COAI's Ramachandran: All for 3G

In may last year, when Tata Group Chairman, Ratan Tata suggested that the licence fee for an operator looking to provide 3G services could be fixed at Rs 1,500 crore per operator, he had set the cat amongst the pigeons. For a while now, cellular operators across the country have spoken of launching 3g services and the biggest hurdle has been the availability of spectrum. Spectrum is a national resource and has to be shared with anybody who uses wireless devices -this includes issues of national importance like that of defence, which is where the issue gets a bit contentious.

As things stand, there appears to be a situation where the Anil Ambani-owned Reliance Communications-operating on the CDMA platform-is in agreement with the GSM lobby, which has broadly agreed to sharing costs of re-farming spectrum between operators. "This cost should be apportioned between operators on a service area basis," states T.V. Ramachandran, Director General, Cellular Operators Association of India (COAI), which represents the gsm players. It is estimated that this amount will be approximately Rs 2,000 crore. This, of course, will be substantially less than what Tata had in mind.

Ambani himself is looking to be a GSM player with a presence initially in Mumbai and Delhi. With his group in line with the GSM way of thinking on spectrum, the Tatas are now on their own. This came to the fore at the meeting called by the Telecom Regulatory Authority of India (TRAI), which was intended to call representatives from the defence forces, COAI and the Association of Unified Telecom Service Providers of India (AUSPI), which represents the CDMA sector. Sensing a divergent opinion between Reliance and the Tatas, AUSPI stayed away from the meeting.

Interestingly, Tata had reacted quite adversely to the government's suggestion that additional spectrum for operators would be allocated on the basis of their subscriber numbers. Tata Group company Tata Teleservices (TTSL) has been among the last companies to launch; and the subscriber numbers tell the story. TTSL has a total of 11.34 million subscribers while rival Reliance has a subscriber base of 21.43 million.

For the operators at large, the 3G story is impossible to miss since it will mean offering the user a host of broadband services, which can result in more revenue flowing in. Besides, globally 3G is the logical way forward. COAI in its presentation to TRAI said that higher voice capacity of 3g spectrum would "serve as an ideal platform to deliver low-cost voice telephony". For Tata, the battle ahead looks like a long one since the GSM lobby is looking visibly stronger with Reliance's support.

-Krishna Gopalan

FDI>FII?
For the April-July period, that was the case.

For the past four years, portfolio investments (see FDI Vs FII) into India have outpaced foreign direct investment (FDI). That, economists have warned, could cause volatility in the economy. This year, 2006-07, could see the trend being reversed, at least if the current momentum of FDI is maintained. FDI inflow recorded in the first four months (April-July) of 2006-07, at $1.74 billion (Rs 8,178 crore), is twice the net FII inflow of $855 million (Rs 4,018.5 crore) in the same period. Importantly, the inflows are towards initial investments in projects, pointing to the sustainability of FDI over the next few years. On the horizon are investment intensive projects in the auto manufacturing segment: General Motors plans to invest $300 million (Rs 1,410 crore) in Maharashtra; Nissan and Suzuki have sealed a deal to invest around $700 million (Rs 3,290 crore) in a car and mini-van manufacturing base in Manesar, Haryana; and Japan's Honda is slated to infuse $200 million (Rs 940 crore) into Uttar Pradesh. A resurgence in FDI couldn't have come at a better time for India: Growth, in the recent past, has been demand-led and the threat of inflation is now looming large; FDI, however, will bolster growth from the supply-end and is the obvious hedge. "Investor interest in the manufacturing sector is on the rise, backed by a better business environment," says Saumitra Chaudhuri, Member, Prime Minister's Economic Advisory Council and Chief Economist, ICRA. "There is evidently greater sensitivity to the needs of the foreign investors and hence, one is likely to see greater FDI flow in the country in times to come." However, governments at the Centre and the states would do well to focus on enabling factors such as infrastructure, rule of law, transparent and fast decision making, and most importantly, desisting from populist moves that hurt business.

-Balaji Chandramouli

Fear Of The Foreigner?
A telecom CEO from overseas could be growth-restrictive.

Tata Tele's Green: A security hazard?

The government's decision to hike the FDI limit in telecom to 74 per cent late last year came with a couple of strings attached. Among them was that the majority of the directors on a company's board-including its Chairman, Managing Director and CEO-shall be resident Indians. This was in addition to the Chief Financial Officer and the Chief Technology Officer also having to be resident Indians. This was ostensibly being done to safeguard national interests.

The issue has been debated for a while considering that a company like Hutchison Essar has a CFO who is a foreigner. Now, the decision to award Tata Group company, Tata Teleservices (TTSL), a licence for national long distance (NLD) services, might go against the company apparently because TTSL's CEO, Darryl Green, is a foreigner. Green, who is of us origin, joined TTSL a little over a year ago from Vodafone K.K. in Japan. While Green could not be reached for comment, Tata Group sources said there has been no official communication from the Department of Telecommunications (DOT). For the group which is already in the midst of a serious tussle on the spectrum issue, this development is something that it could have done without. Interestingly, there are quite a few CEOs in other industries in India Inc. who are foreigners-Douglas Baillie is HLL's CEO and almost all the aviation companies have chiefs from overseas. But telecom, at least for the government, is obviously a different kettle of fish.

-Krishna Gopalan

Shopping ITch
Indian IT firms are both the acquirer and the acquired.

i-flex CEO Rajesh Hukku: The Oracle division acquired Mantas

In mid-August, i-flex, now a division of Oracle after a August, 2005 acquisition, went out and acquired us security software firm Mantas for $122.6 million (Rs 576.22 crore). Around the same time, Polaris Software, the buzz in D-street went, was in the process of being acquired. While cross-border acquisitions are becoming common in India, not too many sectors can boast the kind of two-way traffic in deals that it does. Usually, it is the Indian companies that play the part of the acquirer.

IT is different: while 2006 has already seen three acquisitions by Indian firms for prices in excess of $100 million (Rs 470 crore)-Telecom software firm Subex's acquisition of UK's Azure for $140 million (Rs 658 crore) remains the largest acquisition in the it space by an Indian firm-it has also seen two significant acquisitions by global firms, Mphasis' buyout, in May 2006, by EDs for $380 million or Rs 1,748 crore (for a 52 per cent stake; 83 million shares were brought at Rs 204.5 each), and Flextronics Software's by private equity major KKR for $900 million (Rs 4,140 crore).

With the offshoring story being significant enough to warrant a book about the shape of the world, it is easy to understand the attraction Indian it firms hold for transnational companies. Mid-sized companies are the ideal targets: the valuation of most large Indian it firms puts them out of reach of even the most moneyed multinational.

Indian companies shopping for acquisitions have also been modest with their budgets thus far; the prevailing theme has been niche. This description would fit all the six acquisitions completed by it major Wipro in the past eight months. "Our acquisitions are not for revenue accretion," explains Sudip Nandy, Chief Strategy Officer, Wipro, and the man in charge of the company's M&A activities. "They are to obtain technical expertise in a particular area, get a geographical footprint, maybe acquire the customers of the target firm."

Other companies have sometimes been driven by similar motives. Sasken's acquisition of Finnish firm Botnia was prompted by a desire to acquire customers as well as expand its reach. Botnia operates in Finland, Denmark, and Germany and that should help Sasken's cause in the European telecom market. "Botnia's customer base will help further deepen our relationships with Tier I customers," says Rajiv Mody, Chairman and CEO, Sasken. Interestingly, Indian firms have completed their modest acquisitions at modest prices, with the average being between 1.5 and two times revenues.

Deal sizes, reckon experts, will now get bigger. Avinash Vashistha, CEO, Tholons Inc, an IT advisory, believes both the number and the size of the deals will grow. He explains that while companies have paid cash until now, they could use stocks to fund their future acquisitions. "The robust valuation of Indian it stocks provides them with a strong currency," he says. Although Indian it's Big Three have substantial amount of cash on their books (Infosys has Rs 1,272 crore, Wipro, Rs 434 crore, and TCS, Rs 484 crore), they will likely need more to fund big-ticket acquisitions should they decide to make them. While Wipro has thus far been content with its string-of-pearls (as the company calls it) strategy, Infosys has been reluctant to make acquisitions (it has thus far completed only one, of Australia's Expert Infosystems in 2003) fearing issues related to profitability and cultural fit.

However, the very size of these firms-TCS ended 2005-06 with $2.97 billion in revenues, Infosys, $2.15 billion, and Wipro, $2.28 billion-could force them to opt for the M&A route. A thirty or forty per cent growth isn't easy on a large base. "If these companies have to maintain their scorching pace of growth, M&A will become critical," says Vashistha. Will 2006 see an Indian it major making a $1 billion acquisition? It well could.

-Venkatesha Babu