Telecom to ring in $25 bn investments
India offers scope as its operators are going in for infra sharing & hives off their telecom tower arms.
By Joji Thomas Philip, TNN |
NEW DELHI: Notwithstanding high-bid multiples for telecom assets in India, Ernst & Young’s latest report on the rise of telecom in Asia says high valuations will not deter investments in the sector. The country’s telecom sector will see investments up to $25 billion over the next five years, projects Ernst & Young.
“Confidence levels in South Asian markets are phenomenal, especially in India — almost an arrogance,” the report quotes a leading telecom operator as saying. Besides, financial investors share the view that “China is still an unproved market as a number of deals did not come off even post-signature, while India was more transparent”, the report says. The study also states that India’s EV/EBITDA margins are higher than the European average.
While most M&A is expansionist, India is amongst the few markets that offers scope for in-market consolidations, it adds India’s attractiveness stems from the fact that many other Asian markets do not generate scale to justify large investments.
Also, smaller emerging markets are still inherently more difficult to operate based on factors such as ease of doing business, regulatory and political risks, whereas transitional markets such as Malaysia and Philippines are witnessing slower subscriber growth, the report adds. Another possible factor is that governments in other Asian countries which offer exciting opportunities have been slow to liberalise or offer controlling stakes.
For investors, India offers further scope as its operators are going in for large scale infrastructure sharing and are hiving off their telecom tower arms. While noting that this concept has been very successful in the United States, the E&Y study says that financial stakeholders will be able to maximise their asset prices by investing in telecom towers: “Private equity has an appetite for infrastructure assets, but only for established infrastructure contracted to service providers.
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Massive infrastructure needs in India and China may provide a potential private equity role.” (A recent study by telecom regulator Trai has estimated that the country will need about 350,000 telecom towers by 2010, when compared to 125,000 at present.)The E&Y study also highlights several challenges that India will have to address to remain an attractive market. These include convergence of services not taking off, lack of last mile access for private players on the networks of state-owned operators, the need for 3G spectrum for extra voice capacity and realising the mobile virtual network opportunity.
On the Asian stage, the report states that India and China will continue to be the catalysts for telecom growth: “The scale of their recent success and potential opportunities dwarf all other markets bar none.
India has real expertise and a recognised position in the telecom space, while China has capitalised on its inherent strength in manufacturing and technology.” At the same time, it also warns that both countries are confronted with a massive rural-urban digital divide which needs to be bridged for the growth to continue.
India is worse off as its rural-urban telecom penetration gap has been widening, while China has been successfully reducing it, the E&Y study adds. Interestingly, five of the top 10 global markets with regard to subscriber additions are in Asia, and Bangladesh and Pakistan are growing almost as fast as India on a year-on-year basis.
The report also notes that rising minutes of usage by mobile customers across Asia would not compensate for falling average revenue per minute (ARPM). Service providers here therefore need migration strategies — from pre-paid to post-paid and from 2G to 3G. “Price elasticity is low: 60% growth in minutes generates only a 20% increase in revenues,” it states, quoting a telecom operator.
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