Realty major unitech surprised some of India’s most powerful businessmen last week when it walked off with the permission to enter telecom. Though Unitech outplayed the gaggle of companies jockeying for slots in the regulated market, it’s unclear how it will compete with the likes of Bharti Airtel and Reliance Mobile. After all, there are no similarities between realty and telecom, except for the intense lobbying and the immense money that define both sectors. Just hours after Unitech received the Letter of Intent it needed from the Department of Telecommunications, BW’s Jehangir S. Pocha and Rajeev Dubey caught up with Unitech’s Managing Director Sanjay Chandra and asked how his real estate firm will ready itself for the vagaries of telecom. Excerpts.
Q: You have the capital to enter telecom, but what about the competence?
A: For competence, we would look for a partner who would bring domain expertise. We are in talks with a couple of companies, domestic and international. We could go either way, and in the long term we could do both (domestic and international).
Q: How much of the company would you give the partner?
A: A foreign company would have a large stake. We could go up to 49 per cent.
Q: What is the rationale behind getting into telecom?
A: We were looking to diversify. The government announced that they were releasing more spectrum and asking for more mobile operators…We have seen worldwide that there are a few businesses that have made a lot of money with a lot of growth. Telecom is one. We meet many investors and keep hearing how Bharti is doing in India, how Mexican and Chinese telecom companies are doing. So, we decided telecom would be an attractive proposition. The day we applied for telecom licence there was no stated policy of closing the door. But it got closed about a week after that. So, we were happy with our timing.
A lot of people applied for telecom licences after that announcement on 25 September last year (when the government said it would close the door on applications on 1 October). People suddenly began applying for licenses because society mein naam achcha hota hai (it gave them a reputation in society). That was silly. There were 20-30 companies who had never thought of telecom as business. I think we were one of the few people who applied before the announcement, before the rush. We decided in the first week of September and we applied somewhere around 20 September.
Q: Real estate is a cash generator but telecom is about market cap.
A: It is not just about market cap. It is a business that actually generates profits besides market cap. Our company will be a viable business, in terms of cash flow.
Q: One of the attractions of telecom in India is that you can get in fairly cheap. Spectrum costs are quite low.
A: Yes. But then, you have to invest in a lot of infrastructure.
Q: Those costs are also coming down substantially. In comparison, the market caps in the industry are huge.
A: Yes, today market caps are huge but once there are more operators, will they stay as high? Today, every subscriber is valued at about $700-800 depending on ARPUs (average revenues per user). But I think ARPUs will come down a lot, to $400-500 in five years. That’s because calls are getting cheaper and may even become free.
Q: People are talking about a rate of 20 paise per call. Do you think those call rates are possible? Have you looked at investment-to-return ratios?
A: We haven’t gone that far ahead yet. But we do think that we will see a substantial reduction in rates and packaged offerings, that give users unlimited calling for low rates.
Q: Are you sure you will get the required spectrum?
A: I think we have enough spectrum in most of the sectors. In some circles, there is shortage. But there too, with the release of spectrum from defence in the first quarter of this year, it should be available.
Q: In a sense, telecom is just like the real-estate business. You are capturing a fixed commodity (spectrum).
A: Yes (laughs). Instead of a land bank we are now managing an ‘air’ bank.
Q: How did you view the way the Government of India priced spectrum?
A: We didn’t understand the policy first. Now we understand it a little. I think the policy’s goal is to ensure that prices don’t go up for consumers. So, to that effect, it is a fair policy. Getting more operators will ensure that pricing is stable or slows down. Currently, with the existing operators, there is limited competition. New players like us will boost competition and growth.
Q:Are the existing players trying to keep the industry an oligopoly?
A: Definitely. They are not actually open to accepting competition at all.
Q: You are a late mover. How will you make your presence felt? Also, with five or six new players coming in, how do you plan to pace yourself geographically?
A: We are looking at a pan-India roll out. We are depending on spectrum availability. It may get a bit staggered, but it will be a pan-India roll out with product differentiation. We have advisors on our teams still working on that. It will be very early for us to comment but the idea would be to differentiate ourselves. The market is large and growing. We don’t see a problem, with the size of our population being what it is. Every household today, even low-income ones, are using cellphones.
Q: Are you planning to bid for wireless broadband?
A: We want to put our foot in the door and enter the business before we look at other options. I am sure we will look at that. We will look at 3G.
Q: Being successful with that will require real competence.
A: Yes, we are meeting lots of people and reading up. And it is still confusing. I think data is going to be big. CDMA is better for data. But India is seeing a GSM rush. Our services will be on GSM. We won’t be bidding for CDMA licences.
Q: You have to disrupt the market. Are you thinking on those lines?
A: We will have to. Once you enter something, you have to do it properly.
Q: Do you plan to sell out of telecom eventually?
A: If you see, we have never sold any business.
Q: How has the telecom experience been so far?
A: Telecom is a circus. The existing players have turned it into one.
Q: So what went wrong? Only a few years ago, people talked about telecom as India’s miracle.
A: It is a miracle that we had no lines and now we have 250 million. But the players got greedy, stymied competition, manipulated policies and intimidated regulators. Now, people are trying to clean up the mess.
Q:So, what do you think was going on that spoiled things?
A: Partly cartelisation, partly a government very amenable to certain lobbies.
Q: How were the existing operators able to control so much?
A: Very good lobbying skills. We should learn from them.
They were focusing more on regulations than on business.
Q: Reliance or Tatas could be a very good partner. They are just getting into GSM.
A: We are considering all options.
Q: One synergy between your realty and telecom businesses would be the cell tower business.
A: We have been contacted by every tower company. They want to get into pacts on infrastructure sharing.
Q: Companies are making quick bucks in the tower business. A tower costs just Rs 5 lakh to put up. Yet the valuations are so high.
A: Yes, and so existing operators are selling out of their tower companies as they need to show to the market they are unlocking value. Actually, we missed an opportunity here. We make towers... we started as transmission tower manufacturers with Hyundai. Now we do cell phone towers and supply them to most of the operators. Two years ago our towers guy was telling us we should look at the tower leasing business. And we said we will manufacture. Kya rental collect karenge? (why collect rentals?).
Q: What’s your toughest challenge in telecom?
A: Branding and marketing would be the toughest challenge. Regulation is one hurdle that we have crossed. Infrastructure and rolling out will be relatively easier because there is so much of infrastructure.
Q: Are you planning to outsource your operations like Bharti?
A: Possibly. Most likely, yes. That is the quickest way to roll out. There is vendor financing available in the sector…and the Rupee is strong too.
Q: The criticism is that yours is a rent-seeking business. You have cash, you apply, and even though you have no competence, you win under a bizarre first-come-first-serve policy. Then you cash in on your licence by selling stakes to those with competence.
A: We have been talking to partners since the start. So, people have been talking about a builders’ lobby. The proof of the pudding will be when they see that we are not exiting the business. Our mindset is not of a PE or a short-term investor or a trader. So that is going to be something which we are committed to in our business, we will stay invested.
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