Warning beeps signal a shakeout
Duncans files fresh plea on duty liability in ICI

Last month when Telstra of Australia and Bell Canada decided to pull out of their cellular ventures in Calcutta and Andhra Pradesh, the mavens in the telecom industry were forced to confront a situation that they have been loathe to admit: a shakeout is imminent in the industry.

As the 25 players in the 22 telecom circles scrambled to take stock of how viable their businesses were, there was another story being scripted as the two big daddies in the sector — the Mittals-owned Bharti group and Hutchison Max — worked hard behind the scenes to snap up the turf as the bit players were scalded by the heat of competition.

Says Sunil Mittal, chairman of the Bharti group: “The shakeout has already started with Bharti taking over three circles in South. There won’t be more than two or three private players (cellular service providers) in the market in the next two years; DTS/MTNL will be the fourth operator.”

In December, the Mittals — the telecom fiefs of the North who straddle the cellular, basic and internet segments — aggressively strode beyond the Vindhyas when they snapped up J.T. Mobiles (the cellular operator in Andhra Pradesh and Karnataka) for about Rs 400 crore.

Bharti quickly followed that up by picking up a 51 per cent stake in Skycell Communications (the cellular operator in Chennai) by buying out Crompton Greaves’ 40.5 per cent holding and DSS Enterprises’ 10.5 per cent stake. The reports are that Bharti is mulling an offer to buy out its foreign partners in JT Mobiles: Jasmine International and Telephone Organisation of Thailand (TOT), which together hold 23 per cent.

Now that Bharti has expanded its operations from Himachal Pradesh in the North to Chennai in the South, the buzz is that it is hoping to grab a slice of the action in the East and the West.

Hutchison Max — the cellular operator in the lucrative Mumbai circle — wasn’t going to be left behind in this high stakes war. Reports swirled in the media that Hutchison had snapped up a 49 per cent stake in Sterling Computer, the other cellular operator in Delhi, for a nifty $ 125 million. By taking the battle straight into the Mittals’ lair, Hutchison is clearly signalling that it wants to come out ahead in the numbers game: it has about 130,000 subscribers in Mumbai and, with Sterling’s roughly 100,000 customers, it should be able to knit two of the hottest cellular cities.

The Mittals are certainly not going to take this lying down. Says one telecom expert: “Hutchison will buy out Sterling Cellular, the service provider in Delhi. If Hutchison decides to offer its customers the same tariff for Delhi and Mumbai, Bharti’s customer base will certainly be affected. To save its turf, Bharti may have to work out an alliance with BPL, the second operator in Mumbai which also has a licence for the Maharashtra circle.”

Sterling Cellular is run by the Ruias who have been trying to get the banks and FIs to bail them out of a sticky situation that arose last August when they reneged on the repayment of FRNs worth $ 250 million to foreign creditors which badly dented their reputation abroad. Reports suggest that the institutions have asked the Ruias to sell their non-core business including their cellular operations as a pre-condition for the bailout.

Why the shakeout?

In 1994-95, when the government first invited bids for cellular circles, investors scrambled into what they thought would be a hugely lucrative market. Several unknown firms formed rag-tag alliances with equally unknown foreign players and bid fantastic sums to secure the licences. Many of them have disappeared since.

Among the first serious foreign player to scurry out of the country was Swisscom, the 33 per cent stake holder in Sterling Cellular. It decided it had had enough in 1998 when the cash losses in the cellular industry were put at a staggering Rs 400 crore a month.

Sanjiv Kanwar, vice-president of Essar, feels the Indian and foreign firms that bid for telecom licences then had grossly overestimated the buying power of the Indian middle-class which was estimated at around two million.

Says Kanwar: “The middle class in India were and are investing 40 per cent of their incomes in building a house and 30 per cent in purchasing equipment like washing machines and refrigerators. Cellular phones are at the bottom of the “must-buy” list. The assumption was based on bad business plans.” Industry experts feel that operators who are unable to meet customers’ aspirations are bound to fall by the wayside.

“The ability or inability of the operator to meet the customers’ needs, failure to maintain cost effectiveness through better management of finances, and the ability to leverage technology for value-added service will determine who will stay on in the cellular industry,” says Anil Nayyar, CEO of Bharti Telecom.

Says a senior executive in Hutchison Max: “The shakeout is not a new phenomenon in the cellular industry. This trend can be seen in many countries and India cannot remain isolated. In India, it may happen in a couple of years, which is faster than in other countries. But the reason is same: the inability of the operators to meet the aspirations of customers.”

Operators who cannot satisfy their subscribers will soon find they are losing heavily in terms of revenue which will then undermine their ability to meet their service/licence obligations. Many of them will then become heavily dependent on FIs for survival.

According to a senior executive of a cellular company that recently sold its stake to another cellular firm, a shakeout in both the cellular and basic sectors is inevitable because of the short-term perspective of the companies that bid for licences in the first round.

“Many companies thought they would make a quick buck without realising that it takes a minimum of seven years to break even in telecom ventures. Further, most of these were not telecom-focused companies and had to juggle their resources between telecom and other ventures. Essar and the Usha group are glaring examples,” says an industry expert.

Under the terms of the new National Telecom Policy 1999, there can be four operators in one circle. While there will be a spate of acquisitions and mergers soon, a few operators in circles will continue to survive due to strategic reasons, says a senior executive of Hutchison. Mittal agrees with this view. “A few operators will remain, but the majority stake in these companies will be controlled by two or three majors.”

There’s one other reason why the shakeout is imminent: when the licences were issued, the government had insisted on a five-year lock-in period for promoters’ equity. That cooling-off period for metro operators came to an end towards the end of 1999; in the case of a few others, the period will expire by the end of this year.    

Calcutta, Feb. 6: 
Duncans Industries (DIL) has moved the Supreme Court for the second time in a month asking it to review a decision that said it must pay an additional Rs 18 crore in stamp duties on its acquisition of ICI India’s fertiliser unit at Panki, near Kanpur.

The duty to be paid on the deal has been fixed at Rs 36 crore. “The entire liability will, however, not be borne entirely by Duncans Industries, the flagship company of the G.P. Goenka group. ICI India has agreed to share the liability on an equal basis,” a senior DIL official said.

The deed of conveyance for the transfer of freehold land and buildings pertaining to the fertiliser business taken over in December 1993, though prepared, cannot be registered till the dispute on the Rs 36.68-crore stamp duty — chargeable on fixed assets — is resolved.

Duncans Industries, which has a turnover of Rs 1,000 crore , had acquired the fertiliser unit from ICI for a consideration of Rs 70 crore.

Revenue authorities in the Uttar Pradesh government have asked the company to pay up stamp duty based on the value of the plant and machinery.

Earlier, a writ petition filed by the company before the Allahabad high court was dismissed. Then, a special leave petition in the Supreme Court challenging the lower court order was quashed last month. The apex court has now been moved again for a review.

“The liability will result in the increase in the value of fixed assets and will not have any direct revenue impact. It will, however, will put a pressure on the depreciation costs,” the official said.

He added tough market conditions had put a strain on the fertiliser division. Duncans Industries markets and sells its fertiliser under the Chand Chhap brand.

Later, talking about the problems in the industry, the official said the pricing policy remains an area of significant concern for all fertiliser companies.

“The withdrawal of the retention pricing scheme on phosphatic fertilisers some years back, for instance, did not prove beneficial to all. It pushed up prices to unprecedented levels. However, the subsidy on these fertilisers has since been restored by the Central government,” he added.    


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