Huge potential for investors in telecoms sector

Published in MEED, 24 August 2016

Iran’s telecoms sector is growing quickly, with several potential investors already linked to deals in the Islamic Republic

Iran’s telecoms sector is dominated by Telecommunication Company of Iran (TCI), a 45-year old business that is majority owned by Etemad-e Mobin, an affiliate of the Islamic Revolutionary Guard Corps (IRGC). TCI has a virtual monopoly on the fixed-line phone system. As of October, it had 29.8 million fixed-line subscribers for its Ashenaye Avval branded service, which it says is 99.3 per cent of the total market.

TCI also owns 90 per cent of Iran’s largest mobile operator, Mobile Telecommunication Company of Iran (MCI), which operates via its Hamrahe Avval brand (meaning ‘first operator’ in Farsi).

Both companies’ shares are traded on the Tehran Stock Exchange, where TCI had a market capitalisation of about IR131 trillion ($4.2bn), equivalent to about 4.8 per cent of the total market, as of late July. That is only slightly ahead of MCI, which had a market value of about IR125 trillion.

The main challenger in the mobile space is MTN Irancell, which is 49 per cent owned by South Africa’s MTN Group. MTN Irancell says it has 46.1 million subscribers, a figure that rose by 5 per cent in 2015 alone, and which gives it a market share of 46.7 per cent. Alongside this virtual duopoly, there are several smaller operators such as Tamim Telecom (which operates under the RighTel brand) and Taliya Mobile.

Iran’s mobile market has been slow to adopt new technologies, with 3G and 4G services only becoming widely available within the past two years. However, there have been some notable recent changes. Last year the Communications Regulatory Authority (CRA), which oversees the telecoms sector, invited bids for virtual mobile network operator licences. These allow companies to offer mobile services to the public while using an existing operator’s network, rather than having to build up their own infrastructure. According to Teyf Group, an Iranian telecoms consultancy, of the 51 firms that applied for a licence six have been approved so far, although up to 12 more may yet be approved.

The country is also about to introduce number portability, allowing customers to keep their existing mobile phone number if they switch from one service provider to another. Together, these measures should encourage far more competition between the networks. International investment and the January lifting of most sanctions on the Islamic Republic – which will make importing telecoms equipment and attracting external investment easier – should shake up the market even more.

Such developments will no doubt be welcomed by consumers, given the quality of the service currently available.

“The sector is ripe for more investment in infrastructure and the delivery of services and ancillary technologies and capabilities,” says Ali Nassersaeid, co-founder of the American Iranian Business Council. “Not all current providers have good coverage in all parts of the country and many people carry phones from two or three providers when they travel to ensure they can stay in touch.”

Promising signs

Some deals have emerged this year, offering a sign of what the future might hold in terms of international investment. In April, Italy’s ItalTel signed a memorandum of understanding (MoU) with TCI to modernise and develop its network. Details of what the deal will involve remain scant, however, and it is notable that for now it is simply an MoU rather than anything more definitive.

International telecoms firms, like companies in other sectors, still find it difficult to move money in and out of the country as most foreign banks are still refusing to deal with Iran. For as long as that remains the case, their ability to engage in the country will be limited. Nonetheless, several other potential investors, predominantly from Europe and Asia, have also been linked with deals in the Iranian telecoms sector, from France, Slovenia, Kazakhstan and South Korea.

For those already involved in the market, there should also be opportunities. In its most recent annual report, MTN Group says the easing of sanctions and the expected economic boost it will give to the country “offers significant opportunities to expand our services in the country”. In time it should also make it easier for MTN Group to repatriate some of its dividends and outstanding loans that have been stuck inside Iran. The firm says it currently holds some ZAR15.86bn ($1.1bn) in cash inside the country and is planning to invest ZAR3.5bn this year, as its share of MTN Irancell’s capital expenditure plans.

Even if no other large investments materialise in the near future, there should be other benefits for the local telecoms operators. In February, Davoud Zareian, a spokesman for TCI, said the cost of importing telecoms equipment could fall by 20-30 per cent in the wake of sanctions being lifted, as companies will no longer have to buy the equipment they need using brokers and other middle men. The process of procuring the equipment should also be far quicker.

Iran could certainly do with some improvements to its telecoms systems. The Switzerland-based World Economic Forum ranks the country’s electricity and telephony infrastructure 56th in the world (out of 140 countries), which puts it behind all the GCC states. In terms of fixed-line network it does fairly well, ranked 22nd in the world, but in terms of mobile phone subscriptions it is only 110th.

Those figures are further borne out by data from the Washington-based World Bank. Iran does better than its neighbours when it comes to the proportion of broadband subscriptions and far better in terms of fixed-line connections. However, it trails the rest of the Middle East and North Africa (Mena) region, and indeed the world in general, when it comes to its mobile phone penetration rate; this stands at just under 88 per cent, compared with a world average of 97 per cent and almost 110 per cent among Mena countries.

The potential for growth and development is something that local investors are well aware of, particularly given the country’s young population. According to the World Bank, nearly 24 per cent of the population is under 15 years old. That represents a lot of consumers who will be buying phones and getting online in the coming years. Tehran-based Turquoise Partners, which runs an equity fund investing in the TSE, says telecoms stocks are one of the main areas of investment it has identified as holding promise.

Shervin Shahriari, chief investment officer of Turquoise Partners, says telecoms accounts for the fifth-largest sector allocation of its fund. “The majority of the portfolio is invested in equities and companies that we believe will benefit from economic growth over the coming year,” he says.

IRGC exit

Shares in TCI and MCI have been off-limits to most international investors in recent years, due to the holding that the IRGC has in the two companies. That could change, with speculation that the body plans to offload its shares in TCI, and thus in its mobile subsidiary too. Daniel Riahi, managing partner of UK-based DRST Consulting, has described that as an “encouraging piece of news for foreign investors”, but not everyone is convinced it will happen. “[The IRGC have] said they might sell, but I doubt they will because it’s too important to them,” says one international investor.

Another point of strength for the industry is its profitability. MTN Group reported earnings before interest, tax and other charges from its Iran venture of ZAR5.7bn last year. Dividend payouts to local investors this year have also been good. According to Firouzeh Asia Brokerage, part of Turquoise Partners, telecoms firms have paid $685m in dividends this year and the sector had the highest dividend yield of any industry, at 16 per cent.

If international investors can find a way to tap into the market, there should be profitable pickings for them in the years ahead.