DoCoMo's $2.7 billion investment in India

Mehul Srivastava and Kenji Hall
17 Nov 2008

Early and enthusiastic adopters of 3G phones, Japanese are some of the world's most sophisticated consumers of cellular services. But Japan is not a growth market. It's now almost saturated, with nearly 82% of the country's population of 127 million toting cell phones.

Struggling with moribund sales at home, Japan's NTT DoCoMo is now looking to a very different type of market, India. Indian wireless networks aren't anywhere as advanced as those in Japan, but India is the world's fastest-growing cellular market, adding as many as 9 million new customers a month. That's why DoCoMo, the largest Japanese cellular operator, on Nov. 12 announced it is picking up a 26% stake, worth $2.7 billion, in Tata Teleservices, the No. 6 player in India.

DoCoMo expects there's plenty more room to grow, too. India has just over 300 million subscribers, of which Tata Teleservices (which sells under the brand Tata IndiCom) has cornered about 29 million. With incomes rising sharply in urban India, and somewhat slower in rural India, estimates for growth in India's market are pretty exuberant; Gartner (IT), the research firm, thinks that cell-phone subscribers could more than double, to 737 million subscribers, by 2012.

The DoCoMo-Tata deal is just the latest in a flurry of merger-and-acquisition activity involving India's telecom industry. Vodafone (VOD) paid $13.1 billion for a 67% stake in Hutchison Essar last year, valuing each Hutch subscriber at more than $800. (That's in a market where revenue per customer tends to be less than $10 a month, on average.) Not all the deals have panned out, though. This year, Reliance Communications (RLCM.BO) and Bharti Airtel (BRTI.BO), the country's two largest mobile-phone operators, faced off in a bidding war for a stake in South Africa's MTN, even though no deal resulted.

High valuations

Making money in India is another story. Bitter competition for India's price-sensitive, mostly prepaid customers has resulted in high churn, massive advertising budgets, and a per-minute calling rate that's often less than 2¢ a minute, the lowest in the world. DoCoMo is entering a market where valuations remain high, even overheated, while revenues per subscriber are likely to remain low for the foreseeable future. But at the same time, says Neha Gupta, an analyst with Gartner, the price it is paying for acquiring this stake is offset by the growth potential. 'India has a growth story to sell,' she says, 'and the Tatas are in a great position.'

The partnership could yield other benefits as well. Tata's Videsh Sanchar Nigam, a wholesale bandwidth provider in countries such as Singapore and Vietnam, has had no foothold in Japan or other northern Asian nations. In India, Tata Teleservices operates a CDMA network but has applied to acquire GSM licenses, where DoCoMo's technology could prove crucially important.

Tata Teleservices, which is privately held by the investment arm of the sprawling Tata Group, is reportedly unprofitable but has about $2 billion in ambitious development plans. Hence one appeal of a DoCoMo alliance for Tata. 'Even though it's not a cash-tight company, any inflow of cash will help them expand,' says Gupta.


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