Long distance call

The telco will not find it easy to grow market share or make money.

Vodafone's Sarin facing rebellion" read the headlines days before the UK-based telco's annual general meeting in July last year, with the text referring to the Vodafone stock having underperformed the FTSE 100 index in the three years since Arun Sarin, chief executive took over the job.

"Such opposition to the re-election of a chief executive is rare," observed Telegraph.co.uk.

Sarin retained his job though almost ten per cent of Vodafone (March 06 revenues $57.23 billion) shareholders voted against his re-election. But analysts continued to demand specifics of the growth strategy which hinged on benefiting from emerging mobile markets.

Now they have them. With a majority share in Hutchison Essar, India's fourth largest telecom player, Vodafone has set foot in what is probably the fastest growing wireless market in the world.

Approximately 71 million subscribers were added in 2006 and the cellular subscriber base is expected to hit 240 million by March 2008. At the last count, Hutch had 24 million customers and a market share of 12.4 per cent. The tab for the acquisition: $13.2 billion which includes $2 billion of debt.

Now that Vodafone is here, it says it will aim for a market share of 20-25 per cent. It may have the resources but scaling up the India presence is not going to be simple.

True, Hutch is well-entrenched and the existing management will continue to be at the helm of affairs. But Bharti and Reliance are expanding at a furious pace, Maxis is getting ready to roll out its network in another six circles, Idea Cellular is getting its act together and BSNL is waiting for capacity to come through. Industry watchers say Vodafone is ambitious if it thinks it's going to corner a fourth of the market.

The UK-based service provider appears to have found an ally in Bharti. Sharing infrastructure""towers and the national long-distance network"" will be a win-win situation for both and industry watchers say it is probably why Bharti did not ask for a fee to waive the no-objection clause.

But even if the two were to work together, for Vodafone to double market share in today's competitive environment would not be easy. The Maharashtra circle is an example of how tough conditions are.

Say industry watchers, "Idea is the market leader and Bharti is the number two player and Tata Teleservices too is doing well. Vodafone will surely gain some share in this circle but it's unlikely to be able to overtake either of the two strongest incumbents."

More important, as Prashant Singhal, head, telecom practice at Ernst & Young points out, "The growth from now on is likely to be far higher in the rural areas and less affluent regions, because the urban areas are fairly penetrated." Unless Hutch, which has positioned itself as a player at the premium end, changes its strategy, it'll be hard to grow beyond a point.

"At best they can get a 20 per cent share," says an analyst, adding that what the company makes in volumes it might lose in Average Revenue per User (ARPU), which today are probably the highest in the industry. Where Vodafone can score is at the high end.

Says Singhal, "Its experience in Europe will help it roll out high value-add services and bring in a completely new dimension." Subscribers looking for top quality services account for just 20 per cent of the subscriber base, but could contribute as much as 40 per cent of the revenues.

That would of course mean significant investments of at least $one billion a year""Bharti is planning for almost double that in the next couple of years. With an initial investment of $11.1 billion and capital expenditure of at least $5 billion over the next five years, the stakes are high.

Back of the envelope calculations show that the business should be able to generate cash flows of around $7.5 billion over CY06--CY11. That's assuming revenues grow at a compounded annual rate of 22 per cent plus and operating profits grow at around 24 per cent between CY06 and CY11.

Despite this, Vodafone could take more than six years to make money. Hopefully by then the numbers will ring in.

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