Indosat ready to face foreign competitors in domestic market

Indosat ready to face foreign competitors in domestic market

Esther Fin Harini and Edhi Pranasidhi, Dow Jones/Jakarta

PT Indonesia Satellite Corp. (Indosat) is braced for stiff competition from regional players preparing to enter the country's telecom market, but expects to meet their challenge through improved service offerings and greater coverage, a senior company executive said recently.

"We are well prepared to face the competition," Indosat Chief Executive Hasnul Suhaimi told Dow Jones Newswires.

The new competitors include Malaysia's Maxis Communications Bhd., which owns 51 percent of PT Natrindo Telepon Selular, and Hong Kong-listed Hutchinson Telecommunications International Ltd., which owns 60 percent of PT Cyber Access Communications.

Both PT Natrindo Telepon Selular and PT Cyber Access Communications are expected to begin operating in Indonesia in 2006.

Telekom Malaysia already owns 25 percent of PT Excelcomindo Pratama, Indonesia's third largest cellular operator by assets.

Indosat's plan for competitive success against these firms includes service quality upgrades and expanding coverage to consumers across Indonesia's vast archipelago to resist erosion of the firm's subscriber base by its new rivals, Suhaimi said.

The arrival of foreign firms in Indonesia's telecommunications market marks the end of decades of protectionist government policies enjoyed by Indosat, the nation's second largest cellular operator by assets, and giant state-owned Telekomunikasi Indonesia (Telkom), as the government liberalizes the industry.

Analysts said that foreign entrants will bring experience and marketing expertise that will force Indosat to become a more agile player in a consumer cellular market that they see growing to 65 million consumers in 2006 from 45 million in 2005.

That market, in a country where only 20 percent of its 220 million citizens have cell phones, is expected to expand on the back of projected 6.6 percent average economic growth from 2004 to 2009.

Indosat currently holds a 39 percent share of the cellular phone subscriber market on Indonesia's main island of Java and a 25 percent share of the market outside Java.

Suhaimi said Indosat will consolidate and expand that market share by dedicating 80 percent of its planned US$900 million capital expenditure this year to develop its cellular services. In 2006, the company will invest an additional $670 million to expand its business.

Indosat expects cellular subscribers this year to hit 14 million from 9.6 million in 2004, he said.

"By strengthening our quality services to customers and expanding our coverage, we believe we can still maintain our market share," Suhaimi said.

"We plan to build more based transceiver stations (BTSs) in the non-Java region in an effort to increase our market share," he added, without elaboration.

Suhaimi said Indosat will also benefit from the likely slow start of its new foreign rivals' marketing efforts when they roll out their networks by the end of 2006.

Indosat's solid fundamentals give the firm a strong competitive edge against its looming foreign rivals, he said.

The company's EBITDA margin this year will likely rise to 57 percent to 59 percent from 53 percent last year, Suhaimi said, without elaborating on Indosat's net profit and revenue projections for 2005.

He also said the recent weakness of the rupiah against the U.S. dollar won't seriously impact the company's financial performance.

The rupiah slid to a more than four-year low against the U.S. dollar of Rp 11,800 in August, prompting a series of fiscal and monetary policy remedies including several hikes in the benchmark Bank Indonesia rate to the current level of 11 percent.

The bulk of Indosat revenue is in rupiah, while its investment costs are mostly in U.S. dollars. The weaker rupiah could make Indosat suffer from foreign exchange losses, analysts said.

Indosat has $550 million in debt, but Suhaimi indicated that the firm's net exposure is around $311 million.

"We have hedged some $250 million out of the $311 million, leaving an unhedged exposure of only $61 million," he added.

In efforts to support future growth, Indosat is also considering launching third generation, or 3G, networks. In August the company held its first 3G test and expects to continue trials of the system until the end of this year.

"We will carefully review the results of the trial and observe the development of the 3G market in Indonesia and elsewhere before making any firm commitment to 3G investment," Suhaimi said, without elaborating.