Capitalizing on India's Cellular Market: Watch Vodafone

Includes: HTX, VOD
by: Semi-Standard Deviation

Emerging markets have rewarded investors with tremendous gains over the past year. The BRIC countries have earned a majority of the attention, with stellar growth and favorable economic conditions. With any market though, an investor must make a smart decision and do his homework to keep from throwing money at the wind.

The Bombay Sensex has seen a good dose of volatility in the past two months, coming close to 14,000 pts and dropping just below 13,000 5 days later. Then, more recently, between January 3rd and 10th, the index fell 4.6%. With this much volatility and investors skittish about potential overvaluation of the Indian market, it's important for investors to find a company whose industry and product growth potential can weather a possible market downturn. You should find just that within India's cellular market.
In November of 2006, India reached 100 million GSM subscibers. This places it at 3rd, behind China and Russia, in national subscribers to GSM. All told, there are 140 million cellular subscribers in India. With a total population of 1.1 billion, this means that 12.7% of the population uses cell phones. Compare this to China, with 449 million subscribers and a population of 1.3 billion, with 34.5% saturation. Both countries have cellular concentrations in their major cities, with some spotty coverage in outskirt villages. If you look at this graphic, you'll see that the major cities of Delhi, Mumbai, Kolkata, and Chennai make up about 20.7% of cellular usage (source:


Not only does the country have room for growth, but the government's goal is to have 500 million subscribers by 2010. GSM will provide the pathway for this growth as will expansion of companies like Texas Instruments (NYSE:TXN).

With that in mind, finding an entrance into the Indian cellular market can be difficult. Looking at the providers shown in the graphic above, many of the companies have operations in other countries and are not a pure play.

Hutchison Telecom Int Ltd (HTX) is a multinational corporation based in Hong Kong, whose Indian operation, Hutchison Essar, has an impressive 25% market share in Delhi, Mumbai, Kolkata, and Chennai. They also have an impressive presence in the smaller cities and more rural areas of India. Their business in India is just a piece of the puzzle, as Hutchison Telecom has operations in a number of Asian markets.

HTX isn't the solution to enter into this market, as they are looking to sell off the Hutchison Essar division, for 14 billion USD. Maxis Communications BHD [5051.KU], U.S. private-equity company Texas Pacific Group [TPG.XX], Vodafone Group PLC (NASDAQ:VOD), India's Reliance Communications Ltd. [532712.BY], and India's Essar Group are among those interested in buying the company. Whoever buys this division will benefit from the strong market presence, GMS capability and growth potential.

A company with a small footprint in the cellular market is Mahanagar Telephone Nigam Ltd (NYSE:MTE), which trades in ADRs on the NYSE. Unfortunately, they have a small market presence (2.3 million subscribers) and offer cellular service only in Delhi and Mumbai. Land-line phone services bring in the majority of their revenue. Revenue from mobile services only brought in 10% of their revenue in the last fiscal year. Between March and November, their cellular subscribers have grown 21%. The cellular market in India stands to benefit their business and if they can increase the scope of their internet services, the potential of that market will also benefit them.

My focus would be on the acquisition of Hutchison Essar. With a large market share in India's major cities and presence outside of the cities, they will be able to capitalize on India's cell phone expansion. Hutchison has said that it will not accept anything less than 14 billion and many think that the offers are creeping closer to 20 billion. Vodafone is a major player in this acquisition, but they have some hurdles to overcome.

  • Vodafone has put forward a non-binding offer of 16.5 billion, but Essar has a chance to match this, and with the backing of Reliance Communications, the ante could come close to 20 billion.
  • Essar Group's current 33% stake in the company gives them substantial power if Vodafone were to try to make changes to the company post-acquisition.
  • If Vodafone does indeed acquire Hutchison Essar, the share price might drop pending the final purchase price. I would wait and see the outcome of this before making a move on Vodafone. If its shares drop when the offer is announced, I would pick them up. The street thought Vodafone spent too much when it acquired Turkey's Telsim Mobil Telekomunikasyon, but Vodafone quickly turned that company around and it is in a much better position. Facing cellular saturation in the European market, Vodafone has found great growth potential in emerging markets and acquiring Hutchison Essar would only strengthen its business as India's cellular market begins to explode.

    VOD 1-yr chart

    vod chart

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