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That the Indian telecom sector holds promise for international investors is certain. In the past two months, three deals with global telecom majors have come through, the financial crisis notwithstanding. UAE-based Etisalat bought into new telecom player Swan Telecom; Norwegian company Telenor picked up stake in realty firm Unitech; and now, Japanese telecom major NTT DoCoMo has acquired 26 per cent stake in Tata Teleservices Limited (TTSL) –­ the sixth largest mobile operator in the country –­ for a whopping Rs 130.7 billion.

The deal involves capital infusion by DoCoMo and a part-sale of equity shares by the Tata entities (Tata Sons, Tata Communications and Tata Power), which hold 80 per cent stake in TTSL. DoCoMo will get three board seats. Besides, DoCoMo, in accordance with the regulations of the Securities and Exchange Board of India, will make an open offer through a joint tender along with Tata Sons, to acquire up to 20 per cent of the equity shares of Tata Teleservices (Maharashtra) Limited (TTML), the listed subsidiary of TTSL, with operations in Maharashtra. The transaction is, however, awaiting approval from the Foreign Investment Promotion Board.

At the moment, the portents are good. The fresh infusion of funds will facilitate rollout of TTSL's GSM services as well as expansion of its CDMA business. "In a market where raising debt is becoming increasingly expensive, the investment by the Japanese company will provide some impetus to TTSL's expansion plans. It will help the company meet its earmarked $2 billion capex plans," observes an analyst from Anand Rathi Securities.

Interestingly, the alliance comes at a time when Ratan Tata, chairman of the over $62 billion Tata Group, has announced a heavy "rein in" of all future acquisition plans of the group.

TTSL stands to benefit from DoCoMo's expertise in the international connectivity and enterprise services sectors. The Japanese company also has extensive experience in 3G, a major advantage when 3G services are introduced in India. "The launch of 3G services will not be easy. The key will be in offering the service and handsets at an affordable price. Here, NTT DoCoMo's experience will help, though the wait to launch may be up to two years," says Romal Shetty, industry lead, communications sector, advisory services, KPMG.

Net, net, analysts feel DoCoMo will be a strong partner for TTSL. Meanwhile, the capital alliance has pushed up TTSL's valuation to Rs 502.7 billion, higher even than the market capitalisation of its rival, Reliance Communications (RCOM), the largest CDMA player in the country.

On the valuation front, however, analysts believe this is way over the top, especially considering the modest scale of TTSL's operations compared to its bigger competitors in the industry. (TTSL is operational in only 20 circles and has a subscriber base of a little over 30 million. RCOM, in comparison, has a pan-Indian presence with 50 million users.)

"The enterprise value per subscriber (a popular metric for valuation in highgrowth markets as it reflects the potential for cash flows) in this deal is at a premium to that of all major telecom companies in the country. It is, for instance, at a premium of 6.1 per cent to that of industry leader Bharti Airtel," says an analyst from Angel Broking.

At the same time, this is no great surprise as valuations in the telecom industry have been heading north for a while. "I do not think the deal is overpriced at all. Looking at the valuations the new telecom companies have got, even though they do not have any subscribers or network in place, the value TTSL has got is noncomparable," says Dr Mahesh Uppal, director, ComFirst.

Shetty agrees: "The valuation may seem high, but with 3G spectrum under consideration, DoCoMo stands to gain given its exposure to 3G services worldwide.

For DoCoMo, the India investment follows closely on a $350 million investment in TM International, Bangladesh's third largest mobile operator. It gives the company a foothold in the world's second largest mobile market, which has been notching up additions of 10 million users each month.

According to business daily Nikkei, with this investment, DoCoMo will speed up its expansion beyond a mature home market. Its recent acquisitions in Asia all look positive, especially given the company's extensive knowledge of 3G network services towards which many developing countries are now moving.

Of course, there are some international telecom analysts who have voiced concern over DoCoMo's acquisitions, especially in light of the failures that followed its overseas investment spree in the early 2000s. DoCoMo then spent nearly 1.9 trillion yen on picking up small stakes in operators around the world to promote the use of its i-mode mobile internet technology, which later bombed, compelling DoCoMo to pull out of the investments.

But business conditions have changed hugely today, say company officials. This time, the company can count on growth in developing markets, especially in India where research firm Gartner forecasts the mobile user base to touch 737 million by 2012, as just over a quarter of its 1.1 billion population currently owns mobile phones, compared with Japan's penetration level of about 85 per cent.

Besides, as Kunal Bajaj, director, BDA India, puts it, "If they had not bought TTSL's stake, the other option would have been to get involved with new telecom companies, which presents a much higher risk quotient. DoCoMo must have factored this in. This way they are investing in an operator that has an extensive network, has both CDMA and GSM spectrum, and a track record of dependability."

According to Uppal, "This is the right time to enter into such an alliance, a few weeks before the allocation of 3G spectrum. DoCoMo will bring its wide experience in 3G services. For TTSL, the deal is more about getting a strategic partner than just getting the funds for expansion."

Meanwhile, the partners of the capital alliance are very optimistic about the venture. Both bring to the table many advantages –­ a wide network, a substantial subscriber base, a well-established brand, funds for expansion, access to new customers and experience. Therefore, the expectation is to jointly expand the mobile communication presence and operations in India. Despite the fact that competition will get more aggressive with foreign firms like Telenor, Etisalat and Sistema gearing up to start services and home-grown operators like Bharti Airtel and RCOM also readying for battle, TTSL is hoping to leverage its advantages to increase operating revenue and achieve steady business growth.