Operators announce major investments to drive data growth

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Operators’ reluctance to invest in large-scale expansion and marketing of data services and promotion of mobile internet over the past two years has impacted their businesses.

With a growth in data demand, it has become imperative for them to make investments in building data networks. Despite the high debt burden and policy uncertainty, these companies have prepared significant capex plans for 2013-14. The majority of the investments planned for the year will be directed at 3G expansion and 4G network roll-out.

That said, the total planned investments are significantly lower than global standards. According to a report by Fitch Ratings, Indian operators’ combined capex guidance for 2013-14 is about 19 per cent of expected revenues, as compared to 30 per cent in China and Indonesia. This can be partly attributed to high interest rates and other financing challenges as well as policy uncertainty in the 3G and 4G segments. Issues related to intra-circle roaming in the 3G space, spectrum refarming and allowing voice over 4G have also contributed to delays in service provision.

However, there have been several positive developments as well. The exit of several 2G operators has led to market consolidation, thereby reducing competition. Voice tariffs have been increased, and free minutes and discounts reduced. Also, subscriber churn under the mobile number portability mechanism has reduced. These factors have led to a decrease in operators’ expenditure on attracting and retaining subscribers. Instead, they are now focusing on 3G and 4G network expansion.

A look at the capex guidance of select operators…

Bharti Airtel

The operator, which has been registering a decline in its net profit over the last 13 quarters, plans to spend up to $2.3 billion in 2013-14 on its networks, including about $600 million in Africa. According to company officials, Bharti’s African business has crossed the peak investment period and the majority of its future capex in the continent will be focused on 3G network expansion.

Besides using internal resources, the company has been looking at several other ways to finance its expansion plans. It would raise Rs 65 billion to partly retire its consolidated debt of Rs 650 billion and to finance its capex. This would be sourced through the issue of 2 million fresh shares to foreign investors. The shares will be sold at a marginal premium and may be placed with private equity (PE) firms and listed locally. With the issue of fresh equity, the promoters’ stake, which currently stands at 68.5 per cent, would reduce marginally. Bharti is in talks with Standard Chartered Bank and Citibank to manage the issue. The company has already raised $1.5 billion in 2013-14, of which $500 million has been sourced through a bond issue, largely to pay off high-interest loans and meet capex needs. Another $1 billion has been sourced through a 10-year bond sale in foreign markets. As per the Securities and Exchange Board of India’s public shareholding norms, the company’s tower arm Bharti Infratel will also have to sell shares before end-June 2013.

The company further plans to sell minority stakes in its landline and enterprise businesses. It is reportedly looking at an enterprise valuation of about Rs 170 billion for its fixed line unit and about Rs 65 billion for its enterprise business. Meanwhile, Bharti is in talks with several PE funds to sell up to 25 per cent in its DTH business for about $250 million.

In addition, the company has signed a deal to sell a 5 per cent stake to the Doha-based Qatar Foundation for Rs 67.96 billion in order to improve its finances,  which have been weighed down by a debt of $11.7 billion.

Vodafone India

Vodafone India’s capex decreased from £805 million in 2011-12 to £554 million in 2012-13 due to market uncertainties. However, the operator is relying via 3G mobile data growth to improve its bottom line and plans to invest $1 billion in increasing its network capacity in 2013-14.

Of Vodafone India’s 37 million mobile internet users, 3.3 million are connected on 3G. The operator is betting big on its rural leadership for further 3G growth. Rural users account for over 50 per cent of its subscriber base and the company believes that the 3G growth potential in this market is significantly higher than in the saturated urban markets. The company currently has 82.2 million mobile subscribers in rural areas.

Moreover, a shift is expected in the company’s capex focus in 2013-14 from coverage to capacity for data growth and voice minutes. In the fourth quarter of 2012-13, the company’s user base witnessed 80 per cent growth in smartphone uptake, a trend that is likely to gain momentum with a decline in handset prices. Owing to this, 45,700 TB of data was consumed by Vodafone India subscribers during this quarter.

Aircel

The operator has been struggling with a huge debt burden due to the high costs incurred on acquiring 3G and 4G spectrum. Aircel reportedly has a debt of $3.5 billion on its books.

As part of a refinancing plan for its Indian mobile telephony unit, Aircel, Malaysian telecom giant Maxis Communications will infuse up to $900 million in fresh equity and bring in more capital through a proposed sale of broadband wireless access  spectrum. Aircel has not announced its capex guidance for 2013-14.

Idea Cellular

The operator has given a capex guidance of Rs 35 billion for 2013-14, excluding any spectrum-related payout. This is 4.2 per cent higher than the capex of Rs 33.6 billion in 2012-13.

The capex will be spent on building network infrastructure for the 2G, 3G and fibre businesses. While Idea Cellular has expanded its optical fibre network to 74,000 km, it has become important for the operator to invest further in this network after 3G service launch. Idea currently offers 3G services in 20 circles (except Odisha and Punjab) through a combination of home network and roaming arrangements.

The company will invest in strengthening its presence in the national long distance, international long distance, internet service provider, data service and smartphone device businesses.

Idea intends to meet its funding requirements through its own cash profits. The operator will not need to raise additional funds if it does not participate in further spectrum auctions.

RCOM

Reliance Communications (RCOM) has planned a capex of Rs 15 billion for 2013-14. The investment will be focused on enhancing coverage and data capacity on 2G, 3G and high speed data networks, building additional capacity in data centres, and providing optic fibre backhaul at more sites.

The company has also implemented a growth plan to share infrastructure with competitors in areas where it does not have a network. It has formed its first such partnership with Aircel, and plans to add 10,000 base stations through such arrangements. RCOM plans to reduce its capex through such pacts.

Uninor

While the operator has not given any capex guidance for 2013-14 so far, it has announced certain circle-wise investment plans. Uninor, which has already achieved break even in Uttar Pradesh and Gujarat, plans to become cash positive in the Andhra Pradesh circle in the near future. On an average, 8,000 subscribers are joining the Uninor network each day in the state. The company plans to set up an additional 100 telecom sites and add 1,500 points of sale in Andhra Pradesh. It will also add 130 new towns and villages to its network.

Earlier, the operator had stated that it would expand its presence in Gujarat by setting up an additional 500 network sites by June 2013. It would undertake another round of expansion in the state in the second half of this year.

Conclusion

As the telecom growth story in India shifts to the data segment, investments will be focused on gaining synergies through mergers and acquisitions (M&As). For instance, Maxis Communications is reportedly in talks with potential M&A partners for Aircel. Also, Norwegian telecom major Telenor has hired Citibank and the Tata Group has appointed Lazard to discuss a possible alliance between Uninor and Tata Teleservices Limited. The combined entity will be able to compete with bigger players in the 3G and 4G segments.

Overall, the increase in the capex guidance of most telecom operators is a positive sign and indicates an improvement in the sector outlook.