RCom set for $5.6 bn order

RCom set for $5.6 bn order

New Delhi: Reliance Communications Ltd (RCom) is getting ready to place what will be, at 70 million lines and an estimated value of $5.6 billion (Rs22,288 crore), the biggest order ever by an Indian telco as the firm gets ready to offer services on the GSM technology platform and take on competitors such as Vodafone Essar Ltd and Bharti Airtel Ltd.

Although the firm hasn’t put a date to the launch, analysts say it could be sometime next year. The full-fledged entry of RCom into the GSM arena—one of the company’s units already offers mobile telephony services using the technology in parts of East and North-East India—will likely result in another price war similar to the one the firm set off when it launched its CDMA-based service in July 2002.

That could mean lower tariffs for customers in a market where the average rate for local calls is less than Re1 a minute, or 2.5 cents, among the lowest in the world. It could also mean lower profits for phone companies.

RCom has begun talks with telecom vendors such as LM Ericsson AB, Alcatel-Lucent SA and Motorola Inc. RCom’s discussions with suppliers comes in the wake of the permission granted by the government last month to telcos to use multiple technologies to deliver mobile services. RCom, already India’s second largest mobile telephony firm by customers including its GSM unit, has 38 million of them, the majority (33 million) on the CDMA technology platform.

GSM is a more popular technology in India and telcos using it serve around 75% of the country’s 210 million cellular subscribers. The GSM subscriber base is expanding by almost seven million a month compared with two-three million for CDMA.

“We are already in discussions with equipment vendors for?the?GSM?roll-out, and in addition, we are also expanding our passive infrastructure of telecom towers that could be used for GSM services across the country," a senior RCom executive, who preferred anonymity, said. “The roll-out will be quick, especially since we have our own tower network."

Vendors are gearing up for the contract and indicated that the pricing would be very competitive. State-run Bharat Sanchar Nigam Ltd, or BSNL, had, earlier this year, placed an order for around 12 million phone lines with Ericsson at a price of $107 per line. “RCom is talking about a contract that could be for as many as 70 million lines and it is a tough customer," said a senior executive at a European vendor, who did not wish either himself or his firm to be identified.

At around $80 a line, the RCom GSM contract will be worth $5.6 billion. “Setting up a nationwide network could take anywhere from 6-12 months," the executive added. An analyst said RCom is pushing hard to keep the per line cost at around $50. “They (RCom officials) have said the first investment they would be making would be Rs5,000 crore in a pan-India GSM network and would not like to exceed $50 per line," said Naveen Kulkarni, an analyst with Religare Securities Ltd.

RCom will also be looking to leverage its existing CDMA network to reduce expenses on network roll-out costs. “They could minimize passive infrastructure costs of setting telecom towers (and enclosures housing radio control equipment), which account for 60% of the total roll-out cost," Amrish Kacker, Singapore-based Asia head at telecom consultant Analysys Consulting, said in a telephone interview.

Other analysts tracking RCom said the company could also look at a Bharti Airtel-like model where the network grows in tandem with the business. “If RCom starts only with the four metros, or even looks at rolling out GSM services in phases across the country, the contract may start with, say, 10 million lines and hit 50 million in two to three years," said Yogesh Kirve, a telecom analyst at Mumbai-based Anand Rathi Securities Ltd.

RCom officials declined to comment on any projections regarding growth of the company’s GSM business. According to Mumbai-based Macquarie Research, the company will launch GSM services across the country next year. “We expect RCom to have a GSM subscriber base of 12.8 million by March 2009, 21.6 million by March 2010 and 28.6 million by March 2011," Shubham Majumder, an equity analyst at Macquarie, wrote in a note last month. RCom adds about 1.5 million CDMA customers a month currently.

The RCom executive said that the company plans to grow its existing GSM business (in states such as Orissa, Bihar, and West Bengal), which is managed by subsidiary Reliance Telecom Ltd, to “15 million lines this year".

Apart from setting up a core GSM network, RCom will also need to set up at least three to four times more telecom towers than it currently has. This is because radios used in GSM-based networks have a shorter range and more towers are required to cover the same area.

RCom aims to have 40,000 telecom towers by March 2008. These towers are managed by Reliance Telecom Infrastructure Ltd, which RCom spun off into a separate company earlier this year and has since sold a 5% equity stake in it for $337.5 million to seven unnamed private equity companies in July.