Should Axiata stay or leave?

  • Players who left India after pumping in investments include NTT Docomo and Etisalat
  • Good for Axiata to lower their stake, sell it off as India is going to be more competitive

 

Should Axiata stay or leave?

 

THE now-defunct British rock group The Clash has a famous song from its 1982 album Combat Rock titled ‘Should I Stay or Should I Go Now?’ that oddly reminds me of the dilemma faced by foreign telco players in the pressure cooker-like Indian telco environment.

Specifically, this part of the song brings to mind the players who have suffered and those who continue to suffer somewhat in India:

Should I stay or should I go now?

Should I stay or should I go now?

If I go, there will be trouble

And if I stay it will be double.

In any relationship (even a business one), the decision to leave is often the hardest. Certainly, the Indian telco market, which was once the Holy Grail of South Asia for foreign telcos, has had its fair share of telcos who exited the market and country after being badly burned. Players who left India after pumping in considerable investments include NTT Docomo and Etisalat.

A Bloomberg article in late May reported that foreign telcos (including those who have exited the Indian market) have chalked up as much as US$23 billion (RM91.64 billion) in losses in India. According to the article, this includes US$7 billion in losses/write-offs by the parent of Malaysian telco Maxis Bhd, namely Maxis Communications Bhd, and US$356 million by rival Malaysian telco group Axiata Group Bhd.

Maxis Communications owns a 74% stake in Aircel, and according to a Bloomberg report in March citing sources, Malaysian tycoon T. Ananda Krishnan who has backed Indian telco Aircel Ltd since Maxis Communications first invested in it in 2006, will lose the US$7 billion as a result of the telco’s bankruptcy filing.

Burdened by the hypercompetitive market and financial challenges, Aircel eventually filed for bankruptcy in late February this year. Axiata, which also entered the Indian telco scene in 2006, has been more fortunate. Although losses from its Indian associate Idea Cellular pushed the telco group into the red for the first quarter ended March 31, 2018, the telco’s group chief executive officer Jamaludin Ibrahim said they were “very optimistic” about the Indian market.

He said during a media briefing in late May that looking ahead three to four years from now, there’s no reason to exit India. He added that there’s no reason to sell their stake in Idea, and that they may as well wait for the industry to get better. “If we wanted to sell, it’s because we’d get a better return elsewhere,” he had said at the time. (Read the whole story here.)

A lesson learned

When Maxis Communications and Axiata entered India in 2006, competition was stiff but nowhere as bad as it became when India’s richest man Mukesh Ambani’s Reliance Jio Infocomm Ltd took the Indian telco market by storm in 2016 with free voice services for life and initially free data services to lure subscribers away from its competitors.

Reliance Jio’s strategy worked, forcing smaller operators to exit the hypercompetitive Indian telco industry, while the bigger players such as Idea Cellular and Vodafone Group Plc’s Indian unit are now merging to fight their competition.

Post-merger, which is expected to take place within the second quarter of this year, the merged Idea-Vodafone entity will be the biggest telco player and is expecting to give remaining rivals Reliance Jio and the new entity that results from the Bharti Airtel-Telenor India merger, a run for their money.

However, a telco analyst Digital News Asia spoke to doubts the Indian telco market is going to get any better, or easier for the players in it. Frost & Sullivan vice president of ICT, Asia Pacific, Ajay Sunder pointed out that in the case of Aircel, it was never a profit-making entity.

What could have Maxis Communications have done better with Aircel? “One of the challenges in India is that there is a big dependency on scale, especially in a competitive market like India. So, the decision to go for the Aircel investment could have been evaluated a bit more.

“Aircel never had the complete Indian telco market, it only had seven circles out of 21. It was always going to be more focused than those who had 15 circles or more, such as Idea and Vodafone,” he said.

Although Maxis Communications still has a significant stake in Aircel, he believes that the former should cut their losses and exit the Indian market rather than try to hope and sustain the Aircel business.

“In 2006, when Maxis had the initial investment, the situation was not as bad in terms of competition. But over the years the competition has increased and the Indian telco market has seen eroding ARPU (average revenue per user) quite fast,” he highlighted.

Ajay noted that the last two years have seen existing telco players who have really wised up to the market, in the way they have been coming up with data plans, unlimited calls and such. “That’s why we are seeing the latest bloodbath, in terms of the Idea-Vodafone merger and some of the other telcos exiting the Indian market.”

What Axiata can do

While Maxis Communications and Axiata appear bent on staying the course in India in the short to mid-term, Ajay thinks Axiata may want to decide differently. “I still think that it’s a good time for Axiata to evaluate their stake in the Idea-Vodafone entity and now they want to cut back their stake also. That should be something that they should do, because I believe some of that money can be used for other countries in the region or even for other markets beyond South Asia,” he opined.

He emphasises that is good for Axiata to lower their stake in the entity or sell it off because India is going to be a lot more competitive. “As a holding company, they have the option of going to a lot of other countries. This could be an opportunity for portfolio re-evaluation, whether they want to remain in India.”

India is going to be a lot more competitive for the next three to four years, he said, whereby there are likely to be more exits given the competitive nature of the market. He added that this is going to make the sustainability of the business even more difficult for the Idea-Vodafone entity.

Commenting on the outlook for the Indian telco market for the next three to five years, he believes that ARPU will go down further given that Reliance Jio introduced the unlimited voice 99 Indian rupee plan. (This plan, now priced at 98 Indian rupees, spurred competitors Bharti Airtel and Vodafone to introduce similarly-priced plans.)

One thing the telcos should relook is the enterprise market as they have focused significantly on the consumer side of the market, Ajay said.

“We have not seen any strong competitors in enterprise mobility services. That is a grey area that the Idea-Vodafone entity could look at given Vodafone has some enterprise mobility and IoT solutions.”

Another telco analyst who declined to be named concurred that Axiata should indeed exit India and in fact, he thinks the telco group will do so by the end of the year. “Their stake in the merged Idea-Vodafone entity will be diluted to less than 10%, it is just a matter of time before they exit India. It doesn’t make sense for them to stay in that market, because the loss of control in their investment is inevitable,” he opined.

If the above doesn’t temper Axiata’s enthusiasm about the future of the Indian telco market, I don’t know what will. Perhaps the analysts are right and the telco group should exit the market and invest in other opportunities outside of Malaysia. It certainly does make sense given the unpredictability and hypercompetitive nature of the Indian telco market, which is expected to persist in the mid-term, at least.

One could say the same of Maxis Communications as well, which is still supporting the struggling Aircel. While both companies continue to hold their cards close to their chests, it will be interesting to see which one exits the Indian market first.

 

Related stories:

CIMB remains neutral on Malaysian telcos

Axiata not pulling out of India yet

Maxis launches ONERetail

 

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