Computers Today June 1998 Telcom Line: The Elusive Pot of Gold

Act Two begins in the telecom arena. A new set of P-telcos replaces the existing licence holders, who had been wailing over the "losses".

Estimates say that the number of cell phone subscribers has crossed eight lakh by the end of February last. However, the current service providers are complaining that the gap between reality and projections is too high. As experts look on towards an imminent shake out, some financially-strong corporate houses, capable of absorbing initial losses, are stepping in. Max India has already cashed out on its joint venture, Hutchison Max Telecom, the Mumbai cellular operators. According to industry analysts, about Rs 10,000 crore may change hands over the next few years through sell-out of majority stakes in 43 cellular licences.

One expects not more than 6-7 cellular service providers in place of the current 23 before the turn of the century. The main reason is negative cash inflows, estimated at around Rs 400 crore per month on the cellular companies' profit and loss accounts and no signs of a pick-up in airtime usage by subscribers. It takes about 5-6 years to start having positive cash flows—too long a period for cash-strapped Indian promoters to be able to absorb the losses. Other Asian partners are also looking to get out and divert funds to their ailing home markets. Israel's Bezeq, a 16 percent owner of Gujarat operator, Fascel Ltd., plans to go back. Thailand's Shinawatra, Jasmine and Telecom Organisation of Thailand are also looking towards off-loading their equity stakes in Himachal Futuristic Communications Ltd. (HFCL) and JT Mobiles, respectively.

The P-Telcos which offered to run cellular and basic services, have already committed a very high amount to the government over a period of 10 to 15 years as license fee and capital expenditure from the 43 cellular operators and six basic services providers.

The trend to cash out of the telecom business was set by HFCL when it sold out 30 percent to the Hindujas and 11 percent to Kotak Mahindra in Fascel Ltd., one of the cellular operators in Gujarat. This trend is expected to gain momentum once the Government implements the commitment made to the World Trade Organisation in 1996, which stipulates allowing dilution of Indian control over telecom ventures to as low as 25 percent.

The picture isn't rosy in basic services either. The high licence fee (Rs 11,620 crore) is forcing Basic Teleservices, that holds a LoI from Tamil Nadu Government, to reconsider its basic services project. A joint venture between NTT of Japan and RPG Group, Basic Teleservices received a jolt early this year as NTT pulled out of the venture. RPG is still scouting for a partner, and has failed to pay up the first instalment of licence fee. The fateline of Tata Teleservices in Andhra Pradesh is also moving in similar direction. Close on the heels of Tatas diluting their stake in Tata Teleservices from 90 percent to 51 percent in favour of the Mauritius-based subsidiary of their partner Bell Canada and the US-based AIG Group, Bell Canada has decided to pull out of the venture.

A realignment among Indian companies across all the segments of the telecom sector is expected, but the lure has not reduced yet. "India is too strategically important to ignore," says Arun Seth, managing director, British Telecommunications, India operations, both due to geographic location as well as the huge potential market. The MNCs that have recently joined the bandwagon are Telstra, Singapore Telecom and France Telecom, some of these cash-rich from Government disinvestment.

"The prognosis," says N. Vittal, ex-chairman, Telecom Commission, "is the versatility of the telecom technology that helps in providing more services and it is this scope that propels the growth of the market and ultimately makes the whole investment in telecom financially attractive."

Sell out, Get Richer

The trend was set by C. Sivasankaran, ex-managing director of Sterling Computers Ltd., who boasted in 1994 that his cellular phone business is the goose that will lay golden eggs. The subsidiary, Sterling Cellular Ltd. bagged the licence for operating cellular phone services in Delhi for Rs 2 crore. One year later, Sivasankaran sold Sterling Computer—which held 51 percent stake in Sterling Cellular—to the Essar Group for Rs 212.80 crore. At that time, Ashwani Windlass, joint managing director of Hutchison Max Telecom, quipped: "Wherever there are opportunities, there will be attempts like these." Last month, Windlass signed on the wire-transfer receipt for Rs 561 crore from the sale of the Max Group's 41 percent stake in Hutchison Max Telecom, which operates in the Mumbai circle. The buyer, the Hong Kong-based $4.73 billion Hutchison Group, transferred the shares to Telecom Investments India, a 51:49 joint venture between the Rs 28 crore Kotak Mahindra Capital Co. and the Hutchison Group.