Essar Telecom (ETKL) entered the Kenyan market in December 2008 at a time when the mobile communications market seemed to have reached its peak. At the time, there were about 14.5 million subscribers and three other operators which seemed to leave little room for new entrants. But the operator was determined make its mark in the market. It has since gained nearly 10 per cent share of the 30million subscribers market.
Though it is yet to turn a profit, losing up to $1 million (Sh87 million) a month, the top management says this is part of growth. It is confident to break even in 2014 while sticking to a low-price cost model. YuMobile CEO, MADHUR TANEJA talks about the mobile operators financial status, its future plans and other regulatory issues in the industry.
You have said that ETKL will be profitable by 2014. What gives you the confidence?
We will turn positive at around 2014 as per our plan, we are confident about it. I do not see any challenges.Looking at our performance and growth, I have confident that we will reach there. Youth is the biggest hope for any country and for Kenya as well. Losing is part of business, in any country the best telecom would make money in about 5 years, more often 8-10 years.
What is the scale of your business losses?
We lose about $1 million a month. We are a very young companies though looking at the brand acceptance it would seem like we have been here forever. We do lose money but it will take time before we make money. Two years back we were losing roughly $3 million to $3.5 million a month, so we have come a long way.Our revenues have increased 100 per cent in the last one year.
What is ETKL's current financial status?
We are debt free. Telecom is extremely capital intensive business where we are forced to bring in a lot of money much before yet for returns come in in five to eight years time. We have already invested $500 million in Kenya. Our promoters (Essar) have just put in close to $150 million in to the business and that has been paid off to the banks.
We paid because we did not want any debt for the existing parts of the business, to make our business more viable.We had to reduce the cash calls that we have since we would end up paying interest of about 7-8 per cent, if you have the best. So if you have $200 million dollars in loans, at 7 per cent you end up paying over $1 to $1.5million interest charge.
So whatever money we generate will be for operations. And that is the biggest burden for any telecom company. Most of the companies end up having debt and equity, ours is all equity now.
So you are not planning to take any more loans?
We may take debt, we are raising money now, but that is for expansion not for operating expenses. We plan to raise money in two tranches, the first will be $200 million dollars in March.
This will be for capital expenditure that is, network expansion, radio frequency and transmission . We were at 1.5 million subscribers two years ago and now we have over 3 million so its requisite that we add capacity. On technology investment,we are either going to be bringing in either 3G or 4G. Next tranche would happen in end of 2014 on need basis.
You have been running on the low pricing model since you got into the market, will this deliver profits by next year?
Telecoms is all about scale of operations. We produce millions of minute a day. From the billions of minutes a month you can always drive economies of scale which otherwise you can not do with other kinds of business like FMCG. Once you achieve a scale, a critical mass, the cost of producing average minutes keeps coming down, and if you are able to manage/ increase your revenues you are able to do well.
Yes, we have been giving free calls for over 15months, SMS is free, sending money on networks is free, we have reduced cost of calling other networks to Sh3, you are right to wonder how are we going to make money.
Our philosophy is doing business at lower margins. If you decide to do business on lower margins and you are confident that you will be able to get more scale(subscribers) then that is fine. Its also depends the speed at which you grow, and you have to keep costs low.
How will you manage to keep the costs low, given telecom is a capital intensive business?
We are the only company doing site/infrastructure sharing, which the the government and regulator is promoting.
We do with Safaricom, Airtel and Telkom,Wananchi, KDN, AccessKenya, Milele Fm, Royal Media British Army. Out of our 750 sites, 300 sites are shared saving costs. Then of our 450 sites we share out 100 which thus give us income. Network cost accounts for 60-70 per cent of your total expenses in telecom.
Also 94 per cent of our sites are electrified, which is much cheaper than diesel. You do not save money you do not make money. We buy around 25 000 litres of diesel a month, which is nothing, I know a company which buys around 300 000 litres of diesel a month.
Kenya has enough electricity. When I was in Uganda (Warid) we had to buy around 400 000 litres of diesel a month. Even India does not have good power like Kenya.
So you will not be tempted to increase prices to be at par with other service providers?
We may increase prices, but our promise to customers is the best value for money in our class. Today yu-yu is free, off network is sh3, everyone is Sh4. International UK,US,China, India, Hongkong, Canada its Sh2, one of the lowest in the world.
We will be the cheapest and will keep providing the best quality of network.
Yes, we want to increase because input prices have gone up dramatically like electricity, diesel cost , our site rent has go up every year by about 5-10 per cent though MTR has come down, but looking at who can bear the tough times easily between company and individual, we thought company can bear it.
Looking at your tariffs structure, why do you include a Sh1 or 2 daily charge?
We want customers to realize that there is a cost for providing them the lowest price. For example if you were talking for 10 minutes a day, at 3.60 you would have paid 36 now you pay 30 and we charge you Sh1 for that. If you do not use, you do not pay me. It is marginal and as simple as that.
I know for a fact all the other companies charge Sh1 or 2 everyday for their services whether you use the service or not, at yuMobile we are only charging if you use the network on that day.
What is the situation of you mobile money transfer service, yuCash?
We have really worked hard on getting the distribution in place, today we have around 6000 agents in the country and trying to come up with more everyday. We have already started advertising to send money free,this shows the confidence we have in the distribution which we did not have earlier.
About the new governments tax, we will pass the cost down to the consumer where we charge. If we were a little bigger we would have absorbed it. We lose substantial amount of money in yuCash, but not because we are allowing customers to send money free, but there is a huge costs on bring in the technology, distribution, branding etc
It is a very profitable business compared to voice, so I do not see issues with taxing it. We are paying tax on voice,data, VAS, why not mobile money transfer.
You have in the past been pushing for regulation to allow fro opening up of M-Pesa to other networks, are you still pursuing this?
The biggest issue from a regulatory front is the inter-operability and the other is exclusivity at the agent level. Today, an M-pesa agent will tell you I want to do yuCash but if they do it their agency license will be pulled out. You cant have exclusivity otherwise how will competition come in. Its like telling a retailer you can only sell Cocacola and not Pepsi in their outlet where they pay the municipality charges and rent. We do not have exclusive agreement with our agents, it is not right. We wish this issues will be sorted at regulatory levels
What plans do you have for your data business? Especially as the industry plots move to 4G.
We will soon decide if we want to go 3G or 4G. If 4G does not catch speed, seeing a year has gone and nothing much has happened, we may end up rolling out 3G because our consumers are demanding it.
Why do you feel 4G is not catching on as fast as hopes
There are many issues. The consortium itself is an issue, between the telecom operators, and other companies that are actually the manufacturers of the equipment needed, whether to allow voice over 4G or not because there some companies that do not have voice licenses.
There is also an agreement on if it should be a countrywide roll out or will it be in some areas .
But if these issues are resolved we will be more than happy to go ahead. We have been holding back 3G because we knew there was 4G but if it does not happen, what option to we have?