Will Sistema?s big talk pay off in India?

Experts lists several reasons for that. For one, although Sistema is among Russia?s top private companies and derives about 70% of revenue from telecom, it operates mainly in Russia and CIS countries, and not much is known about its practices in markets outside that region.

Secondly, unlike Vodafone?which won Hutch?s stake in a very noisy global bidding against Reliance last year?Sistema?s entry was not all that grand. It bought 10% stake in Shyam Telelink, which operates less glamourous landline services and that, too, just in one telecom circle of Rajasthan for which it paid about $50 million (compared with Vodafone?s $12-odd billion). Recently, Shyam paid for licences to operate telecom services, including cellular, in 21 other circles across the country in a bid to become a national player. However, it is still to be allotted cellular frequencies to operate the services.

Sistema has raised the stake to 51% and has plans of going up to the sectoral foreign direct investment limit of 74% within a couple of years. Shyam chairman Rajiv Mehrotra has emphasised the point that Sistema has already ?without much noise? invested around $600 million in the project.

Sistema president Alexander Goncharuk has reportedly said that the company will invest $4-7 billion in India over the next two years for rolling out telecom networks nationwide and operating them.

Some analysts are skeptical of the kind of investment. ?There is a big difference between four billion and seven billion dollars. This investment in Indian telecom is a significant percentage of Sistema?s annual revenue of about $10 billion (for the first 9 months this fiscal) and of its asset base of about $25billion,? says Ravi Visvesvaraya Prasad, an independent telecom analyst.

Goncharuk, however, has been talking aggressive about his India entry. He said at a select media gathering recently that the investment marked Sistema?s first big entry into the world?s fastest growing mobile telephony market and it was determined to make the most of it. In fact, according to Sistema, it is the first private Russian business to operate in India since the break-up of the Soviet Union.

Goncharuk said in a recent interaction with FE that he agreed with the projections that India would have around 600 million mobile subscribers by 2012. He said Sistema-controlled Shyam Telelink was looking at about 10% share of that market size. India?s mobile market is already nearing a subscriber base of 300 million and Sistema?s projections indicate that it will aggressively go in for new subscribers. About 7-8 million subscribers are being added to India?s mobile networks every month.

Goncharuk said, however, that Sistema will look at the possibility of buying some mobile companies for non-organic growth.

Sistema?s entry into India comes a year after the high-profile entry of UK-based Vodafone in a big way. Vodafone exited Bharti?s 10% stake last year to buy about 74% of Hutch in a venture with Essar. SingTel is another big foreign operator in India and has stake in Bharti Airtel. The general expectation now is that Sistema?s entry into the cellular market will heat up competition and pose a big challenge to existing players as well as new entrants/licensees.

But, despite Goncharuk?s aggressive stance and big plans, some observers are not very sure of any major impact he wishes to make on the market. Said an industry officials, who requested anonymity, ?Sistema will have to focus on semi-urban and rural areas for growth and with mobile tariffs in India being the lowest in the world, I don?t know if they would be able to lower prices much further, considering that a roll-out in those areas is generally costlier for new operators.?

Prasad, too, is doubtful of Sistema?s ability to break tariffs much. ?The cream of the high-paying market has already been taken, and Sistema will have to target the low-paying customers whose ARPUs (average revenue per user) would be less than Rs 150 a month. Not just that, it may be difficult to compete with state-owned BSNL in the rural areas, let alone the established private operators like Airtel and Reliance.? He said Sistema would need to understand the mind of the Indian consumer, who demanded quality services at a very low price, and was highly price-conscious.

Goncharuk doesn?t seem to be deterred by these challenges. He told FE that Sistema was entering India for long-term growth and was keen on taking the stake in Shyam Telelink up to 74% within a couple of years. He said, although Sistema operated telecom services only in Russia and some CIS countries and had not competed with the likes of Vodafone and SingTel so far , it has about 80 million mobile subscribers and around 20 million more, including those using landline, Internet and cable services amidst tough competition in Russia and the CIS.

?We are not entering India to be number10 in the market or be a marginal player. We will grow big within the next few years,?? said Goncharuk. He, however, did not specify either the technology (CDMA or GSM) that Sistema would choose for mobile services, or the total investments the company would make. ?The choice of technology will depend on the availability of spectrum,? he added. As for investments, Goncharuk said, depending on the details that would emerge over the next few months, Sistema might need to invest anywhere between $2 billion and $3 billion within a year or so. Goncharuk said that raising funds for the India project, despite a difficult global economic climate, would not be difficult for Sistema. The telecom business accounts for 70% of Sistema?s projected $13 billion-odd revenue for the entire fiscal, and it is profitable.

Overall, it seems like a case of investor confidence in India and its booming telecom sector. So much so that, even in such a competitive market nationwide, full of big players like Bharti Airtel, Vodafone, Reliance, Tata Teleservices and BSNL, foreign operators like Sistema are keen on investing billions of dollars in new projects right from scratch. It also seems that those who bet on a maximum of four to five telecom players in India (going by the international average in various markets), will have to re-work long-term business plans. Interestingly, Sistema chief Goncharuk himself feels that India?s telecom market is likely to undergo a lot of consolidation. And he is confident of being among the survivors.