 40 per cent share of the US data communications market and will help RCOM penetrate into the global enterprise and data segments.
Further, to tap the UK’s retail international long distance market, the company tied up with London-based TeleGlobal, which enabled it to sell its Reliance India Call calling cards across 20,000 outlets in the country.
There was also an increased focus on the internet and broadband business. Explains S.P. Shukla, president, personal business, RCOM: “As a company goes into the interiors of the country, there is a huge advantage in using wireless mediums for internet connectivity. It would also help to bridge the divide between the urban and rural areas. RCOM is the biggest provider of wireless internet mediums in the country. We offer the largest number of wireless internet cards, which can be plugged into a laptop, thereby facilitating access to the internet on the go. Also, in many areas where it is difficult to access the internet, we offer wireless modems that can be connected to a PC.” In November, RCOM entered into a $500 million, eight-year technology alliance with Microsoft for launching IPTV services in mid-2008. The service, which will include nearly 400 channels, will be launched in Mumbai and Delhi.
Reliance’s infrastructure business also witnessed substantial activity in 2007. In July, the company divested 5 per cent stake in its wholly owned tower subsidiary, Reliance Telecom Infrastructure Limited (RTIL), for $337.5 million. The sell-off valued RTIL at $6.75 billion. Reliance has invited bids for selling another 5 per cent stake in the company.
Perhaps the only dark spot to mar the company’s overall growth last year was the loss of 4 million subscribers in April on account of the subscriber verification drive. It has taken the company a long time to fill that gap.
Outside view
Despite recognising that the company has pushed its way in on several occasions, like when it lobbied to make CDMA-based limited mobility services into a fullfledged mobile service, it is difficult not to marvel at Reliance’s unbridled confidence.
Uppal puts it in perspective: “Reliance has a long-term strategy quite uncharacteristic for India and is one of the few companies that understands the importance of regulation in this business.”
Sridhar Pai, CEO of research firm Tonse Telecom, notes: “Reliance is extremely agile and adapts rapidly to market changes. It is a heavy investor and has a sense of the marketability of its abilities. It is cautious and watchful, but has the ability to dream big.”
There are a few areas that the company particularly needs to watch out for. One key weakness, feel industry analysts, is that it is too centralised. “It is one of the few companies where the middle to senior management tends to be actually invisible,” observes Uppal. “It runs its telecom business in the same way as it runs its other businesses and therefore misses out how different the telecom and IT businesses are. This is the main reason why it has stumbled sometimes.”
Besides, the company doesn’t seem to be following a straight line strategy. It has been holding talks with French IT services group Capgemini, which could result in the first acquisition of a major Western IT firm by an Indian company. While the initial discussions have failed, analysts question how RCOM intends to fit IT into its overall operations. Similarly, there doesn’t seem to be much clarity on RCOM’s GSM plans or indeed what it intends to do on the CDMA front. “The question is, how will RCOM leverage both networks best,” comments Romal Shetty, executive director, KPMG. “I am sure the company will push subscribers towards GSM and use CDMA for data.”
Otherwise, according to Shetty, “there is no difference in providing GSM or CDMA services. The two technologies are different, but if you look at the basic components in the network, there is nothing different. A company’s marketing strategy doesn’t change. It’s just that the strategy will be a little different in terms of which customer segment will be targeted.”
For RCOM, the choice of targeting a particular customer segment may not be easy. Its market largely comprises lowerend subscribers. “So it is going to be a challenge getting more lucrative customers,” says a senior analyst from Anand Rathi Securities. For instance, if Bharti’s user base comprises 5 per cent corporate users, RCOM caters to only 2 per cent. Therefore, according to Shetty, RCOM will have to work to take its services to a different level of users.
Shukla is not convinced. “For one, our strong project execution skills are legendary. We have achieved the fastest rollout of CDMA services, and similarly, we will achieve the fastest rollout of GSM as well. Second, our speed-to-market is something people envy. We have the ability to take quick decisions and implement them flawlessly. Third, our strength remains our very committed manpower. So we will derive the benefit of being able to achieve synergy between GSM and CDMA in a very significant way.”
Meanwhile, RCOM’s GSM foray will certainly increase market competition. Users can expect more of RCOM’s price point strategy. It has already brought down local call tariffs to Re 0.50 per minute. “Reliance knows how to compete on price, but it is not as smart on services as other companies. Its costs will be significantly lower than other GSM operators as it already has a huge CDMA infrastructure, but it will be a tough fight to take on established GSM incumbents,” says Uppal.
RCOM’s quality of service is seen by many as a key problem area. “Customer service and quality of service are two main issues that the company needs to focus on,” says Sourabh Kaushal, industry manager, ICT practice, Frost & Sullivan. Overall, analysts feel RCOM needs to go beyond competing merely on price and adopt a more sophisticated approach to the industry.
Future prospects
RCOM has been actively exploring overseas telecom opportunities. It has launched a new umbrella brand called Reliance Globalcom, which will deliver a broad portfolio of voice and data services including enterprise, wholesale and managed services. It intends to leverage Flag Telecom’s global telecom infrastructure and Yipes’ expertise in plug-n-play Ethernet technology. Services such as Reliance India Call, Reliance Global Call, Reliance Netcall and Reliance Passport will all be clubbed under the Reliance Globalcom brand.
The basic idea behind creating the new brand, according to company officials, was to align Reliance’s global communications operations into a single entity so as to better cater to the needs of its global customers. With the consolidation of its global business, Reliance Globalcom will have annuallised start-up revenues of Rs 52.79 billion and EBITDA of Rs 13.37 billion. The new brand is expected to be present in over 50 countries.
RCOM is looking at busy times ahead. It plans to offer IPTV services and fully digital direct-to-home (DTH) services in 2008 through its brand Big TV. To facilitate its foray into the DTH segment, it has recently booked capacity on the Malaysian satellite system MEASAT-3. It has booked four transponders, with the option to add four more on MEASAT-3 after a year. This will help RCOM offer high-definition TV services in India. The capacity created will enable the company to provide DTH services to over 10 million subscribers and offer feed to over 15 million households.
Meanwhile, group company Reliance Technology Ventures Limited (RTVL) has bought 10 per cent stake in French telecom chip-maker Sequans Communications. This is expected to help RCOM access the latest telecom technologies and is in line with the company’s plans to offer 4G services in India.
Also on the anvil is Reliance Infratel’s initial public offering (IPO). The IPO will offer 89 million equity shares at a face value of Rs 5 each. The issue will constitute 10.05 per cent of the postissue, paid-up equity capital of the company. At least 60 per cent of the issue will be allocated to qualified institutional buyers, of which 5 per cent will be available to only mutual funds. According to company officials, 30 per cent of the issue will be reserved for retail investors and the remaining 10 per cent will be available for non-institutional bidders. The company filed its draft red herring prospectus with the Securities and Exchange Board of India earlier this year.
In the immediate term, RCOM plans to test the waters with several new products and solutions. Meanwhile, doing what it does best, RCOM recently brought down the prices of its wireless internet cards to below Rs 2,500, passing on the excise duty relief announced on data cards in the recent union budget.
With an end-to-end telecom services model spanning voice, data and international connectivity and its recent foray into IPTV, RCOM seems to be paving the way to deliver robust growth in the future.
Company snapshot
Presence: All circles
Mobile subscriber base: 41.88 million
Market cap: Rs 1.2 trillion
Outlook for 2008: Provide GSM services across the country and further consolidate its position in the CDMA segment. It has earmarked $6 billion to expand its GSM operations and strengthen its wireless network in 2008-09.
