Investing In India with Dr. Uday Lal Pai

India - fastest growing telecom market in the world.

By Dr. Uday Lal Pai
Exclusively for InvestorIdeas.com
posted June 12, 2006

India happens to be one of the fastest growing mobile markets in the world. In terms of percentage growth rate, India is the fastest growing telecom market, and in terms of absolute numbers in wireless, India is the fastest with 4 million new users being added every month on an average.

India has become the fifth country in the world to have more than 100 million mobile subscribers. While China has the highest number of mobile users with 404 million subscribers, India crossed the 100-million milestone at the end of May when operators added close to 4.2 million new mobile users. The US with 185 million subscribers, Japan with 150 million and Russia with 140 million mobile users are the other countries ahead of India. Germany, Italy, the UK and Brazil are the countries behind India in the top-10 list.

When India's mobile subscriber base has crossed 100 million in May with GSM based cellular operator's subscriber base touching 75.3 million, and CDMA users touching 25.3 million. According to the figures released by trade associations Cellular Operators Association of India (COAI) and AUSPI (CDMA Industry body), the cellular operators added 3.2 million and CDMA operators 1.1 million in May, taking the total number of mobile users added last month to about 4.3 million.

Bharti Airtel is retaining the top position among GSM players with a total user base reached 21.9million and with a market share of 29%. Public sector BSNL has total subscriber figure to 18million and its total market share to 23.9%.BSNL was followed by Hutch with a total user base of 16.7 million. CDMA based operator Reliance Communications now has 19.3 million users, Tata Indicom at 5.9 million. Bharti Airtel remains the leader with 21.8 million, BSNL 18 million, and Hutch 16.7 million users.

However, considering the population of the country is more than billion, it still provides a huge market for companies to sell their products. The mobile tariffs in India are some of the lowest in the world and this has further fueled the demand for mobile phones in the market. Analysts have attributed the growth to cheap tariffs, low cost of handsets and rising incomes of the country's estimated 300-million strong middle class.

Tele-density growth

The Government of India has now set a target of reaching 500 million telephone subscribers by 2010. According to Dayanidhi Maran, Union Minister for Communication, the Government policies have resulted in declining tariffs and improving affordability of service and handsets." We will achieve 250 million phones by 2007 and 500 million phones in five years and who knows one billion phones soon after," he added. There are currently around 150 million phone connections in India, with less than 50 million of them fixed line and mobile is growing faster.

Buoyed by the better-than-expected teledensity in 2005 (11.4% against 8.6% in 2004) due to the mobile boom in India, Department of Telecommunications (DoT) is planning to revise upwards the target of 22% teledensity by 2007. DoT Secretary Dr JS Sarma says: "The government had set a target of 250 million subscribers and 22% teledensity in India by 2007. Currently, the rural density in India stands at a meager 2% compared with urban teledensity of 31%."

According to ITU (International Telecom Union), India is far behind US and China which have a teledensity of 60% and 23% respectively. France (73%), Germany (86.4%) and UK (102%) also have a high teledensity.

According to reports, the national telecom policy to be released in 2006, envisages a phone for three rural households by 2007 which it wants to reduce to one phone per two rural households by 2010. The Telecom Regulatory Authority of India (Trai) plans to raise the teledensity in rural areas from the current 1.9% to 15% by 2007 and has proposed a $1.8 billion subsidy for creating necessary infrastructure. With this kind of subsidy support, it will be possible to install 20,000 base stations in rural areas to cover about 80-90% of the villages, according to Trai.

The main roadblock to achieving high rural teledensity is USO policy and lack of necessary infrastructure. According to the Trai, if the present USO Policy continues then India would achieve rural teledensity of only 3% by 2007. So, in order to achieve the subscriber target of 250 million India would require an urban tele-density of 70% by December, 2007, which even if achieved would create a large rural/urban divide, which cannot be acceptable.

That's because "while most of mobile telephony's growth has occurred in China," said a recent Deutsche Bank white paper on wireless telephony called "Brilliant Past Bright Future", "India represents one of the most exciting growth opportunities for mobile." The paper adds that with its billion plus people, India is the second most populous country on the planet, but has just 33 million wireless/mobile telephone subscribers. It is expected that the subscriber base will grow to 290 million by the end 2008 and 500 million by 2010. "This makes India one of the fastest-growing markets of this decade," Deutsche Bank said.

And according to study called "Redefining Indian Telecom", released by Ernst & Young, Indian telecom sector could see almost three-fold jump in revenues by 2007, " by when the Indian telecom network will become the second largest in the world after China", it said.

Admittedly, "India has been witnessing a very high telecom growth with phone connections growing at 22 percent and 100 percent for cellular and Internet services. To reach around 100 million connections by December 2005, India will need an investment of around $12 billion," says Michael Kennedy, chairman of Motorola and Telecommunications Industry Association (TIA) of the United States.

World telecom majors rush to India

The markets are already crowded by such global goliaths like Motorola, Siemens, Nortel, Alcatel and Nokia.

During the last one year, telecom players from China, Korea, Singapore and Taiwan have been muscling their way into the Indian telecom scene, staking their claim to the potentially golden opportunities offered by the sector. At least six new handset manufacturers from China have launched their products in India. These include China's largest homegrown handset manufacturer Nungbo Bird, Taiwanese DBTel and the $3.5-billion BenQ.

Companies like Korea Telecom and Singapore Technologies are looking for ways to tap the booming wireless and broadband market in India.

Korea Telecom in fact has already signed an understanding with India's largest state-owned telecom operator BSNL Ltd. to offer broadband services, while Singapore Technologies are talking to Indian cellular operators for joint ventures.

Besides Malaysian telecom major Telekom Malaysia, joined the list of large South East Asian telecom names like Singtel, Hutchison, ZTE Corporation, Huawei Technologies and First Pacific that are already embedded in the country, by acquiring 33 percent of AT&T's stake in the country's third largest mobile telephony operator Idea Cellular.

Nokia for instance, is already huge in India; the market leader recently reported revenue of Euro 1 billion in 2003 from India alone, which means that India is Nokia's sixth largest market in the world and the Finnish company isn't about to let others get a foothold without a fight.

Multi national companies (MNCs) are going in for pact with domestic players. For instance, Sweden's equipment vendor Ericsson agreed to a revenue-sharing deal with the Indian mobile telecomm operator company Bharti Televentures that will allow Ericsson to earn a percentage of revenues every time a subscriber downloads video or plays a Java game. This kind of cooperation is quite unusual in the global wireless world, say global vendors, admitting that participating in the Indian market has forced them to radically reduce costs in their own companies.

Indian mobile unit of Hong Kong-based Hutchison Telecommunications International Ltd., India's fourth-largest mobile services provider, reportedly bought the equity of its Indian partners in several subsidiaries and issued shares to them in the merged entity.

In yet another consolidation deal, Aircel Televentures, a mobile telephony-services provider in India's southern state of Tamil Nadu, said that it has entered into a non-binding agreement with Russia's AFK Sistema to sell its 49 percent stake in the company for $450 million, for which AFK Sistema would float an Indian arm.

Growing demand calls for investment

This growing demand has prompted both Motorola and Nokia to invest heavily and establish local manufacturing plants to supply to the ever growing market for mobile phones. Elcoteq is planning to establish units in the country. Korean majors like Samsung and LG are on the expansion drive that calls for huge investments.

"India's telecoms sector may attract about a billion dollars of foreign direct investment in the year ending March 2007 as global majors boost operations," Communications Minister Dayanidhi Maran said recently. If all the investments fructify then the foreign investment should be around $1 billion in 2006-07.

Recently IBM has announced that it would invest $6 billion in the country over a three year period. Though it is not wholly for telecom sector, IBM had invested more than $2 billion in India in the past three years. "Locate a Telecommunications Research & Innovation Center at its India Research Lab that will serve as a key resource to IBM's telecommunications clients around the world," says Sam J Palmisano, chairman and CEO of IBM Corporation.

Following IBM's announcement, India's Telecoms Minister stated that the government would raise its estimate for 2006/07 foreign investment in the country's information technology and telecoms sectors. Last year, Maran estimated that India would attract $22 billion in 2006/07 from foreign firms in the two key sectors, behind much of the country's recent economic growth.

About $9 billion in planned investment was announced last year, including $3 billion by SemIndia and chip maker AMD, $1.7 billion by Microsoft Corp. and more than $1 billion each by Intel Corp. and Cisco Systems Inc.

Motorola Inc, the world's second-largest handset maker, has stated that it will spend $100 million in India in stages to boost sales in one of the world's hottest mobile markets. The company will initially invest $30 million to develop a unit making handsets and base stations in a 300-acre (120 hectare) special economic zone on the outskirts of the southern city of Chennai. The remaining $70 million will be invested in two stages.

"India is a vitally important market for Motorola and as a strategic manufacturing hub offers compelling value proposition and strong cost efficiencies," Ron Garriques, executive vice president at Motorola Inc., said.

Almost all global telecoms equipment majors such as Ericsson and Nortel Networks Corp. have made a beeline to India. Alcatel, in association with C-DOT, establishing a Global Research Centre in Chennai. Ericsson has opened a unit for manufacturing base transmission stations (BTS) in Jaipur, LG had established a handset-manufacturing unit in Pune and Elcoteq had opened shop at Bangalore. Besides, Alcatel and Indian Telephone Industry were involved in the transfer of technology for telecommunication needs by manufacturing Global Satellite Mobile switches and BTS.

Bright future for telecom investments

So what's in store for India's telecom future? In a word: Growth. India may gain a few billion in Foreign Direct Investment from these bullish telecom makers. The Government is in the process of making India a manufacturing destination for telecom equipment. To facilitate telecom players to roll out networks faster, especially in the rural areas, Maran said Government would amend the Telegraph Act to make cellular operators beneficiaries of the Universal Service Obligation (USO) Fund.

India is expecting foreign direct investment (FDI) in the telecom sector to more than double this year. Communications and IT ministry sources said that liberalization in FDI rules would pay off to the tune of an increase of more than 100% over the $8 billion in investments pledged by foreign companies in 2005. India is establishing Telecom-specific special economic zones (SEZ). "With telecom services expected to boom the Government would aim at facilitating investment of up to $1.1 billion for telecom hardware manufacturing. It would set up telecom specific special economic zones and a promotion council to encourage exports," says Maran.

Disclaimer
Dr. Uday Lal Pai is an independent columnist for this web site. Dr. Uday Lal Pai may hold long or short positions in any of the stocks mentioned in this article and those positions can change at any moment. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp, InvestorIdeas is not affiliated or compensated by the companies mentioned in this article. Dr. Uday Lal Pai is a freelance writer. Nothing in the articles should be construed as an offer or solicitation or recommendation to buy or sell any specific products or securities. Past performance does not guarantee future results.

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