And most eyes turn squarely toward China, which has grown staggeringly fast into a market boasting 150 million mobile phone users, and where the dominant indigenous telecom equipment builder, Huawei Technologies, is humming along at $3 billion in annual revenues.

India, though obviously a growth market, seems to have been left out of the party as it is a decade behind China in the realm of telecom infrastructure. Surprisingly, despite its huge population, India has a mobile phone subscriber base inferior to that of the Philippines. So why did Warburg Pincus and SingTel invest nearly $1 billion combined in upstart Indian wireless service provider, Bharti? Is the Indian telecom opportunity coming of age?

Living Up to the Numbers
“There are many areas in India where the underlying potential seemed large, but was never realized,” says Dalip Pathak, a partner at Warburg Pincus in Singapore. Pathak, who sits on Bharti’s board, is echoing a classic refrain. Despite the country’s massive size and high growth rate, doing business in India has not always been a slam-dunk. The unraveling of Enron’s Dabhol power plant project (even before Enron fell into disrepair) is a recent example of seemingly vast potential in India yielding only frustration.

But Warburg Pincus invested a cool $300 million in Bharti, to fund the company’s plan to build a vast network for primarily wireless telephony in India. Bharti Televentures has since built out a network in 13 Indian states, comprising thousands of kilometers of fiber.

And when it comes to the wireless services that Bharti is providing, Pathak is thoroughly bullish. “One could say that India should have been booming in X Y or Z, but it didn’t. But here [for wireless services], 95 percent of the conditions seem to be right,” he says. The goal is for Bharti to evolve into one of the biggest telecom service providers in the world. It’s not there yet, but both Bharti Chairman Sunil Mittal and Warburg seem confident that it will be.

The Leap
When Warburg made its first $63-million investment in Bharti in 1999, Pathak might not have been quite as confident in the company’s future as he is today. It was clearly an act of faith to invest heavily in the lofty dreams of a company, which, at that time, had only one practical mobile operating license to its name, was in a market that was not yet de-regulated, and was in India no less. “We were certainly taking somewhat of a chance,” says Pathak. “We had not known these guys for more than a year.”

Bharti, which was founded as a small builder of telephony products in 1985, applied for a wireless license from the Indian government in 1992. After two rounds of litigation, the lineup for licenses was finalized in 1994, and the company obtained its Delhi license. That operation became profitable, and started attracting attention. First Vivendi, then Telecom Italia, then British Telecom invested in Bharti, and the company grew via acquisitions.

“We acquired some companies in the South, which were not doing well, and we picked up one of the new licenses,” explains Mittal. Soon SingTel and Warburg (as well as smaller investors New York Life and AFC) came on board to deliver the real money.

Despite the risks, the numbers were attractive. “India clearly is the hottest growth story in telecom now. With China having run its pace for the last several years, it is still connecting lots more than India. But the absolute growth number in terms of percentage is now tapering off,” says Mittal.

Pathak concurs. “India is, in broad economic terms, about 10 years behind where China is today. China’s GNP per capita is slightly more than double India’s. If India can keep growing at 6.5 percent a year, India’s GNP is going to double in the next 10 years. China today has 150 million mobile phones. India has 6.5 million. There is potential for that to increase 15 to 20 times in the next 10 years.”

Mittal predicts 50 million mobile phone customers in India by 2005. At the moment, about 400,000 people are subscribing to mobile telephony services in India every month. With a slight increase in that rate, the current subscriber base will double over the next year.

“We were betting on creating one of the biggest telecom companies in the world,” says Pathak. “We don’t often get an opportunity to back something as unusual as that.”

The Risk
Although India presents a major potential market for wireless services, it may not have been immediately evident three years ago that Bharti was worth the billion-dollar investment. There was no certainty as to how India’s mobile industry would really evolve, given numerous regulatory variables.

“The problem in India is procedural cobwebs,” says Pathak. “The policy has been formulated by very bright guys at the top and the system below can’t support the policy. People with the wrong motivations can exploit that situation to slow down progress.” According to Pathak, betting on India “has to do with conviction and understanding of the market.” He adds, “The fact is that when we see the positive side of the India story, we see progress on a lot of fronts and we see the economy deregulating across the board.” In some sense, Warburg’s bet was that the Indian government couldn’t do anything but deregulate telecom.

Another Warburg Partner, Pulak Prasad, says, “The Indian cellular industry is effectively two-and-a-half years old.” Prasad points out that companies used up money buying licenses in 1994, and didn’t have money left to roll out networks or acquire customers. This essentially stalled the growth of the industry, so it was not until 1999 that things took off.

Rewards

“Bidding [for new licenses in 2001] came at time when people had run out of money and not too many people were looking at India,” says Mittal. “You had to pay in seven days. Nobody could make a crazy bid and get away with it like the last time. We had the money in the bank.” Bharti acquired eight additional wireless licenses, as well as licenses for fixed-line and long-distance telephony in 2001.

It didn’t hurt that real estate prices crashed, and properties for networks as well as space on rooftops for wireless hardware could suddenly be cheaply obtained. On top of that, equipment manufacturers hit with the telecom sector crash were selling their products for a fraction of the cost. “The stars were aligned very well for us,” says Mittal.

And Bharti had to grow, because the Indian wireless services sector has since seen fierce consolidation. Joining Bharti as major players in the wireless arena in India today are Hutchinson Max Telecom; merged entity, Tata-AT&T-Birla; and the public sector players, BSNL and MTNL. The AT&T conglomerate is backed by a number of foreign investors, including AIG and MediaOne, which no doubt see the same opportunity that Warburg saw with Bharti.

Mittal surveys the market and predicts that the four major players will have between 10 and 12 million customers each by 2005, and annual revenues of several billion dollars. Bharti’s current 1.6 million customers (primarily wireless, but also wire-line and Internet) now generate annual revenues of about $500 million, according to Mittal, with seven operations in service. “With eight new launches in the next six weeks, we should get to a billion [dollars in annual revenue] in 18 months,” he says.

For now it looks like the four main players will remain the ones to share the bulk of the wireless market. “You need a billion dollars before you say yes to telecom in India,” Mittal contends. “Because now you cannot do one city or state; you have to do a nationwide network because everybody else is more or less moving to that. Not many Indian houses can dream of spending a billion dollars to create the infrastructure to compete.”

More Bharti for the Buck
“We sat down [in 2001] and asked, ‘Are we taking on more than what we can handle?’ And clearly the consensus was, ‘Yes, we are taking on far more than what a normal company can handle,’” says Mittal. “But you go into our offices in the middle of the night on Sundays and you find people working.”

In little more than 18 months, Bharti’s network has grown from its Delhi stronghold to covering 90 percent of the relevant subscriber population in India. The company now has 23 licenses.

Bharti went public in India in February 2002, raising $175 million. Warburg, as a long-term investor, is not looking to exit right away. Indeed, Mittal sees a listing on the NYSE as a distinct possibility at some point in the future. In three years, he expects all of Bharti’s projects to be cash flow positive.

“When the company is generating $1 billion plus in revenues, with 40 percent EBITDA, the company starts looking very interesting!” Mittal says.

If that really happens, then Warburg Pincus will be a happy investor. But more importantly, success for Bharti could chalk up a victory for India’s potential as the world’s most exciting growth market— and potentially force large investors to pay more attention to India as a whole.