The beleaguered telecom industry’s hopes for relief from the Interim Budget 2019-20 were mostly centred on changes and clarifications in tax codes. The budget disappointed on that score, although it reiterated the government’s commitment to create a robust telecom infrastructure with 100,000 digitally enabled villages, and a focus on artificial intelligence, 5G and other new technologies.
The telecom industry wanted clarity on the treatment of interest expenditure incurred on spectrum acquisition. While it has been clarified that spectrum is amortisable, there is no clarity on the treatment of interest expenditure incurred prior to the date of use.
There was a long-standing demand for reducing the goods and services tax (GST) on telecom services from 18 per cent to 5 per cent. There have been disputes and litigation pertaining to tax deducted at source (TDS) when a telecom service provider supplies material to distributors. The industry had sought clarity on this, along with a minimal rate of 1 per cent TDS.
Further, tower companies wanted the benefit of carrying forward business losses in the event of a merger. The industry also sought tax-free status for bond issues. And it was hoping for a reduction, or removal, of customs duty on the import of capital goods and equipment.
The budget fell short of these expectations. It did not change much in the way of tax provisions, which means that the sector will continue to struggle. Telecom companies are in a difficult financial situation, and face a real danger of falling deep into a debt trap.
While stakeholders praised the Digital India initiative, there was an underlying sense of disappointment. Rajan S. Mathews, director general, Cellular Operators Association of India (COAI), commented, “The Interim Budget 2019-20 is pragmatic, and we laud the government’s vision and commitment towards Digital India and the digital economy. Interim finance minister Piyush Goyal expressed the intent to create 100,000 digital villages over the next five years. The government also stated its commitment to deploy 300,000 common service centres for delivering digital services. But considering the financial stress that the telecom sector is reeling under and the economic backbone that the sector provides to the economy, we expected concrete targeted initiatives to revitalise this sector. However, the sector did not receive significant support.” Meanwhile, Rajiv Kapoor, vice-president, India and SAARC, Cambium Networks, said, “The government’s plan to set up 100,000 digital villages in the next five years is a huge step towards leapfrogging India’s on critical initiatives such as Digital India. By placing wireless connectivity at the heart of development, particularly in rural areas, India is poised to further consolidate its position as a global hub for disruptive innovation.”
The telecom sector contributes 6.5 per cent to the GDP and employs around 4 million people, directly and indirectly. It has witnessed nearly Rs 10 trillion in investments, including around Rs 4 trillion in spectrum payments. But it has over Rs 4.5 trillion in debt and about Rs 2.5 trillion in annual revenues. Mergers forced by financial weakness have led to substantial job losses over the past two years. Debt servicing is extremely difficult under the circumstances; however, the government can certainly help by reducing some of the substantial burden of taxes and fees payable.
The budget estimates that revenues from telecom services for 2019-20 will increase to Rs 415 billion, 5.8 per cent higher than the revised revenue estimate of Rs 392 billion for the current fiscal year (2018-19). The initial budget estimate for 2018-19 was Rs 486.61 billion, but this was revised downwards to Rs 392 billion. This indicates a declining trend in revenues owing to the price war. The actual revenues were Rs 307 billion in 2017-18 as against a budget estimate of Rs 443 billion. Apart from services, which lead to the accrual of spectrum usage fees, revenue share, GST collections, etc., the major contributor to government revenues is spectrum sale. In the absence of auctions, there was no contribution from this head in 2018-19. The next spectrum auction will reportedly not take place before August 2019.
The sector has been struggling for three years. By mid-2016, the hyper-competitive industry, which was witnessing low tariffs and high spectrum bids, had left service providers deep in debt. The entry of Reliance Jio Infocomm Limited in September 2016 and the fact that it was allowed to offer free services for six months led to a crisis. It caused massive subscriber churn. ARPUs and profitability, which were already low, nosedived.
Many service providers were unable to service their debt. This led to major market consolidation. Today, only three private entities are left in the services segment. In subscriber terms, they are Vodafone Idea Limited (VIL), Bharti Airtel and Reliance Jio.
While Airtel, Vodafone India and Idea Cellular have suffered huge losses over the past two years, Reliance Jio has gained considerable revenue and subscriber share. It claims to be profitable, although it still has a high cash burn rate as it rolls out ambitious plans. Unlike Airtel and VIL, which are pure telecom players, Reliance Jio has the backing of Reliance Industries Limited, which is a highly profitable business conglomerate with interests across the energy and retail sectors. Although Reliance Jio has already raised and spent well over Rs 2 trillion, it can play an aggressive game for a length of time.
Reliance Jio has grabbed a high revenue market share and holds a dominant position in the data segment, which is the only fast-growth segment. The company’s ARPU of Rs 130 for the quarter ended December 31, 2018 is better than that of Bharti Airtel (Rs 106) and VIL (Rs 89) for the same period.
Bharti Airtel reported a 72 per cent year-on-year decline in consolidated profits for the period October-December 2018 at Rs 860 million. The company would have suffered even bigger losses had it not been for a one-time gain of Rs 14.137 billion and a deferred tax asset of Rs 7.2 billion. The total revenue during the quarter under consideration was Rs 205 billion, just 1 per cent higher than the Rs 203 billion reported in the third quarter of 2017-18.
VIL registered Rs 50.057 billion in net losses in the second quarter of post-merger operations, despite a tax write-back of Rs 20 billion. However, merger synergies helped it in reducing operating expenses (excluding licence fees and spectrum usage charges) by Rs 7.5 billion to Rs 81.5 billion. Meanwhile, Reliance Jio declared Rs 8.3 billion in net profits on total revenues of Rs 103.83 billion.
Airtel and VIL are trying out a new strategy – shedding low-value “incoming-only” customers in order to boost ARPUs. Airtel dropped 48 million subscribers in the quarter ended December 2018 while VIL dropped 36 million subscribers. Both the companies managed to raise ARPUs sequentially. During the same period, Reliance Jio gained 28 million subscribers.
The highly leveraged Airtel and VIL are both looking to raise more cash. Airtel will seek to sell a larger stake in its tower arm, Bharti Infratel, to raise up to $3 billion. Meanwhile, VIL is planning to launch a rights issue to raise Rs 250 billion.
Given the trends, there is a significant chance that Reliance Jio will soon become the dominant player. India Ratings expects Reliance Jio to increase its revenue market share from the current 26 per cent to 38 per cent by the end of 2019-20 while VIL’s revenue market share will decline to 29 per cent and Airtel’s will drop to 28 per cent.
This will not be healthy for sector dynamics. Hyper-competition has led to financial collapses and a highly concentrated market. If this evolves into a quasi-monopolistic situation, with one player dominating the market, there will be a different set of problems for subscribers and regulators.