04

Technologies

TELECOMMUNICATION

It's boom time for telecom

WITH AN EXPLODING DEMOGRAPHICS AND A SURGING MIDDLE CLASS, INDIA IS THE DREAM DESTINATION FOR TELECOM COMPANIES.

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But given the huge potential of the burgeoning Indian telecom market, the Russian state is re- ported to be interested in back- ing SSTL with cash to help scale up its presence in the In- dian market. The Russian State Duma’s Budget and Tax Committee have recommended that the lower house of parliament okays the purchase of a stake in SSTL for $676 mn. The deal was supposed to go through last year. However, due to dis- agreements between Russian authorities, the money was not spent in 2009 and the 2010 budget does not mention any such expenditure. The competition is intense. Until 2018, capital expendi- tures by the Indian subsidiary of AFK Sistema will amount to $2.3 bn, “an insignificant amount", according to Ilya Fe- dotov, director of the stock market analysis department at Veles Capital Investment Com- pany. In comparison, one year before, Vodafone, which is also working in India, said it would invest about $2 bn in the mar- ket in 2008–10. “It is important

to realise that an investment program implies not only ap- plication of funds, but also cost reduction. India is a very spe- cial country; a number of cel- lular operators work in the same state and there is a con- stant interplay of interests,” said Rozanov. “That’s why, for example, the joint use of infra- structural equipment is so widespread here: a number of operators can share one tower or one operator can buy traffic from another for subsequent resale to end users,” he added. The cash infusion in SSTL would go a long way. Vladislav Kochetkov from Finam Invest- ment company, notes that the whole idea of the Russian gov- ernment purchasing a share in SSTL emerged during the cri- sis and that now AFK Sistema could probably acquire debt fi- nancing. “But since Russia is India’s strategic partner, its holding a share of the Indian subsidiary is still on Sistema’s agenda, as it will simplify lob- bying in India,” he said. According to plans made last year, after an additional share issue, the Russian government could own 20 pc of SSTL. Since local legislation does not allow

The “Big Three” group of cellular operators in Russia include MTS, Vimpelcom and Megafon (see their logos on the picture)

foreign investors to own over 74 pc of the shares in telecom- munications companies, AFK Sistema will have to reduce its share to 54 pc. To this end, In- dia’s Shyam Group, which sold the controlling stake in SSTL to Sistema and which now owns 24 pc of the operator’s shares, will also take part in is- suing additional shares. The group will buy 7 pc of the op- erator’s shares for $47 mn; the preference price of one share for Shyam Group is Rs 10 ru- pees, whereas Russia will pur- chase the securities for 49.3 ru- pees ($0.93) a share. The transaction is to be credit- ed against India’s Soviet-era debt, which approaches one billion dollars. According to an agreement signed by the two countries, Russia can use this credit solely for investments made on Indian territory. A spokesman for AFK Sistema noted that his company and other Russian firms do not work on Indian soil. This transaction is, therefore, a good opportuni- ty for Russia to unfreeze funds that are currently of no use and invest them in a promising, de- veloping business. The attractions of the explod- ing demographics and increas- ing upward mobility in India are added attractions. Russian experts are upbeat: the coun- try’s population is expected to exceed 1.5 bn; the real GDP growth should continue at one of the world’s highest rates (about 10 pc); telecom market volumes should double to $60 billion by 2014 and mobile penetration should increase from 29 pc in 2008 to over 80 pc in 2014. India’s telecommunications market is highly competitive: 13 operators work in the coun- try. AFK Sistema has, there- fore, chosen a “double impact” strategy and placed its bets on

RUSSIA INDIA BUSINESS REPORT

IN ASSOCIATION WITH ROSSIYSKAYA GAZETA, RUSSIA

THE ECONOMIC TIMES WEDNESDAY_MAY 12_2010

BOOKMARKS

www.sistema.com AFK Sistema website www.mtsgsm.com Mobile TeleSystems website www.mtsindia.in MTS India brand of SSTL which oper- ates on CDMA technology

improving voice communica- tion and developing data transfer services. With monthly growth rate of its subscriber base at 15 pc, SSTL has emerged as the most aggressive newcomer in India’s cellular market. This is an ex- cellent performance, given the strong competition on India’s market, notes Boris Solovyov, deputy director general of ALOR Group. SSTL is the only company that holds an univer- sal pan-Indian license for tele- com services and frequency coverage of the entire area, with exposure to 1.13 bn peo- ple. However, at this point, the operator’s share, as estimated by the Telecom Regulatory Au- thority of India, does not ex- ceed 1 pc. As of today, four bil- lion subscribers use the services of SSTL. The biggest players in the Indian market are Bharti, with a share in ex- cess of 22 pc and Reliance with 17.63 pc. SSTL has declared its intention to expand its sub- scriber base to 35 mn in 2012 and cover 7 pc of the market. “As of today, we can offer no predictions concerning the subscriber base. As far as fi- nancial indicators are con- cerned, we plan for SSTL to

achieve positive EBITDA by 2013 and an increase in reve- nues to $1.5 bn by 2014,” said SSTL’s president. During the fourth quarter, Sistema Shyam TeleServices Ltd’s revenues reached $14 mn; for 2009 as a whole, they reached $36.4 mn. This projected revenue growth would be possible only with a fresh influx of cash. AFK Sistema’s cash fund as of third quarter of 2009 was $7 bn with MTS accounting for $4.2 bn and Comstar contributing $290 mn. Funds available on Sistema’s accounts, however, do not exceed $2.6 bn. Although indicators suggest that SSTL plays an insignificant role in AFK Sistema’s earnings profile, Fedotov says, “Sistema will have a hard time developing its business in India without the support of the government.” While different avenues are being explored to finance ex- pansion plans of SSTL, it is still possible the Indian sub- sidiary may venture to raise funds on its own. Rozanov has indicated that an IPO is a pos- sibility. AFK Sistema has stat- ed that “company shareholders view an IPO as an instrument that could increase sharehold- er value. If a decision to con-

duct an IPO is made, a local stock exchange is likely be chosen as the primary ex- change.” SSTL is not the only Indian project of the Russian holding. Last year, AFK Sistema regis- tered Sitronics India, another Indian subsidiary. Shipments of RUIM cards (analogues of SIM cards in CDMA networks) for SSTL have already begun (the contract amount for 2009 was about $3 mn). In addition, a three-year CRM & Billing system contract with the oper- ator worth $64.2 mn has been concluded. AFK Sistema is holding nego- tiations and consultations over the construction of emergency control centres, the establish- ment of coastal economic zone monitoring systems, security systems for municipal struc- tures (“A Safe City”), and the introduction of state-of-the- art technologies using the GLONASS satellite naviga- tion system. AFK Sistema is determined to make a success of its India dream. “India is nearly the only country in the world where an impressive market potential is combined with unique opportunities for investors,” says Rozanov.

Understanding Russia’s demographic challenge

in@rbth.ru in.rbth.ru/letters

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