Thursday 28 Mar 2024
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This article first appeared in The Edge Malaysia Weekly on May 21, 2018 - May 27, 2018

PERHAPS it was already written in the stars when superstar Shah Rukh Khan launched Reliance Jio with India’s richest billionaire Mukesh Ambani and his family in December 2015 — all the more so when Jio gave free local calls and cheap data and declared it wanted a 50% revenue share within four years.

Jio’s over US$30 billion investment in the sector is sizeable relative to Ambani’s US$40 billion net worth, which is triple the market capitalisation of Axiata Group Bhd and comparable to Singapore Telecommunications Ltd’s. Ambani’s flagship conglomerate and oil and gas giant Reliance Industries Ltd has a significantly larger market cap than the two regional government-linked telecommunications companies combined.

SingTel too has had to contend with red ink at its 39.5%-owned Indian associate Bharti Airtel Ltd — despite having a strong partner in Indian billionaire Sunil Mittal, who controls India’s No 1 mobile phone operator that recently made its first loss in 15 years.

The cut is even deeper at Axiata Group, whose 16.34%-owned Indian associate Idea Cellular Ltd has been loss-making for at least six quarters. While the completion of Idea’s merger with Vodafone as early as June this year could herald a new largest player for India, Axiata could take in easily RM1 billion impairment losses on the carrying value of Idea shares that have fallen over 40% this year. British operator Vodafone last year recorded impairment loss of more than €3 billion on its Indian unit.

Axiata’s stake in the merged Vodafone-Idea is likely to fall below 10%, making it the smaller of two foreign telecoms partners of Idea, which has named billionaire Kumar Mangalam Birla of the Aditya-Birla group as chairman. Birla, with a 26% stake, has the right to level holdings with Vodafone, which has 45%. If Birla buys Axiata’s stake, it will need to buy less shares from Vodafone to have a larger say.

Axiata, which has invested over RM5 billion in Idea, is expected to say it is in no hurry to sell. Yet, its minority position and the challenging industry landscape mean it would likely welcome a fair offer for its stake, which, despite losses, can raise at least RM1 billion cash to be used to expand other priority areas like its telecoms tower business or increase dividends.

The latter is something shareholders may want to ask Axiata for at its annual general meeting this Wednesday.

“The completion of the Idea-Vodafone merger could lead to an accounting adjustment and write-off, which may not necessarily reflect the intrinsic value of the investment,” says a source, who notes that three of the nine international players that invested in India in 2012 have exited (Etisalat in 2012, Bahrain Telecom in 2012 and DoCoMo in 2014). Two others have merged with larger players, including Telenor’s Uninor with Bharti, while Aircel has filed for bankruptcy.

Vivek Sood, Axiata’s group chief financial officer who served as CEO of Telenor India in 2015,  had this to say about the ongoing battle for top spot in India: “The disruption to the Indian market is unique and unprecedented, giving rise to a devastating price war and placing undue financial pressure on an already hyper competitive market.”

Are institutions like Axiata handicapped from the get-go? As seen with Jio, a deep-pocketed investor with an entrepreneur at the helm seems to have greater advantage and less to deal with investors asking about dividends.

“Yes, Idea and material public-listed companies are partially handicapped due to the need to balance short-term returns and long-term value creation. But that can be overcome with proper strategic communications to stakeholders. Greater lesson on hindsight — if we had known that there would be such a player, we would have exited India earlier. But it was impossible to predict that such an unprecedented disruption would ever happen,” Vivek tells The Edge.

While detailed and rigorous business case analysis is done before foreign investments are made, “it is still very hard to predict all the risks”, he says.

Is there a chance of the “Jio surprise” happening in other markets that Axiata is in, especially Indonesia?

“There is always a chance, but the odds are very low for any new company to be able to invest the same amount in four to five years, that had taken the entire industry a combined investment of 20 to 30 years. Even deep-pocketed operators would not take a risk of this magnitude. Also, there are not too many markets left with double-digit growth for such a situation to arise. Scenarios that lead to this are asymmetric regulations that bring about market failure. Being ahead of the curve in data provisioning and leading in network strength will minimise the risk of disruption and we continue to do that in all of our markets, reducing any exposure to such a disruption,” he says.

 

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