February 5, 2014
Interviewed by: David Snow
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Broadband Reboot: How New Silk Route Improved Augere

New Silk Route’s Parag Saxena discusses telecommunications company Augere’s shift in operational model.

New Silk Route’s Parag Saxena discusses telecommunications company Augere’s shift in operational model.

Broadband Reboot: How New Silk Route Improved Augere 

PE Value-Creation Stories With Parag Saxena of New Silk Route

David Snow, Privcap: Today, we are joined by Parag Saxena of New Silk Route Partners. Parag, welcome to Privcap. Thanks for being here.

Parag Saxena, New Silk Route: Thank you, David. Glad to be here.

Snow: I’d like to here a value creation story from you about a way that you identified the opportunity to create value in a private company. In your case, your firm invests in India and South Asia. I would love to hear about Augere, a telecom company. Can you start with your firm’s analysis of the sector in which Augere does business, and the opportunity you saw to disrupt and to create value through that investment?

Saxena: What we have done well is having teams of people that can invest in areas we understand well. We have a large team of operating experts who are full-time to our company; these people generally used to be chief executive officers in the businesses we invest in.

Looking at Augere, we were interested in the telecom space. In fact, when we were launching the fund and meeting potential limited partners, we talked about the huge demand for telecommunications and the absence of traditional communications, like landline telephones. There are only 40 million landline phones in India, with similar lack of penetration in Pakistan and Bangladesh, the neighboring countries. With a population of about one-and-a-half billion between those three countries, that is a very small number of telephone penetrations.

So, as technology makes possible, we leap forward to the current time, which means wireless. In India, we are seeing that, with rapid telephony. Every month, you see $10 to $15 million in new cell phones being sold in India, which is a staggering sum. In the U.S., we have that many in a good year. Of course, it is too late to join that particular bandwagon, but what has happened next? If you look at AT&T, Verizon or Vodaphone in the last five years, the revenues have shifted from voice to data.

Data has become much more important.

So, we acquired licenses, and we have licenses that approach 500 million people. Using that 5% example, we could have a company with 75 million users over some period—a very valuable company because of that.

We started off, but we began on the wrong model: one of growth without regard to profitability. After running it that way for two years, we made an internal assessment at New Silk Route. We said, “We should be able to run this better than it is being run now.” So, we went to our other two investing partners and said, “We would like to buy control from you. Please sell us some of your shares so that we can run this company. We intend to make a lot of change; if you trust us to do that, sell us a majority position.”

They did, and 18 months ago, we were looking at a company that was losing $2 million a month. Subscribers are growing rapidly. From a zero base, percentage gains are always large, but the growth was not profitable. In fact, our gross margins were negative, meaning that, as we added each subscriber, you were losing more money on each subscriber. This was the opposite of the old adage—that you make it up in volume. We were not going to make it up in volume.

We have been able to change those plans. Essentially, we focused on providing very high quality. We said, “Let’s have fewer subscribers, but people who are going to be very happy.” We wanted this wireless service to be as fast as you would expect from a cable modem or DSL line, a hardwired line, so we set a high standard for the speed of the communication, concentrating on high quality, not going after massive growth first, but first going after profitability. That has yielded a great outcome.

Today, we have the Pakistan and Bangladesh operations—they were losing $2 million a month 18 months ago. Last month’s results were a loss of about $47,000 in Bangladesh, $60,000 in Pakistan. That has been a great lesson—we have not yet launched the service in India, but we know exactly how to launch it, what model to use. Today, we have a company that went from looking like it would be a lost investment to one that is growing in revenue terms and subscriber terms. Most importantly, the company is just about at profitability.

Snow: In changing the business plan and making the core product more of a luxury product to start with, does it also change the profile of the exit? Are you thinking of different potential buyers for this asset once you have taken it to the next step?

Saxena: In telecom or in many businesses over time, people go after the most lucrative markets like the U.S. and Europe, as they should. With new innovation, it does not matter if it’s telecommunications or a pharmaceutical where it is introduced. It is introduced into the markets where people have the ability to pay the most, so companies do the same thing. Once they saturate that market, they tend to go overseas.

We will see this happening in three or four years in Pakistan and Bangladesh, which, relatively speaking, are frontier markets compared to India. But, just as you have Vodaphone in India now—and they made an expensive $18-billion purchase of a telephone company 10 years ago—several people will be interested in acquiring a dominant player. One important thing is that, in Bangladesh and Pakistan, we will be one of two or three players. In India, we will be one of two players, so if somebody wants to come in, there are only two players to buy. So, we will be very attractively positioned.

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