In October 2019, the union cabinet finally announced a revival package worth around Rs 700 billion for the two debt-ridden telecom PSUs Bharat Sanchar Nigam Limited (BSNL) and Mahanagar Telephone Nigam Limited (MTNL). In addition to merging the operations of the two loss-making firms, the government has announced measures such as administrative allocation of 4G spectrum, asset monetisation, voluntary retirement scheme (VRS) for employees, and fundraising through sovereign bonds. The aim is to turn around the combined entity to make it profitable over the next two years.
Prima facie, the government’s revival package for the telcos looks attractive. 4G spectrum will help them stay competitive, VRS will reduce the huge wage burden, asset monetisation will ensure quick cash inflow, the merger will provide a pan-Indian presence and fundraising will help meet future expenditure. However, a mere fund infusion (through taxpayers’ money) will be meaningless if a plan of action to revive operations is not in place. Without a strategy to sustain future growth, it will become a case of throwing good money after bad.
Rolling out 4G will be a challenge
The non-availability of 4G spectrum has been a key competitive disadvantage for BSNL. In view of this, the decision to administratively allocate 4G spectrum has been taken. Apart from spectrum, a huge capex investment is required to ensure pan-Indian network coverage and service roll-out. As per ICRA, private telcos have made investments of around Rs 5 trillion (including spectrum purchases) over the past five years, the majority of which have been on 4G expansion.
Clearly, BSNL would need more capital infusion from the government to stay relevant in the 4G market. As per the latest reports, BSNL is planning to launch 4G services within the next six months. It is looking at upgrading its existing equipment, and identifying the locations for early 4G roll-out. The total 4G roll-out capex has been estimated at around Rs 120 billion over the next two years.
Given the changing industry dynamics, 4G alone may not be enough to sustain BSNL’s future growth. Telcos have started moving towards NB-IoT. In fact, Bharti Airtel and Vodafone Idea are now preparing to launch commercial services soon. 5G has become a buzzword and telcos like Airtel and Reliance Jio are already gearing up for 5G. In this scenario, BSNL cannot afford to lose out on the 5G opportunity.
Employee cost to remain a challenge
Both the PSUs have rolled out VRS schemes, allowing eligible employees to opt for voluntary retirement by December 3, 2019. According to BSNL, all its regular and permanent employees (including those on deputation to other organisations or posted outside BSNL on a deputation basis) who are over 50 years old are eligible to seek voluntary retirement under the scheme. The telco expects 70,000-80,000 (out of the total of 160,000) employees to opt for VRS, generating savings of about Rs 70 billion in salary expenses. The company’s employee costs stood at Rs 144.92 billion in 2018-19. Meanwhile, MTNL has stated that all its regular and permanent employees of age 50 years and above as on January 31, 2020 are eligible to opt for its VRS. The company expects 15,000 (of its 22,000) employees to opt for VRS, which will bring down the employee cost to 25 per cent of revenue from 85 per cent at present.
However, even in a highly optimistic scenario, where employee costs for both companies get slashed as per expectations, these costs will be well over 15 per cent of the combined entity’s turnover as per industry calculations. In contrast, for private telcos these costs stand at no more than 5 per cent.
Merger matrix
The Indian telecom industry has undergone a major structural transformation in the past few years, with telcos opting for various kinds of restructuring models. The merger between Vodafone and Idea was surely an unprecedented move. In its wake, the merger of BSNL and MTNL comes as no surprise, although it remains to be seen what kind of synergies can be achieved by two ailing telcos to stay competitive. Both the companies have been in the red for almost a decade now. Their total debt stands at around Rs 400 billion. As for operations, the PSUs have been reduced to marginal players in terms of both subscriber base and revenue share. In the mobile market, their combined customer share was merely 10.22 per cent as of August 2019 (as reported by the TRAI). In terms of revenue market share, their share stood at a little over 6 per cent (gross revenue) during the quarter ended June 2019, as per TRAI.
Given that the merged Vodafone India-Idea entity too is struggling to hold up under intense competition, the ride for the BSNL-MTNL combined entity will be far from smooth.
Asset monetisation to improve revenue
BSNL’s huge strategic asset base is one of its key competitive advantages. The telco has a footprint of 68,000 towers and a national fibre network of 750,000 route km, larger than the optical fibre cable networks of all other telcos. These assets can be monetised and leveraged to earn revenues. Currently, only 14,000 towers are being shared with other telcos, and only 400 route km of fibre has been leased out. Going forward, the telco can look beyond telecom carriers, and explore infrastructure leasing, virtual networks and unbundling arrangements with internet service providers as well as other stakeholders across the telecom value chain.
Further, BSNL has land parcels and real estate properties across the country with an estimated value of over Rs 3 trillion. The revival plan includes arranging Rs 380 billion in the next four years through monetisation of BSNL’s land and properties. On its part, BSNL has already identified 14 land parcels worth about Rs 80 billion that can be readily monetised.
The way forward
Going forward, there is a need for a strong PSU in the telecom sector. BSNL plays a key role in establishing and managing telecom networks in border areas as well as the country’s hinterland. Unlike private telcos, BSNL operates 17,000 loss-making exchanges in rural and other far-flung areas as a part of its Universal Service Obligation Fund obligations. The telco has always been at the forefront in restoring communication links in areas hit by natural disasters.
Further, a successful BSNL-MTNL revival can have far-reaching implications for the sector’s competitive landscape. With Vodafone-Idea in the middle of a financial crisis, the sector is headed towards a two-player structure. BSNL-MTNL, with debt lower than that of other private players, has a fair chance of survival if the operational challenges are addressed.
Thus, it is crucial that the government’s fund infusion gets backed by an effective turnaround roadmap that can bring the BSNL-MTNL merged entity back from the brink of a crisis. The PSU is in urgent need of a dramatic reinvention to withstand competitive pressures, a tall task but not impossible.
By Akanksha Mahajan Marwah
