Can Indian telcos succeed overseas?

Alok Shende Director (Consulting)Datamonitor

That Bharti Airtel is in exploratory talks with MTN of South Africa for the possible acquisition has aroused considerable interest amongst investors, constituents of telecom industry and public at large. Reactions from industry analysts and media have been sanguine to hagiographic where as the reactions from investors appears lacklustre in light of incomplete information. The genesis of the two contrary viewpoints can be best coalesced as follows: when the going is so good in the domestic market, should Indian players expand overseas? If yes, is there a value in transmuting the Indian business model to Africa?

And if yes again, what are the upsides and risks.
Predominantly, the strategic rationale for telcos entering new geographies is that, while they have leading market share and peak cash flows in their home market, their home markets are, in turn, reaching the stage of near saturation. The spectrum of limited upside on growth as well as deflating investor expectations is real; prompting telcos to scurry abroad.

With monthly additions of 6-8 million subscribers, India's growth story is far from running out of steam. However, with the subscribers expected to reach 500 million by 2010, telcos will have to cast the net disproportionately wide to clock the same growth rates, adding pressures on ARPU that are already one of the lowest in the world and simultaneously raising capex as telcos target geographically sparse rural population.

While inflection on the S shaped subscriber trajectory is only one reason for Indian telcos to scour opportunities abroad, equally important driver that will facilitate international expansion is their autodidactic business model that veers on the revolutionary. With one of the lowest call rates and ARPU in the world, Indian telcos have induced innovations on cost structure that is unique. This together, reflects in EBITDA margins of 41% as well as increasing price elasticity of demand leading to increasing minute of usage.

For the Indian telcos, the Africa continent represents the brave new world. There are numerous homologous parallels' between the two markets. Africa, like India, is a heterogeneous market. The mobile penetration, as of 2007, ranged from 92% in South Africa to 2% in Ethiopia and Eritreia. With an overall mobile subscriber growth of 40% in 2007, Africa was world's fastest growing region. Africa's ARPU of $13.23 compares favourably with India's ARPU of $8.85 in Q4 2007. The unequal income distribution and high proportion of low income population for Africa resembles India's. In Africa, as in India, higher degree of poverty is not synonymous with low adoption rates.
Large distances, high degree of informal job market and lower penetration of fixed line telephony have increased the importance of mobile phone in citizen's life. Most operators in Africa, 72% at the end of 2007, have less than 1 million subscribers, providing potential for consolidation and creation of pan regional play.

Indian players, who have thrived on such demand and supply side scenarios. While savings in technology cost and consolidation of business processes will be the first driver for the acquisition, the second level of savings will come from transplanting the best practices and cost model that Indian players have developed in serving low income subscriber to the African market.

Historically, the biggest risk in telecom acquisition remains that of paying a steep strategic premium, particularly in light of competitive bidding that may emerge. While political instability and country risk remain high, regulatory risks are reasonable: Africa is inviting foreign investments and there's adequate spectrum available. Currency risks have been touted as another risk, however diversified operations across the continent is likely to cancel out the fluctuations. With the panning out of both the positives and negatives, there exists a possibility of significant value creation from this deal. Bharti should conclude MTN's acquisition under conditions of fair valuation.

Alok Shende Director (Consulting)Datamonitor