Unlike other mobile service companies, Hutchison Essar doesn't chase subscriber numbers "� it focuses on revenues. Even so, it confronts several challenges. Quite some time ago Hutchison-Essar, the telecom company that's a joint venture among the Hong Kong-based Hutchison Telecommunications International Ltd, the Ruias of the Essar group and other Indian partners, decided to advertise on television, it handed its advertising agency an unusual mandate.
The agency would steer clear of celebrity endorsements of the brand, something many of its rivals had opted for (Bharti had Sachin Tendulkar and Shah Rukh Khan while Reliance had Virendra Sehwag). The agency had to project Hutch as a brand that offers a completely reliable network.
The agency's answer was a commercial that went on to rivet the imaginations of millions of Indian television viewers "� a pug faithfully following his young master throughout the day, even while playing or eating. In a rare interview, Asim Ghosh, Hutchison Essar's extremely low profile managing director, explained: "For us the brand is the real hero."
That commercial reflects the essence of what India's second largest private GSM mobile services operator likes to think it's all about "� it does things differently from its rivals.
Its rivals may be aggressively trying to attract new customers to expand the number of their subscribers. Not Hutchison. It has eschewed the numbers game. But it is chasing a different kind of number: a larger share of the incremental mobile revenue by tapping subscribers who are heavy users of mobile phones.
So at the end of September 2004 it accounted for 25 per cent of the GSM mobile services market but commanded over 30 per cent of revenues in the private GSM mobile services market. Rival and market leader Bharti Televentures accounted for over 34 per cent of the subscribers (it is present in more circles than Hutchison Essar) but just 35 per cent of the private GSM operators' revenue.
Hutchison Essar has gone into markets where others have feared to tread first. It has aggressively pushed value added and data services as a key differentiator. And it has stuck to the knitting "� instead of becoming an integrated telecom company like its rivals Bharti, the Tata group or the Reliance group, it has confined itself to offering only mobile phone services.
Again unlike its rivals, Hutchison Essar has been a plodder, moving much more slowly in its quest to become a pan Indian player, not because it doesn't have the cash but because it wants to existing operations to stabilise before moving on to take the next step.
Says Ghosh: "We have at all times, kept the company in a solid financial position "� we have never bet the house." For example, it offers services in 13 circles. But Bharti Televentures operates in 20 circles and Reliance Infocomm in 18 circles.
Ghosh says that Hutchison Essar has concentrated on what he describes as the premium end of the mass market. "We have never positioned our business on price, but that does not mean we charge a premium. We have always matched competitive tariffs in the marketplace," he adds.
So the company's average revenue per user (ARPU) of Rs 488 (in September) is 22 per cent higher than the comparable industry average and over 12 per cent higher than those of Bharti Televentures during the last quarter.
Looking at it in another way, in the 10 circles where Hutchison has been around for a while, it accounts for 43 per cent of the revenue earned by private GSM companies in these markets.
In lucrative Mumbai, Hutch had over 58 per cent of the incremental revenue between July and September this year, compared with the same period in the previous year. Its nearest rival is far behind, with a 36 per cent share of the incremental revenue.
Why did Ghosh and his team decide to grow slowly instead of quickly expanding Hutchison's network and why did they decide to continue being a pure play mobile services company? The answer, of course, is that preferred to first milk high per capita income circles, because its objective in the initial stages of regulatory turmoil was to keep overall debt gearing conservative.
So Hutchison Essar moved to a new circle only after it's operations had stabilised and felt that it could make new investments without putting too much pressure on the balance sheet.
On the second question, Ghosh replies: "The essence of our strategy is that you have to make a trade off "� you cannot do everything. So you focus your resources on certain things which in our case is the mobile services business."
Hutchison Essar, he says, will only get into other telecom businesses if these are required for its subscribers and if it is cheaper to do so rather than buying these services from others.
So what has Hutchison Essar done differently? Take its tariffing strategy. It is aimed clearly at reducing the cost of only heavy users but does not make sense for marginal customers.
So when a few months ago some mobile service companies decided to offer subscribers lower tariffs for calls terminating on their own network, Hutch decided to match the offer.
But it did one thing its rivals did not. Hutchison Essar offered the same low tariffs not only for calls terminating on its network but on all other mobile numbers too.
But subscribers had to pay an extra fixed monthly charge. Hutchison Essar executives say that this was meant for only heavy users who were willing to pay the extra amount; casual users would not be interested in the offer.
Secondly, Hutchison Essar has moved aggressively into offering value added services. The numbers again reflect the story "� data services and value added services account for over 13 per cent of the company's revenues, versus Bharti Televentures' 9-10 cent of revenues.
Indeed, Hutchison Essar was the first to offer an array of services "� Java games (the next Indian operator launched it seven months later), interactive cellphone broadcast services and Microsoft Outlook mail on the phone, among others.
Thirdly, in a bid to raise ARPUs, Hutchison has tried to shift pre-paid subscribers to the post paid category. Analysts estimate that 35 per cent of its new subscribers are post paid, far higher than the industry average of around 20 per cent.
Fourthly, Hutchison Essar has consciously avoided being a heavily sales driven organisation "�instead, it has focused on operations and offering better services. The logic is simple: company executives say that in the mobile services business 95 per cent of the revenues are recurring in nature; the remaining 5 per cent comprises one-time revenues like activation charges.
Says Ghosh: "Sales driven organisations are good at managing one time revenues "�and that leads to the risk of mortgaging the future for the present."
Hutchison Essar's strong focus on ensuring a superior network is reflected in its investments in base stations. For instance, in the three major metros (Kolkata, Delhi and Mumbai) Hutchison Essar has over 1,840 base stations. The holders of the first licences have only 1,540 base stations in the three cities.
Yet Hutchison Essar's carefully crafted strategy has its fair share of critics. Says Gartner telecom analyst Kobita Desai: "Integrated players are advantaged when it comes to bundling solutions like long distance services using bucket plans."
Hutchison Essar's competitors point out that its premium customer strategy is already under attack. Its ARPUs are falling, its edge in the value added services market is being blunted as competitors launch an array of services and chase high ARPUs subscribers.
Hutchison Essar's ARPUs have fallen slightly, from Rs 490 in the April-June quarter to Rs 487 in the July-September quarter. And the ARPUs of rivals like Bharti Televentures are picking up. In the July-September quarter this year, Bharti Televentures' ARPUs were only 12 per cent lower than Hutchison's, versus 17 per cent in the previous quarter.
In markets like Delhi, rivals have grown faster in revenue terms than Hutchison. According to competitors, Delhi accounts for over 21 per cent of Hutchison Essar's total revenues.
But the company's revenues grew by only four per cent in July-September 2004 from revenues in the previous quarter, versus over 13 per cent for Bharti and 19 per cent for Idea Cellular (on a smaller base, though).
Notes a senior executive at a competing mobile services company: "It does not have a pan Indian presence and is missing in lucrative markets like Maharashtra and Tamil Nadu. Its value added services advantage is reducing as we also have launched numerous services. So when it launched services in Punjab with a value added services positioning, it did not create a stir as the existing mobile service operators were already offering such services."
Others claim that Hutchison Essar does not have distribution and marketing prowess equal to those of its competitors. Bharti Televentures, for instance, has over 25 per cent more distribution outlets in Mumbai than Hutchison Essar does.
Says a senior executive of a company that is fighting a bitter battle with Hutchison Essar: "Their speed to market has slowed down and they are overrelying on the brand equity to do the magic."
Some say that Hutchison Essar is aware of this. It has also decided to pare costs. Says Ghosh: "We have followed the old economy business model "� be the lowest cost producer and have a strong balance sheet."
Hutchison Essar, therefore, leveraged the company's global purchasing power with vendors to get lower equipment prices, which has been passed on to the Indian joint venture.
The company also took advantage of attractive terms offered by its foreign associates, especially Hutchison Telecommunications International Ltd, to fund the project Hutchison Essar is also sharing nearly over 30 per cent of its cell sites with competitors and is renting fibre and microwave link capacity from Bharat Sanchar Nigam Ltd wherever possible., in a bid to put the lid on capital expenditure.
So till June 30, 2004, according to analysts, the company's capital expenditure was $ 620 million (over Rs 2,713 crore), to support a subscriber base of 5.2 million "� the per subscriber capital expenditure is much lower than that of most of its rivals.
According to industry experts, the company's bad debts are much below the industry average of 6 per cent of revenues. More importantly, the company has avoided subsidising mobile handsets. So its payback from new subscribers is much quicker than that of its competitors and it has a higher ARPU.
For all this, however, competition and high mobile penetration in the metropolitan cities are pushing mobile service companies to expand to smaller towns and cities. Will Hutchison Essar's strategy work equally in the changing marketplace? That's the big question Ghosh will have to address.
| Readying for a Rs 1,750 crore IPO Hutchison Essar is now betting on bigger things. In the second quarter of next year, Hutchison-Essar is expected to float its maiden public issue in the Indian market. While no one is ready to furnish numbers, analysts expect a $400 million (about Rs 1,750 crore) float, based on a Goldman Sachs valuation of the Indian operations at US $ 4 billion. The company will divest 10 per cent of its equity to the public. Before doing so, however, Hutchison Essar has got down to a complicated restructuring exercise to bring all its circles (many of which were acquired and have others partners like the Ruias of the Essar group, investment bank Kotak Mahindra, and the Hindujas) under one holding company. Analysts say that Hutchison (through the Hong Kong-based Hutchison Telecommunications International Ltd which just went public) will hold directly as well as indirectly about a 55.91 per cent stake in the new company, with the rest of the equity being held by its partners. Hutchison Essar has attractive financials. While Ghosh declines to spell out the numbers, analysts say that the company is expected to have gross revenue growth of over 60 per cent this year (about Rs 4,000 crore) compared with 2003. That is double the estimated industry revenue growth of about 30 per cent. And the company's earnings before interest, depreciation, taxes and amortisation (EBIDTA) margins "� a reflection of its profitability "� are also in line with those of the bigger telecom companies at 38-40 per cent. Hutchison Essar has already built assets of over $1.4 billion (Rs 6,130 crore) on the ground. This year it launched operations in three new circles, Punjab, UP west and West Bengal. It also went through an elaborate exercise of re-launching services in the erstwhile Essar circles of Rajasthan, UP east and Haryana and introduced the Hutchison brand name. Many analysts also make the point that Hutchison Essar is closing the gap between market leader Bharti Televentures and itself. Bharti Televentures has about 2.5 million subscribers "� it has a presence in more circles "� but the difference could go down by a million if Hutchison's deal to buy out Aircel's Tamil Nadu and Chennai circles for US $ 361 million gets government permission (the deal has been stuck with the government so far). The difference between Hutchison Essar and Bharti Televentures in terms of their share of private GSM company revenues is narrower "� Bharti Televentures raked in 35 per cent of the revenue at the end of September 2004, versus Hutchison Essar's 30 per cent. But if the Aircel deal goes through, Hutchison's share of the total private GSM company revenue could be very close to or equal Bharti Televenture's. |
The challenges ahead
- Hutchison Essar's ARPUs have fallen slightly, from Rs 490 in the April-June quarter to Rs 487 in the July-September quarter. And the ARPUs of rivals like Bharti Televentures are picking up.
- In markets like Delhi, the revenues of rivals have grown faster than those of Hutchison. Delhi accounts for over 21 per cent of Hutchison Essar's total revenues.
- It does not have a pan Indian presence and is missing from lucrative markets like Maharashtra and Tamil Nadu. Its value added services advantage is becoming smaller as others have launched numerous services.
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