Wednesday, March 31, 2010

Who will be the first beneficiary / victim of the telecom consolidation?

Disclaimer: All views expressed in this post are my personal views, and do not necessarily reflect the views of any entities, that I may be associated with. I have no financial investments in any of the companies mentioned. Use all information at your own risk.

On this day, when the Bharti-Zain deal has been finally sealed, I will like to propose a hypothesis related to the much-talked-about and inevitable consolidation in the Indian telecom industry. I am of the view, that, given the current scenario, among the bigger players, Idea Cellular will be the first one to cash out or merge with another player within the Indian market.


I believe, an Indian telecom player, needs to satisfy either of these 3 conditions, to sustain for medium-long term:

1. Be (comfortably) amongst the top 3 players, in terms of total subscribers
The latest (Feb '10) wireless subscriber figures available show the market share of the various players:


Vodafone 17.2%
Loop 0.5%
Idea / Spice 11.0%
Bharti 22.1%
Reliance 17.6%
HFCL 0.1%
Sistema 0.6%
Tata 11.2%
Aircel / Dishnet 6.2%
Stel 0.1%
Unitech 0.6%
MTNL 0.9%
BSNL 11.8%

Bharti, Vodafone and Reliance satisfy this particular condition.

2. Be consistently amongst the top 3 players, in terms of absolute market share growth
Comparing Feb '10 figures to Mar '09 figures shows the following growth in market share for the various players


Vodafone -0.3%
Loop -0.1%
Idea / Spice 0.0%
Bharti -1.9%
Reliance -0.9%
HFCL 0.0%
Sistema 0.4%
Tata 2.2%
Aircel / Dishnet 1.5%
Stel 0.1%
Unitech 0.6%
MTNL -0.3%
BSNL -1.5%

Tata (Docomo and other operations), Aircel and Unitech (Uninor) satisfy this condition.

3. Be amongst the top 3 players, in terms of percentage increase in market share
Comparing Feb '10 figures to Mar '09 figures shows the following percentage increase in market share for the various players (percentage increase = market share by end-Feb '10 / market share by end-Mar '09)


Vodafone 98%
Loop 89%
Idea / Spice 100%
Bharti 92%
Reliance 95%
HFCL 59%
Sistema 368%
Tata 125%
Aircel / Dishnet 131%
Stel            infinity
Unitech            infinity
MTNL 77%
BSNL 89%

Stel and Unitech are new players and had not started operations in Mar '09 (hence, the 'infinity' in the table against their names). Leaving these, the players that satisfy this condition are Sistema, Aircel and Tata.


So, as per my view, if any of these conditions are not being satisfied, it makes little sense for the player to remain in the industry. This is especially true when there are 13 players (and more entering as we speak) in a sector that is globally seen to have 4-6 players, on an average.


So, the top contenders for any kind of consolidation are Idea Cellular & BSNL (among the bigger players) and Loop, HFCL & MTNL (among the smaller players). I have kept Stel out of the consideration, since it is a very new player and many of my conditions might not exactly be applicable to it.


Among these 5 firms, BSNL and MTNL are government-owned entities, and given by what we have seen in the Indian context, the maximum that will happen with these companies is - merger of MTNL & BSNL and / or IPO of BSNL.


So, Idea Cellular looks to be the top contender that will be involved in a major consolidation event. Loop and HFCL might get gobbled up by some player on the way.


If one looks at Idea's performance in various circles in the period under consideration (Mar '09 - Feb '10), it's subscriber base has grown by 44% in the 11 months, same as the overall market growth rate. I would have expected it to grow at something above market growth rate, given it is the fifth largest player and someone like Vodafone (having 55% more subscribers than Idea) has grown at 41% in the same period.


Even this growth for Idea has come partly because of entry into newer circles (it was operating in 15 out of the 22 circles in Mar '09 and has since entered the remaining 7 circles).

A look at the market shares and the growth / decline in various circles shows some challenges that the company is facing



Market share (Feb '10) Market share change from Mar '09
Andhra Pradesh 13.9% -2.7%
Assam 0.8% 0.8%
Bihar 8.5% 4.4%
Delhi 9.2% -1.8%
Gujarat 17.4% 1.2%
Himachal Pradesh 5.2% 1.0%
Haryana 15.3% -0.6%
J & K 0.7% 0.7%
Karnataka 7.1% 0.1%
Kerala 22.2% -4.4%
Kolkata 2.9% 2.9%
Madhya Pradesh 23.2% -1.2%
Maharashtra 21.7% -2.2%
Mumbai 5.5% 1.6%
North East 0.3% 0.3%
Orissa 3.9% 3.9%
Punjab 16.4% -0.3%
Rajasthan 7.0% 1.6%
Tamil Nadu 1.4% 1.4%
U.P.(E) 8.6% 1.2%
U.P.(W) 19.3% -1.7%
West Bengal 2.5% 2.5%


1. The company has lost ground in most circles that used to be its major strongholds (e.g. Andhra Pradesh, Kerala, Madhya Pradesh, Maharashtra, U.P. (W))
2. A lot of the major gains have been in circles where operations have recently been launched (e.g. Kolkata, Orissa, Tamil Nadu, West Bengal). It is to be seen how much of this can be sustained going forward.


It has done well in some circles, such as Bihar, Gujarat, Mumbai, Rajasthan, U.P. (E). The growth, though, has mostly come on a much smaller base (except in Gujarat). This has enabled it to sustain it's overall market share in the country at 11.0% in the period under consideration. However, it is not clear how this share will be defended from hereon.


I understand that my analysis has entirely been based on the subscriber numbers and I have not looked at a lot of aspects that are internal. I have started from the assumption that consolidation is inevitable and the pricing pressures, number of subscribers gives a strong first-cut indication about the player conditions and potential future outlook.


I also want to propose, the different scenarios that might become the characteristic of the landmark consolidation event:
Scenario 1: One of the major foreign telecom companies acquiring significant shareholding from promoters (structure will become similar to Uninor). One possibility can also be Telekom Malaysia increasing it's stake.
Scenario 2: A major Indian industry group entering the telecom space through acquisition of a controlling stake
2.1 may be some one who gets a lot of money through selling an existing group company and wants to enter a different sector (e.g. recent diversification by the former Ranbaxy promoters)
OR
2.2 existing groups with diversification / ambitious growth plans (Mahindra? ITC?)
Scenario 3: A player like Tata, after increasing it's market share through organic route, wanting to catapult in the Top 3 through Idea's acquistion
Scenario 4: Idea merging with a smaller player (Aircel?) to retain / enhance it's falling market position.

I will keep an eye on this sector to see how things emerge. It will also be interesting to see, how much of the above was just my imagination, hard at work.

Monday, March 29, 2010

Warren Buffett's letter

Warren Buffett writes these famous annual letters to the shareholders of Berkshire Hathaway. Some interesting excerpts from his recent letter

"Our metrics for evaluating our managerial performance are displayed on the facing page. From the start, Charlie and I have believed in having a rational and unbending standard for measuring what we have – or havenot – accomplished. That keeps us from the temptation of seeing where the arrow of performance lands and then painting the bull’s eye around it.

I have been in dozens of board meetings in which acquisitions have been deliberated, often with the directors being instructed by high-priced investment bankers (are there any other kind?). Invariably, the bankers give the board a detailed assessment of the value of the company being purchased, with emphasis on why it is worth far more than its market price. In more than fifty years of board memberships, however, never have I heard the investment bankers (or management!) discuss the true value of what is being given. When a deal involved the issuance of the acquirer’s stock, they simply used market value to measure the cost. They did this even though they would have argued that the acquirer’s stock price was woefully inadequate – absolutely no indicator of its real value – had a takeover bid for the acquirer instead been the subject up for discussion.

When stock is the currency being contemplated in an acquisition and when directors are hearing from an advisor, it appears to me that there is only one way to get a rational and balanced discussion. Directors should hire a second advisor to make the case against the proposed acquisition, with its fee contingent on the deal not going through. Absent this drastic remedy, our recommendation in respect to the use of advisors remains: 'Don’t ask the barber whether you need a haircut.' "

Monday, March 22, 2010

M.B.A.

Interesting view from Matthew Stewart

"For companies, M.B.A. programs can be a way to outsource recruiting. Marvin Bower, McKinsey’s managing director from 1950 to 1967, was the first to understand this fact, and he built a legendary company around it. Through careful cultivation of the deans and judicious philanthropy, Bower secured a quasi-monopoly on Baker Scholars (the handful of top students at the Harvard Business School). Bower was not so foolish as to imagine that these scholars were of interest on account of the education they received. Rather, they were valuable because they were among the smartest, most ambitious, and best-connected individuals of their generation.Harvard had done him the favor of scouring the landscape, attracting and screening vast numbers of applicants, further testing those who matriculated, and then serving up the best and the brightest for Bower’s delectation. "

Addendum: I guess the chain continues, and to some level, various private equity firms and corporate houses (for senior management positions)  have outsourced their recruiting to firms like McKinsey.

Saturday, March 20, 2010

I don't know if, I should stay

One of the better email forwards I received ...

-------------------
The name is good, the brand is big
But, the work I do is that of a pig.
My Future, or the Brand; what is my way?
I don't know if, I should stay.


To work, they have set their own way
Nobody will care to hear what I say.
My will be NULL, they wont change their way
I don't know if, I should stay.


The project is in a critical stage,
To do good work, this is the age.
This dilemma is worsening day by day
I don't know if, I should stay.


The money is not good, the place isn’t as great
And the decline is at a very rapid rate.
Should I go for the opportunity, or wait for loyalty pay
I don't know if, I should stay!


The managers don't know what they talk,
The team doesn't know where they walk.
That's a bad situation, what say?
I don't know if I should stay.


I can go to any other place
But, what if, I get the same disgrace?
I can't keep switching day by day
I don't know if, I should stay.

The -ves are more, the +ves are less
Then why have this unnecessary mess?
No more will I walk their way,
It's all done, I won't stay.