Russian Conglomerate AFK Sistema Not Giving Up On India Telecom Venture

on Nov 22, 2012

Russian billionaire Vladimir Evtushenkov has not given up on his company’s venture in India, even after investing $3.2 billion (£2 billion) only to crash against a regulatory wall raised by New Delhi.

**Fight to Recover Mobile Licenses**
The joint venture Systema Shyam Teleservices (SSTL), which operates its telecom services under the MTS brand in India, is poised to invest billions more on top of what it already spent as long as the government stops hindering its business.
In February India’s Supreme Court decided to cancel 122 license permits, which in turn prompted Prime Minister Manmohan Sing’s government to alter the country’s airwave policy. Code Division Multiple Access (CODA) operators now have to go to auction, where prices get inflated as much as 12 times their original levels from 2008.

Sistema Shyam filed a petition against the cancelation of the licenses – if it loses the legal battle the mobile operator will have to choose between completely scratching its investments so far or bid with its rival competitors at the inflated price levels.
Other companies that lost their permits after the Supreme Court’s decision include Norway’s Telenor ASA, Idea Cellular and Emirates Telecommunications. In February the court ruled that the 2008 sale of licenses was illegal due to corruption and some buyers’ ability to manipulate the system. Since then the government has began re-auctioning the airwaves.

Telenor and Idea decided to participate in last week’s auction but incurred nine times higher prices than what they paid in 2008. Emirates Telecommunications simply gave up on its India business, while Sistema sat on the sidelines awaiting a decision on its appeal against the cancelations.
!m[The Oil-to-telecoms Company Doubles Income Despite Lossmaking Indian Business](/uploads/story/875/thumbs/pic1_inline.png)Despite the difficulties, Sergey Savchenko, chief financial officer at Sistema’s Indian unit, said the company is not leaving the country yet. “We have a saying in Russia: once you’ve burnt your hand in hot water, you’ll start to blow at cold water too,” Savchenko said in New Delhi. “We are prepared to spend billions this year for organic and inorganic growth if the government ensures security of our investment.”

**Soaring Profits in Third Quarter, Indian Unit Still at a Loss**
Yesterday the Russian conglomerate reported its Quarterly Financial Results showing a net profit spike of 67 percent to $532.2 million (£333.4 million). Net income, excluding impairment charges from Sistema Shyam, doubled from last year’s third quarter to $653.2 million (£409.2 million).

Sistema Shyam TeleServices also announced modest growth in profits as its net loss narrowed to Rs 495.4 crores* (£56.24 million) on the back of a favourable exchange rate with the rupee. The company said it is open to acquisitions but only after the Supreme Court takes a decision on its petition to have its licenses restored.
The CFO Savchenko says Sistema’s failure to expand its market share in India above 2 percent or 16.6 million active numbers is a result of policy “hindrances”. There are a total of 13 operators in the country offering services to some 906 million devices while the market remains highly competitive with price wars pushing rates down to as low as 0.6 cents.
Some analysts, including Anna Kurbatova working at the Moscow-based BCS Financial Group, think that Sistema should consider either exiting the country or scaling back its operations as investing more could scare shareholders away. “Any further spending by Sistema in India would be negatively perceived by investors,” Kurbatova opined. “India with over 1 billion people may seem attractive, while tough competition there is curbing revenue-per-user growth for market participants.”
Shares in Sistema (MCX:AFKS) have surged by about 9 percent since last week. At 1.15 PM Moscow time the stock was changing at 23.67 rubles or 0.98 percent lower than Wednesday’s closing price.