India Reliance Infocomm's Break-Even In 1st Yr Possible
By Uday Khandeparkar of DOW JONES NEWSWIRES
Monday December 30, 4:57 PM
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MUMBAI (Dow Jones)--Reliance Infocomm Ltd.'s target of breaking even in its first year is achievable, but its high-volume strategy which makes it imperative to attract hordes of customers quickly, and some regulatory issues are potential pitfalls, analysts said Monday.
The unlisted telecommunication services unit of Reliance Industries Ltd. (P.REL) said Friday it aims to be profitable in the first year of operations. The company, which was created about two years ago, is likely to begin its commercial operations in March.
The large number of subscribers it hopes to get, about 1 million a month, will impose a high customer-acquisition cost on the company, said Ramchandra Hegde, telecommunications analyst at Enam Securities.
"In the initial phases, the subscriber-acquisition cost will be high because they will be seeding new technology," he said, referring to Reliance Infocomm's pioneering launch of Qualcomm Inc.'s (QCOM) CDMA technology, which provides limited mobility. All other cellular phone companies in India offer services using GSM technology.
Reliance Infocomm's subscriber target is indeed ambitious, considering the current cell phone users in India total 9.7 million.
Citing a recent research paper by his brokerage, Hegde said Reliance Infocomm could break even on its 200 billion rupee ($1=INR47.95) project if it had a base of about 8.5 million subscribers. The study assumed an average revenue per unit of INR500 a month.
The INR200 billion price tag, though, is for all three phases of the project. In its first step so far, Reliance Infocomm has spent about INR110 billion and break-even could come between 4 million and 5 million subscribers.
"The question therefore is how fast the company can roll out its launch and get those customers," said Hegde, adding deepening the market wouldn't be very difficult since India has a teledensity of just 4.4, meaning for every 1,000 people there are just 4.4 telephones.
Hegde said one problem Reliance Infocomm faces in its race to get a large number of customers is the lack of clarity in rules.
"There is this question of tariffs and some issues on interconnect agreements. You really can't roll out aggressively until these issues are solved. Also, subscribers may not want to commit until they know for sure how much they may end up paying," he said.
Tariffs have become a ticklish issue in India because cellular phone companies, which first came into the country about six years ago, paid high entry fees and they are now complaining that firms like Reliance Infocomm could offer predatory pricing because they haven't had to pay similarly high license fees.
Reliance Infocomm has benefited not just from a lower license fee but also from substantially lower project costs, thanks to its entry at a time when the global market for telecom equipment makers was in a slump.
The fact that the company was laying 60,000 kilometers of fiber optic cable and looking to double that over the next few months meant suppliers keen to get a large customer were only too happy to offer bargains.
"When they started the project some 20 months ago, every telecom equipment maker was in trouble and they got very good prices," said Anant Katare, an analyst at brokerage Khandwala Securities.
But he too said the lack of clarity in telecom regulations is a stumbling block for Reliance Infocomm.
"The telecoms authority could block their efforts to cut tariffs saying it is predatory pricing," he said, adding competitive pricing was key to Reliance Infocomm's strategy.
Reliance Infocomm itself is hopeful it won't be thwarted from reaching its goal. "I would be very surprised if any system prevents us from offering value to the customer," Chairman Mukesh Ambani said at the launch of the company's service last week.
-By Uday Khandeparkar, Dow Jones Newswires; 91-22-2288 4212; uday.khandeparkar@dowjones.com |
