Price war to infect post-paid and international roaming charges

S Tel and Uninor garner substantial subscriber addition in January

Bhaskar Hazarika & Sanjeev Sharma

New Delhi: The price war sparked by new entrants like S Tel and Uninor in prepaid rates, that has helped them garner a substantial number of subscribers, may now be looming on the postpaid rates, corporate connections, wireless data, international roaming and SMS.

According to analysts, competitive pricing is likely to spread. The director for telecom at KPMG, Romal Shetty, said that the short term would be difficult for the operators but positive growth was possible in the long term.

"We will next see a fall in tariffs of other services such as international roaming, data services and postpaid," Shetty said. In January mobile operators added 19.9 million subscribers. Vodafone added 2.74 million, Bharti Airtel 2.85 million and Tata Teleservices 2.98 mil- lion.

On the other hand, S Tel added 3,64,000 in three circles and Uninor 1.33 million in eight circles.

According to a Macquire equities re- search report, "A further ramp-up and rollout of services by greenfield entrants will likely lead to a further cut in prepaid rates. The report says that as greenfield op- erators Uninor and S Tel ramp up their GSM services, competition will intensify, hurting the revenue market share and profitability of older GSM operators.

Industry net additions, says the report, reached 13.9 million, helped by a ramp-up by the newcomers, with Uninor capturing 33 per cent of the net additions in its eight circles and S Tel cornering 20 per cent in January.

Uninor's executive vice- president of corporate af- fairs, Rajiv Bawa, said that in a market this competitive, there was bound to be price competition in all telecom products. "But our view also is that a differentiation based only on pricing is always shortlived. It will last only as long as the next lower offer. A long- term dif- ferentiation has to be based on much more  better cus- tomisation of the product for distinct consumer needs and an overall focus on quality of service," he said.

"For Uninor, it is much more than how many paise are raised every second," he added.

Commenting on the pressure of margins on oper- ators, Bawa said, "Some op- erators look at subscriber additions at any cost. Others look at a low-margin, high- volume play. Then some others seek to deliver the lowest costs, but to a certain kind of customer. Irrespec- tive of the approach, howev- er, it is clear that the tele- com sector requires a long- term commitment and long- term business ambition.And the model must make for a sound business case."

The CDMA operators lobby, Association of Unified Service Providers of India's secretary-general, S C Khanna, said the market was under pricing pres- sures. "However, we do not see further cuts, but there will be competitive offers and packages for cus- tomers," he said.

The chief corporate officer of Idea Cellular, Rajat Mukarji, said, "We are in a hyper competitive market. But this is not sustainable in the long term for new opera- tors, as they do not have the coverage others have. Serv- ices such as wireless data are niche segments not mass subscriber services. It is difficult to forecast if the competitive pricing will enter these segments."

The CEO of S Tel, Shamik Das, was not avail- able for comment. Bharti Airtel and Vodafone did not respond to the calls made by Financial Chronicle.

© Financial Chronicle

Zain deal could generate free cash flow of $11 billion for Bharti

Analysts suggest Zain deal high priced

Sanjeev Sharma & Bhaskar Hazarika

New Delhi: Telecom major Bharti Airtel’s $10.7 billion proposed transaction to buyout Kuwait-based telecom company Zain’s African assets could generate free cash flow of $11 billion in five years. Morgan Stanley report states, “The consolidated entity would address 1.5 billion population with over 164 million subscribers, with Ebitda 26 per cent higher than Bharti standalone, growing at 11 per cent per year (financial year 2010-2012E).

Analysts say that Bharti would be able to de-leverage itself in a couple of years. The report says the consolidated entity’s cash flows would be $13 billion in five years.

Bharti in an official statement said, “The total agreed enterprise valuation of $10.7 billion is likely to result in a total payout of around $9.00 billion (which includes any loans payable by the operating companies to Zain Group) based on the estimated net debt of approximately $1.7 billion as on December 31, 2009. It has been agreed that a sum of $ 700 million out of the total payable amount would be paid after one year from closing.”

Just after Bharti and Zain announced payment milestones, Econet Wireless, which holds 5 per cent stake in Zain’s Celtel Nigeria BV unit, has clearly opposed the deal, citing first right of refusal over the Nigeria operations. Official statement from Econet said, “It is currently pursuing arbitration proceedings against Celtel (now Zain) and others to challenge the transaction. Under the terms of the original VNL shareholders agreement, Econet had a right of first refusal over the stake, a right, which was denied in 2006. Econet made an application for interim measures to prohibit Celtel (now Zain), from selling, transferring, disposing of, dealing with or otherwise encumbering the disputed stake until such time as the Arbitral Tribunal has published its final award.”

According to Macquarie report, “The valuations look very expensive, in our view, even assuming no debt is being acquired by Bharti. This is a loss-making business at the PAT level, even while it makes an Ebitda margin of 31.4 per cent with average blended ARPU of $6.2. Bharti may be banking on significant improvements in capital expenditure efficiencies and better financing terms for this business, but quick comparisons with MTN suggest that this business is significantly inferior in terms of profitability, operating metrics and growth outlook.”

Bharti stock has fallen almost 14 per cent in the last two days.

Talking about regulatory hurdles Morgan Stanley states, “We suspect some licenses in Africa will face change of control reviews, but we do not see this as a major stumbling block for a potential deal. We are waiting on clarity on the Kuwait Investment Authority – a 24 per cent shareholder – position on the deal though in the past it has been supportive of such a transaction.”


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