Sistema plans for life after Reliance Communications

The Russian giant puts its ill-fated entry in telecom behind it and builds on its PE and retail businesses

Vsevolod Rozanov, group chief financial officer of Russian giant Sistema JSFC, does not make a secret of his disappointment in investing in India. “Despite the ease of doing business, it took us two years to close the deal to merge MTS with Reliance Communications (RCom), and all our energy was concentrated on this. And till it happened a few weeks ago, we were not even sure whether we should continue.” 

His disappointment is not without basis. The $12-billion Sistema, which invested over $4 billion in its CDMA telecom services business through MTS in India, has lost a lot of money. With a 10 per cent stake in financially-strapped RCom, after the merger, the value of its shareholding has dwindled to Rs 430 crore. 

Despite losing its shirt, Sistema wants to put money in the country. And Rozanov, who was in Delhi on a whistle-stop visit to attend a high-level strategy session of the Indian subsidiary’s top brass, says the management has decided to be much more cautious with its investments. So, after a lot of brainstorming both in Russia and in India, Sistema has decided to do three things: put in more money and diversify the portfolio of its private equity fund Sistema Asia Fund; expand its retail business through the Acoola branded kids retail chain and, if the business model works, introduce some of its other mass retail brand outlets; and, third, wait for an opportune time to sell its stake in RCom. 

Rozanov is non-committal on whether the group would like to take a majority stake in the truncated RCom (after all, the banks could convert their loan into equity and get 51 per cent stake which they will sell), which will house only the B2B business, including data centres, and the enterprise business. Or whether it will make a bid for the tower and fibre optic assets of the Anil Ambani company. 

Those in the know say it is inconceivable that Sistema would want to dabble in the telecom or its related business again, having burnt its fingers once so badly. Rozanov, however, says the group may bid for wi-fi projects that are on offer by state governments looking at providing connectivity to their citizens in hospitals, universities, colleges, bus terminals and so on. 

Also, a few years ago, the group had made a tryst with smart cities by offering security solutions and had demonstrated pilot projects for various state governments, but that business did not make any headway. 

In the immediate future, Rozanov wants to concentrate on the private equity (PE) and the retail business and get them established before foraying into other areas — the group has a bevy of business options, from agriculture, healthcare, paper and pulp to defence, microelectronics solutions, hospitality and pharma. But Rozanov has a clear philosophy of which business to bring to India: “We will only bring businesses that are already well established and are large in Russia. That is what we have done with retail or, earlier, with telecom,” he points out. 

The cornerstone of the group’s new thrust into India clearly is the PE fund. To begin with, it has decided to raise an additional $70 million to expand the size of the fund to $120 million. This would be completed by the first quarter of 2018. The fund, which made just two investments last year, has already undertaken five investments this year and 85 per cent of it is into companies based in the country or ones that have large businesses in India. 

But more importantly, Rozanov wants the proprietary fund (100 per cent of the money comes from Sistema) to diversify the source of its funds by tapping Indian, Russian and Asian high net worth individuals. Rozanov says that based on discussions, he believes that 50 per cent of the fund will be raised from high net worth Indians. “These are not the richest Indians because they already have their own funds, but these are individuals who have money and are reposing trust in our funds’ performance,” he says. 

With most of the fund’s $25 million invested in risky venture or Stage B capital, Rozanov is looking to hedge his bets. “The exit route on our current portfolio is seven to eight years. We need to have some investments in which we can exit in three to four years so that we can balance the risks,” he explains. He also wants the fund, which makes an average investment of $3- 5 million, take larger bets on a company in which it is investing. 

In retail, a Sistema subsidiary has a joint venture with India’s Saamag group, a diversified conglomerate with interests in shipping, hospitality and retail, to launch Acoola, a  clothing, footwear and accessories retail brand for kids between two and 14 years. With about 260 outlets in Russia, Sistema has chosen India as one among the first markets to replicate its success overseas. The plan is to set up at least 10 stores across the main metros of Mumbai, Bengaluru and Delhi. The advantage is that the Concept group — which runs Acoola and in which Sistema owns 40 per cent stake — is increasing the sourcing of its products from India pretty dramatically. 
 

If the retail foray works out, Sistema might look at bringing in other retail formats under its fold. It has Detsky Mir, the largest mass market children’s goods brand in Russia, which offers toys, clothes, sporting goods and products for expectant women, with over 500 stores in the country. Rozanov says that currently the group is researching this market in India. 

Of course, Sistema realises that it cannot make much money from selling its stake in RCom, especially because of the uncertainty about the company’s restructuring plans. Rozanov acknowledges that the group might wait at least another two to three years or until after the ongoing consolidation in the telecom industry is completed before taking a call. But the tryst with telecom is clearly something Sistema would like to put behind it as a bad dream.