Ringing in a win-win deal

Bharti's outsourcing deal with Ericsson makes good business sense

Bharti Tele-Ventures has outsourced the maintenance and management of most of its networks (13 of the 21 circles it owns licenses) to Ericsson. Earlier, Ericsson had signed a similar agreement with Telecom New Zealand to operate and manage Telecom NZ's entire mobile network.

Bharti is also talking to its other network suppliers, Motorola and Siemens, for a similar tie-up in the other circles. The motive behind all this is simple: to cut costs in a competitive environment.

The success of the WLL-platform, largely due to Reliance India Mobile, has resulted in stiff price competition in the past one year. Average revenue per user has fallen 5 per cent, 6 per cent and 15 per cent in the past three quarters for Bharti.

And according to research done by Gartner India Research in mid-2003, there's ample scope for it to come down further - although client addition will happen at a fast pace, the new additions will be lower-value customers.

In order to attract the (relatively) low income groups, operators may have to lower rates, and this will have to be passed to existing customers as well in order to avoid churn.

The lower ARPUs will partly be negated by higher economies of scale, as was evident in Bharti's results for the December quarter, and also in better focus on corporate customers.

But the jump in profitability last quarter was also due to sharp cuts in costs, and this is where the Ericsson deal fits in - it lowers cost, apart from savings on management time and energy.

Since Bharti will pay Ericsson only for utilised capacity, it will result in significant savings in network operating costs, which accounted for 12.25 per cent of net revenues in the nine months till December 2003.

Besides, the deal helps Bharti get "capacity on demand", but at the same time it will have to pay only for actual utilisation. This will result in a better cash flows as well.

What's more, the agreement links payments, penalties and rewards to network quality and service levels provided by Ericsson. It's indeed a win-win for Bharti, since service levels will be better although costs will be lower.

From Ericsson's point of view, the deal provides an additional source of income - otherwise, revenue streams would be restricted to sale of equipment.

What's shining, what's not

The CSO's advance estimate of an 8.1 per cent rise in GDP this year owes much to the 9.1 per cent rise in agricultural growth, which, in turn, owes much to the -5.2 per cent negative growth in the sector last fiscal. Agriculture is certainly shining, thanks to the excellent monsoons.

But in mining and quarrying, in construction, and in the "financing, insurance, real estate and business services" segment, the FY04 growth estimates are lower than the growth rates in these sectors in the previous year.

Growth in manufacturing is higher, at 7.1 per cent compared to 6.2 per cent in FY03, but lower than 2000-01's manufacturing growth of 7.3 per cent.

As a matter of fact, if we take sectoral growth rates in the last six years the position is as follows:

Agricultural growth is the highest in the current year; Growth in mining and quarrying has been higher than the current year's 4 per cent in FY03 and FY 1998; manufacturing growth has been higher in FY01; Growth in the "electricity, gas and water supply" segment has been higher in FY98 and FY99; construction growth has been higher in all the years except FY02; growth in "trade, hotels, transport and communication" is the highest in the current year; growth in "financing, insurance, real estate and business services" was higher in FY98, FY99, FY00 and FY03; while growth in "community, social and personal services" was higher in FY98, FY99 and FY00.

Seen in this perspective, the two segments of the economy that can be said to be currently shining are agriculture and "trade, hotels, transport and communications." The rest have all shone brighter during earlier years.

India special?

Emerging Portfolio.com Research, which tracks global emerging markets funds flows, points out that Asia ex-Japan emerging markets and Latin America suffered outflows in the first week of this month for the first time since last November.

The research outfit says that concerns that the US Federal Reserve may raise rates soon and the outbreak of avian flu depressed sentiment towards emerging markets.

However, FII net investment into India this month till February 10 was $162.7 million, no mean amount considering the outflows for Asian and Latin American funds, and also considering that global emerging markets funds tracked by Emerging Portfolio.com saw total inflows of only about $245 million during the week.

Is this proof that India is special, or does it have more to do with bird flu?

With contribution from Mobis Philipose