India’s highly lucrative telecom sector has started testing operators in a serious way. Norwegian company, Telenor is having to face investor flak in a big way with regard to its Indian operations. The cost of entering Indian markets summed up to almost US$ 2.08 billion which includes the US$ 1.3 billion worth of stake in Uninor acquired from Unitech.
The entry was rosy with Uninor being everything that a financially streamlined venture should be. The rates were cheap to attract customers in the highly cost-sensitive market, operating costs were minimized by leasing tower access from other companies and outsourcing back-office functions as reported.
Nine months into operations and Telenor bled a US$ 556 million in operating losses. This, would ordinarily, not be a point of concern since the industry is high investment and it takes time to break even but the massive changes that the sector has witnessed in the last 2 years, mostly in the last 12 months, has made it pretty worrisome. There are around 15 operators in the market and tariffs have fallen to now, almost standard, 1 paisa/sec rates across all operators. This fierce competition has brought down margins substantially and new entrants are facing the heat. As established players, who can afford a cut in cash flows, try to move onto the shove from the push while squeezing out new competition, the will to continue in the market needs to be backed very solidly.
Andrew Hogley, London-based analyst at Execution Noble, said, “The market may be getting a bit too optimistic that they may walk away from the project, which isn’t just backed by management, it’s backed by the largest shareholder which is the Norwegian government. The government is more interested in the company’s long-term strategic position and is prepared to carry losses for many years.” Based on data released by the Telecom Regulatory Authority of India (TRAI), top players have started speaking about consolidation in the segment. If Telenor take the Norwegian Government’s vision, it might just be the decision which they can look back to as the defining moment when it genuinely looked at potential in the Indian telecom market and was prepared to stick it out to cash in over a long term.
Recently, WATBlog featured a post on Videocon, which launched its 1 paisa/sec international calling rates, and how they were also facing the heat in the market to expand their subscriber base.
