Business - Q&A;Tony Worthington, global head (telecoms, media & technology) at Standard Chartered Bank

Siddharth Zarabi

Tony Worthington, global head (telecoms, media & technology) at Standard Chartered Bank, has been involved with the Indian mobile sector since the original licence bids in 1995 — he’s done M&A transactions for a host of Indian and global firms and has helped raise finance for them. He spoke to Siddharth Zarabi on the sector’s future. Excerpts:


You’ve raised forecast for mobile subscribers in India by around 15 per cent, to 700 million by 2012. Why?
Last year, Standard Chartered was forecasting 252 million subscribers by March 2008. The actual subscribers were 261 million. In the current year, subscriber growth is tracking ahead of forecast. Five main factors have influenced this. We are seeing relentless innovation amongst operators, tariffs are continuing to fall, handset prices are becoming cheaper and are lowering a barrier to entry, the growth of a towers industry is enabling new operators to slash capital expenditures and, most importantly, 2009 will see the arrival of several well-backed new entrants who will have to be highly competitive with their product offerings.

Is the current pace sustainable given the economic scenario?
First of all, let us look elsewhere. Pakistan is experiencing significant macroeconomic problems, yet the mobile market steams ahead. Penetration is now over 50 per cent there, compared with 27 per cent in India. Many African countries have experienced strong mobile growth despite economic problems. For India, I do not see any noticeable slowdown in subscriber growth until 2012. The marginal subscriber in India today is going to be a pre-paid user and not overly concerned about a credit crunch or an economic slowdown. He will have more choice than ever before and very affordable handsets and tariff structures.

We’ve just seen three major M&A deals in India’s mobile space — Tata Teleservices-NTT DoCoMo, Swan Telecom-Etisalat and Unitech Telecom-Telenor. Are the valuations excessive?
You can also probably throw Sistema-Shyam into this mix as well. I think all the selling shareholders will be very satisfied with the valuation levels achieved. However, I do not think that any of the international new entrants will feel aggrieved. India is a special market and a ticket at the table is not cheap. DoCoMo, Etisalat and Telenor are all very experienced, successful operators with operations in many countries and all share a strong strategic intent to be in India.

Will we see more telecom M&A’s?
I think there are probably one or two more deals to be done. Consolidation will take place, and in three to five years, we will have around half a dozen national operators and a few niche regional operators. The dating game amongst the smaller players will probably kick off in a couple of years and mergers will ensue. It is difficult to see today’s big three — Bharti-Airtel, Reliance and Vodafone-Essar — being overtaken, although this will depend to some extent on BSNL’s future corporate structure.

Since global valuations are down significantly, do you see Indian telcos acquiring assets overseas?
We have seen Tata and Reliance acquire international communications infrastructure over the past five years and it is only natural that successful mobile operators move overseas for exposure to new growth markets. Bharti and Reliance are on record as having evaluated sizeable investments this year. It is possible that BSNL, MTNL, Tata and Essar will also invest selectively. Current valuation levels dictate that it is the right time to target new investments, although of course large-scale funding will present problems given the current financial markets. Another problem is that there are not too many willing to sell, given the depressed valuations of many international mobile operators.

What will drive Indian mobile growth? Tariffs?
The same five factors — relentless innovation, low tariffs (possibly induced by the new entrants), cheaper handset prices, availability of third-party towers to lease and the stimulus to be given to the market by Loop, Swan, Unitech, Shyam and the other new entrants.

How do the prospects for the new entrants look?
The international shareholders who’ve come in through M&As have done this many times before, and are entering India with their eyes wide open. They are about to compete with some outstanding mobile operators. I regard Bharti-Airtel as probably the best operator with whom I have worked. Reliance has done a tremendous job given the limitations of CDMA, as has Tata Indicom. Vodafone’s record speaks for itself. BSNL, Aircel and Idea are no slouches and have carved out excellent market positions.The new entrants will need to have a very distinct proposition.

They will be hoping for a market share of 8 per cent of gross additions. The problem is not all will achieve this level. It will be fascinating to see how the market evolves.

The towers industry is a fascinating recent development. Mass players Bharti Infratel, Indus Tower and Reliance Infratel sit side-by-side with independent tower companies such as GTL and Quippo. New entrants and existing operators alike are now able to slash their capital expenditures substantially through co-locating on third party towers and leasing rather than owning the infrastructure. This enables an operator to be up and running without the large costs we have seen historically. The downside is that given the higher operating costs, EBITDA break-even is pushed out by at least a year or two.

The government is targeting an auction of 3-G mobile licences by mid-January 2009. Will the current investment environment affect the interest in 3G?
There are two broad themes which will impact 3G licence valuations. Firstly, there is a scarcity of 2G spectrum in many circles and 3G will help alleviate some of these pressures. Secondly, there is the business case for 3G — domestic operators are looking at the 3G experiences of countries in Asia and Europe. The first question they are asking themselves is what services domestic customers want and do they need 3G for these or will 2.5G suffice? Evidence from elsewhere is that 2.5G does suffice for many customers. Once operators look at the capex required for 3G, they can form a view on valuation. I do not think we will see anything like the valuation levels recorded in Europe in 2000 and 2001, but there will be an element of mind games involved — “if I have this licence then my competitor cannot have it”. The question is how far an operator will be prepared to go to secure the 3G licence.