Indian Telecom Opertors Cup of Woes

Indian Telecom Operators have seen Bad News  hitting them one by one  in a unrelenting way for the past one year

  1. First there was the Price War unleashed by New Telecom operators like Tata DoCoMo,Sistema Shyam Telecom and others.The 2nd round of 2G licensing has been mired in controversy with allegations of foul play as the new operators got the Telecom spectrum for a song.This allowed the newer Operators to Wage a Price War to Gain Subscribers from the existing Operators.The Larger Incumbent Companies like Reliance Communication,Airtel,Idea and Vodafone had to respond to the lower tariffs by lowering their prices as well.This resulted in a severe compression of margins and profits  for all the companies involved.Companies with bigger marketshare were hit the most as is the case with a Price War.
  2. Next came the Number Portability problem which allows the switching of Operators without  changing the phone number at nominal costs.Though this problem has been delayed by more than 6 months by the inept Telecom authorities, it still hangs like a Damocles Sword.
  3. 3G Auctions proved to be another huge burden with the auction prices for 3G spectrum far exceeding the expectations of both the Government and the operators.The Government made a Huge Windfall from the Auction and the Operators had no option but to  bear it and move on.

Reliance Entry could prove to be the Final Straw

Reliance Industries (RIL) is India’s largest privately owned company which recently rescinded  a no-compete agreement with the ADAG Group.This frees RIL from entering India’s fast growing Power,Telecom and Financial Services sector.RIL has lost no time in doing just that.It bought 95% stake in Infotel,a small no-name company which bought Broadband Wireless Access (BWA) spectrum in all the 22 circles in India for ~$3 Billion no doubt with prior assurances from RIL.Note RIL has a massive cash war chest and proven execution abilities.Its entry will surely be a huge headache for existing telecom companies as it will certainly aim at the No.1 spot.With Voice Communications fast becoming a commodity with little profits,Data Communications was supposed to be the next big Cash Cow.Now with RIL planning to take that over with plans of making a big splash in providing Data Services over Wireless Broadband,the Telecom Operators are in severe danger.Most Telcos have already rolled out wireline and wireless broadband services and earn a small fast growing chunk of profits from this segment.But with Reliance entering ,expect a major Tariff Decline in this segment as well.Good News for the Indian Consumer and More Bad News for the Telecom Operators.

Mukesh makes Rs 4,800 cr telecom foray – Yahoo

Five years after exiting telecom business, Mukesh Ambani-managed Reliance Industries Ltd (RIL) on Friday re-entered the sector by acquiring Infotel Broadband, the only company to have got the all-India broadband wireless access (BWA) spectrum. RIL will invest Rs 4,800 crore by subscribing to fresh equity capital and own 95 per cent equity in the company, making it a subsidiary of RIL. Mukesh exited telecom business in June 2005, when, following the settlement, Reliance Infocomm went to Anil, who changed its name to Reliance Communications.

This was a setback for Mukesh as he had conceptualised RIL’s first serious foray into telecom.Nineteen days after a May 23 settlement that nullified a non-compete clause between the brothers, RIL chairman and MD Mukesh was optimistic.

“We see this as next wave of value creation opportunity in the wireless broadband space,” he said. “This will polevault India’s economy into the digital world at an accelerated pace while creating next generation tools that will enhance productivity and will create world class consumer experiences.

The Indian 3G and Broadband Wireless Auctions finally ended after Two Months resulting in a Massive Windfall for Government Coffers .The combined value of both auctions is around $23 Billion which is more than double what the Government was initially expecting.Predictably it has left the Telecom Operators in the Red with the Companies having to spend much more than what they had budgeted for.The Indian Telecom Market is Hypercompetitive with 10-12 Operators fighting for a share of the the world’s fastest growing market.The earlier 3G Auctions had depleted the Telecom Operators so severely that most of them dropped out of the Broadband Wireless Auctions.Idea,Vodafone and Reliance Communications dropped out of the race , with even market leader Airtel only winning 4 out of the 22 circles on offer.The Big winners in the BWA auctions were Qualcomm,Aircel and newcomer Infotel (which has been bought over by Indian’s largest company Reliance Industries).

The Indian 3G Auction had proved to be a “Winner’s Curse” with most Companies unhappy with the amount of money they had to bid.Airtel has complained of the scarcity of slots and the extremely high price levels.It remains to be seen whether these auctions prove successful in the long run.There is the danger that the Telecom companies may not have enough capital to deploy 3G infrastructure thereby negating the huge government windfall.

India reaps billions from BWA auction, biggies stay away- Yahoo

India’s auction of spectrum for broadband wireless access (BWA) services ended Friday enriching the government by Rs.38,543.31 crore (over $8.56 billion).The 16 days and 117 rounds of auction saw many of the big telecom operators like Reliance Communications dropping out of the race as the license prices shot through the roof.The pan-India license price stood be at Rs.12,847.77 crore (over $2.85 billion) at end of the auction in which 11 companies took part, according to official data released here.

(BWA) auction prices significantly exceeded its business case estimates. We will focus on broadband wireless through 3G-ready pan India CDMA and maximum 13 circle 3G coverage,’ said a Reliance Communications spokesperson.Reliance Communications paid Rs.8,585.04 crore towards spectrum fees for 3G sevices in 13 service areas, while Idea shelled out Rs.5,768.59 crore for 11 circles.

Bharti Airtel bagged four slots — Maharashtra, Karnataka, Kolkata and Punjab for Rs.3,314.36 crore. The compay had bid for all major 3G circles earlier spending Rs.12,295.46 crore.’A combination of scarcity of slots and the auction format, once again, resulted in extremely high price levels. The Company has secured BWA spectrum in select circles to experiment with new technologies for a total consideration of Rs.3,314.36 crore,’ said a Bharti statement.

BWA spectrum is essential for rolling out Worldwide Interoperability for Microwave Access (WiMAX) services enabling hand-held devices and laptops to access the Internet.

The detente between the Ambani brothers which lead to the rescinding of the non-compete agreement has resulted in Reliance Industries  Ltd (RIL) being the biggest Winner in the win-win arrangement.While on one hand Anil Ambani’s Reliance Communication which was facing a liquidity problem has benefited by being free to sell a stake in the company,Mukesh Ambani’s RIL has gained even more. RIL has been a huge cash cow generating billions of dollars in free cash flow from its Energy businesses each year.However RIL was finding it itself hamstrung by the non-compete agreement which prevented the company from entering the areas in which ADAG ( Anil Dhirubhai Group ) operated in. RIL tried its hand at overseas acquisitions but was not finding much success.However with the Ambani Brothers burying the hatchet,Reliance find its hands free to enter the virgin territories of Telecom,Power and Financial Services which will be high growth areas in India’s booming economy

Reliance has firmed up its intentions in all Three Areas through acquisitions,JVs and greenfield expansion.

Financial Services

Reliance has made its move in this sector by signalling its intention through acquisition of a small private player JM Financial Services.With the private financial companies trading at decent valuations compared to the sky high valuations during the 2007-2008 this might be a great time to make acquistions.

Mukesh Ambani may buy MF firm – LiveMint

Mukesh Ambani, who controls India’s most valuable company Reliance Industries Ltd (RIL), is in talks to buy a majority stake in JM Financial Asset Management Pvt. Ltd, his first attempt to enter Anil Ambani’s territory since the estranged brothers scrapped a “non-compete” agreement between them a week ago.

Negotiations are under way for a deal that values JM Financial Asset Management, the money manager controlled by investment banker Nimesh Kampani, at around 8% of its assets under management, which equals Rs685 crore, said two officials close to the development who didn’t want to be named.


Reliance is making forays into Power starved Indian Market by planning to set up Thermal ,Solar and Nuclear Energy Plants.With its superb project executions skills and rock solid Balance Sheet , Reliance is ideally situated to become a dominant player in this space

Reliance may foray into nuclear energy – report – Reuters

Petrochemicals-to-gas conglomerate Reliance Industries Ltd is looking to enter nuclear energy, the Economic Times reported on Monday, citing unnamed sources with knowledge of the matter.The energy major is believed to be in talks with Bechtel, the largest U.S. engineering firm, for a possible collaboration, the newspaper said.”RIL has indicated to the government that it is keen on generation and distribution of nuclear power,” it quoted an unnamed senior government official as saying, adding the plans are at a preliminary stage.

RIL may enter thermal power sector – Energy Business

For RIL power sector is not new as it is already supplying power to Jamngar refinery, Hazira petrochemical complex and Jamngar city through 800 Mw captive power plant, and said sources close to the family.
The company might enter in to the bidding process during next round of UMPPs are offered by the government. However it is unlikely that, RIL will enter in to telecom or financial service sector as RIL are a B2B company and not B2C company


Reliance Industries had brought a revolution in the Indian Telecom space by introducing the “Monsoon Hungama” scheme which allowed poor Indians to go mobile at a  startlingly low cost of $11 ( Rs 500)  . This arm was hived off as Reliance Communications under the separation agreement between the two Ambani brothers.Now Reliance sees an opportunity to return to Telecom through the new wave of investments in 3G.

RIL to offer 3G, WiMAX devices – Financial Express

Five years after its exit from the country’s booming telecom sector, Mukesh Ambani’s Reliance Industries Ltd (RIL) is plotting the road map for a return trip. However, this time around, it won’t be plain vanilla telecom services that RIL will be interested in, but rather the emerging segments of 3G and WiMAX. According to executives familiar with the development, the initial strategy is not to enter as a telecom operator, though this cannot be ruled out in the long run.

Unique Indian Telecom Market

The Indian Telecom Market is a unique market in many ways due to the following reasons

  1. Fastest Growing Telecom Market in the world in terms of subscribers per month
  2. Call rates are cheaper than any other country in the world
  3. HyperCompetitive with 12-13 players compared to 3-4 in most other markets

Recently the market has seen a lot of turbulence due to Price Wars and “Winner’s Curse” 3G auctions. This comes after the huge controversy raised in spectrum allocation to new operators.

Competition leading to Huge Margin and Balance Sheet Pressure

The competition which used to be benign earlier with 4-5 big telecom operators turned into a hypercompetitive one with the advent of new telecom operators like TataDoCoMo, MTS,Maxis,Etisalat and others.The newcomers totally changed the market through Extremely Low Priced plans (as low as 3c/minute) to lure customers from existing operators.With price being the only differentiator between the the 10-12 operators , it quickly descended into  an All out Price War between the telecom companies with everybody a Loser except the Indian Customer.While market leader Airtel has a good balance sheet,other major players like Reliance Communications,Vodafone and Idea were put into a tough situation.Their  margins and profits collapsed at the same time they were spending billions of dollars to expand their telecom footprint across the country.The result was that Indian Telecom stocks have massively underperformed the general market with RCOM shares falling below the level it had reached when the Indian market was 50% below current levels.

Has the Consolidation Started?

The 3G Auctions came as an additional shock to the telecom companies with the bids being far in excess of what the government and companies had anticipated.These compounded the already mountain of problems that the companies were facing.Market analysts had predicted that M&A would soon being as the market was not big enough to support 10-12 operators under the present conditions.However with the Indian Telecom Regulator TRAI having strict guidelines against M&A ,the timeline for the M&A was unpredictable.Abu Dhabi based Etsalat which is one of the world’s biggest telecom operators and was one of the licensees in the recent 2nd round of telecom license allocations has confirmed talks with Reliance Communication.This company has the most strained balance sheet in the industry and with the recent detente between the Ambani brothers,a deal was waiting to happen.Though earlier big ticket transactions have taken place with Vodafone buying Hutchison Whampoa,this is the first big M&A deal to happen after the Price War started. Note this deal may fall through due to regulation and valuation hurdles , but eventually a market reorganization will have to happen because the current conditions are unsustainable for a lot of these companies.

Indian mega industrial groups led by Ambani brothers decided to rescind their non-compete agreement which allows oil and petrochemical giant Reliance  to enter the financial,telecom and power sectors.This deal is much more beneficial to Mukesh Ambani led Reliance Group then Anil Ambani’s led ADAG Group.This deal came about after ADAG lost a gas supply dispute with Reliance in India’s Supreme Court recently.

Power companies in India may face a formidable competitor

Reliance is a massive free cash flow machine as its oil and petrochemicals businesses are one of the most profitable around the world.Its  project execution abilities are also well known.I don’t think that Reliance would like to enter the Hyper Competitive Telecom market but it would make sense to enter the Power Sector where India faces a huge shortfall.It already has a some presence in power installing Solar panels for India’s Commonwealth Games and it would be logical to enter this field as power sector requires large capital outlays and project execution capabilities.Reliance also may want to enter the Financial Services field which  is growing rapidly.It could enter through acquisitions of india Infoline,Edelweiss or any of the myriad  private players to jumpstart their entry.

ADAG Group could be a Loser

ADAG has less to gain from this deal as entering the oil and gas sector might not be that profitable given the large amounts of capital and long gestation periods required .Note the ADAG Group is strapped for cash and facing headwinds in its telecom and power companies I think it has more to lose from competition in the power and financial sectors where it is quite dominant.However the full deal is not known and Anil Ambani might have received a big monetary settlement to free Reliance from the non-compete agreement

Mukesh-Anil Ambani scrap ‘non-compete’ agreement of 2006 – ANI

In a significant development, Reliance Industries Ltd. (RIL) and Reliance ADA Group companies on Sunday formally agreed to cancel all existing non-compete arrangements which the two groups entered in January 2006.The two groups have entered into a new simpler, non-compete agreement with respect to only gas based power generation.The new agreement has been approved by the board of directors of RIL and the respective Reliance ADA Group companies.

However, RIL has agreed not to enter into Gas Based Power Generation Business for the period upto March 31, 2022. An appropriate exception has been made in respect of RIL’s captive gas based power plants.It is believed that these developments will eliminate any room for further disputes between the two groups, on matters relating to the scope and interpretation of the non-compete obligations.

Huawei and ZTE have been in the eye of a storm with the Indian government banning these companies from selling telecom equipment in India due to security concerns.Note the relations between India and China have never been cordial with a war being fought in 1962 between the two countries and China continues to generously aid Pakistan which is India’s arch enemy.There have been reports that Huawei does not allow Indian nationals to enter restricted parts of its R&D centre in India .It is also known that ZTE has very close relations with the Chinese government making the Indian security agencies even more wary.

China’s government which has always been a big supporter of their Industry nudged India on lifting the ban without condemning the ban.India is the fastest growing market in the world and crucial for any telecom equipment manufacturer.Huawei and ZTE have been trying to mollify the Indian authorities by planning to set up plants in India and building R&D centres.

China avoids condemning India over Huawei, ZTE ban – C114

China’s commerce ministry said on Monday New Delhi should not discriminate against Chinese firms, but did not directly condemn a bar on Indian operators buying telecoms equipment from two Chinese companies.India has banned mobile phone operators from placing orders with ZTE Corp and Huawei Technologies because of security concerns,industry sources say.

But Beijing, which has not shied away from criticising other countries, including the United States, over investment and trade restrictions, appears to be downplaying the ban.Commerce Ministry Spokesman Yao Jian, when asked about the ban, said New Delhi should aim for a fair and transparent investment climate and emphasised the large stake  Indian firms have in the Chinese market.

“We hope that (Indian) policies to be launched should be fair to all enterprises…and should not discriminate against Chinese enterprises,” Yao told a regular news conference, in Beijing’s most extensive comments on the issue so far.”The investment by Indian firms in China is larger than Chinese firms’ investment in India, and China has created a very good service and investment environment for foreign      investment.”

Indian telecom operators which have spend huge amounts of capital on winning the 3G auctions have now joined the Chinese govt in supporting Huawei and ZTE as well . They need to source cheap equipment and Huawei and ZTE are known for being  the cheapest makers around.Not that there is a lot of players in the world.The other  major supplies are European or US and considered much more expensive than the Chinese ones.

India Inc bats for Chinese telcos – Business Standard

Chinese firms won the backing of Indian companies on a day when the brass of ZTE called on Union Home Secretary G K Pillai in Delhi in an effort to allay the government’s security fears. Chinese equipment makers, including ZTE and Huawei, have been denied security clearance to sell their networks to Indian companies. Top executives from Huawei have also sought time from Home minister P   Chidambaram and principal secretary to the prime minister, T K A Nair to discuss the same issue.

“The Chinese are the leaders and have undertaken major R&D (research anddevelopment) and they control 50 per cent of the global market,” said Anil Sardana,managing director of Tata Teleservices, which has bought substantial Chinese equipment.“By subverting the technological innovations and particularly dollar-to-deliveryefficiency, which are by far the best from these Chinese companies, you are not allowingconsumers access to new technology.”

Sardana.Tatas, he said, have been denied permission to import even computers and servers from China because of the security concerns. The views were echoed by the Cellular Operators Association of India (COAI), the industry lobby for GSM players.