A sequence of developments led to substantial tariff hikes by the three private telecom operators in December. Although the higher tariffs could signal an end to the fierce price war, it may not be enough to restore the sector’s financial health.
In October, a key Supreme Court judgment on adjusted gross revenue (AGR) means that private operators, in particular Bharti Airtel and Vodafone Idea Limited, have a massive burden of payments. Vodafone Idea, Bharti Airtel and Tata Teleservices have filed separate petitions in the Supreme Court, seeking a review of the penalties and interest on dues, and questioning some components of the non-core items the court included while computing AGR.
The court judgment decreed that the telecom industry has to pay Rs 920 billion by January 2020 to settle AGR-related dues that date back all the way to 2004. The calculation includes interest payable. The bulk of this new burden falls on Airtel and Vodafone Idea since Reliance Jio Infocomm Limited (RJIL) was a latecomer and began operations only in 2016. RJIL’s liabilities amount to a comparatively lower Rs 90 billion.
These new liabilities forced Airtel and VIL to declare record losses in the July-September 2019 quarter. VIL declared a loss of Rs 509.22 billion – the highest quarterly loss in Indian corporate history – in the second quarter of 2019-20 as it had to make provisions for the AGR dues. Airtel reported record losses of Rs 228.3 billion in the same quarter for the same reasons.
Airtel has provisioned Rs 284.5 billion over and above the earlier provisioning of about Rs 58.1 billion, taking the total provisioning for AGR dues to Rs 342.6 billion. VIL has assessed its AGR liabilities at about Rs 441 billion, which includes Rs 276.1 billion towards licence fee and Rs 165.4 billion towards spectrum usage charges. The company has provisioned about Rs 256.8 billion.
The government recognises that the operators lack the resources to service this additional burden. As such, they will be given a moratorium until April 2022 to make the payments. If they overstep this deadline, additional interest would be charged.
In the wake of these developments, private operators have increased their tariffs. Airtel and VIL have announced a tariff hike of 15-40 per cent for various services, with a focus on data and prepaid services. RJIL has also imposed a charge on outgoing calls to other operator networks, which will go towards meeting interconnect usage charges. These hikes will ensure some increase in revenues for the three private operators.
However, judging by current cash flows and trends in terms of profitability, this increase will still not be enough for Airtel and VIL to service payments from their internal resources. Both companies are making operational losses quite apart from the new AGR liability.
Hence, these two companies would have to raise more funding. This could be difficult since it would entail finding new strategic investors to take stakes, or perhaps institutions with deep pockets that are willing to offer the requisite loans. Both the parents of VIL – Vodafone PLC and the Kumar Mangalam Birla Group – appear unwilling or unable to invest more themselves. Indeed, Vodafone has written down the value of its India investments to zero.
Meanwhile, the government has announced a revival package for the ailing PSUs Bharat Sanchar Nigam Limited (BSNL) and Mahanagar Telephone Nigam Limited (MTNL). This envisages a merger between the two PSUs, alongside a large-scale voluntary retirement scheme (VRS) to reduce the burden of overstaffing and other plans to generate resources by selling off sundry assets belonging to the two companies. This will ensure that four players – three private operators and one PSU – operate in the sector for at least some time.
RJIL is in better shape than any of the other players. It is the only operator that is making profits. Also, it can draw on the resources of its giant parent, Reliance Industries Limited (RIL), to raise more funds if required. However, there are clear signs that the Reliance Group is trying to deleverage its telecom subsidiary, and get set for an initial public offering that would spinoff Jio as a separate listed entity. Hence, while the Reliance Group may be capable of investing more, it would probably prefer not to.
As a result of these developments, it is evident that the telecom industry will remain cash-strapped in the foreseeable future. Any fresh financial resources that are raised – and there is considerable need to raise such resources – will go towards meeting the new AGR burden.
This means that the roll-out of 5G networks is likely to be delayed considerably. The government has already postponed the auction of 5G spectrum, which was due to take place in 2019-20. This is because it is aware that there would be no meaningful bidding for such spectrum and indeed, even if the spectrum was allocated at a low cost, the operators lack the resources to roll out 5G networks or to make the other investments required to set up new networks.
The industry is also near saturation point in terms of attracting new subscribers who will generate reasonable ARPUs. Indeed, the last six months have seen both Airtel and VIL trying to induce low-ARPU subscribers to leave their networks. The urban user base is saturated across most of India, with many subscribers carrying dual connections. There may be some room for growth in the rural subscriber base, but this tends to be low ARPU and it takes a very long time to achieve profitability on a rural network.
The Supreme Court judgment on AGR and the government moratorium on this means that the three private operators will have to pay somewhere between Rs 920 billion and Rs 1.47 trillion by April 2022. After that, further interest will be charged on any outstanding amount.
Airtel’s consolidated full-year revenues for 2018-19 were Rs 807 billion, with EBITDA before exceptional items at Rs 262.93 billion. The merged Vodafone Idea is likely to hit revenues of Rs 450 billion for 2019-20. Vodafone has written down the business value of its India operations to zero. The Kumar Mangalam Birla Group too has expressed concerns about the sustainability of operations.
Let us assume that the tariff hikes will enable the three private operators to raise revenues. CRISIL expects sector revenues to grow from Rs 1.29 trillion in 2018-19 to Rs 1.69 trillion in 2020-21, an increase of 31 per cent. The sector-wide EBITDA is expected to grow 106 per cent to Rs 605.7 billion in 2020-21. Monthly ARPUs will likely rise from Rs 116 to Rs 145 by 2020-21. But this would still not be enough to generate the cash flows necessary to pay the additional AGR. After all, the sector already had debt of about Rs 5 trillion as of March 2019.
Airtel or VIL will have to sell stake, or raise money from the bond market, or borrow. Both companies will not be able to make significant investments on other fronts. Airtel says it will hold an EGM in early January 2020 to seek the approval of shareholders to raise $4 billion (approximately Rs 283 billion). In a filing with the exchanges, it said it would seek approval to raise $2 billion through one or more instruments, which could be a qualified institutional placement, compulsory convertible debentures, or other convertible securities, American depository receipts and global depository receipts. Airtel hopes to raise another $1 billion through the issue of foreign currency convertible bonds (FCCBs) or other similar securities in foreign currency, and another $1 billion via redeemable non-convertible debentures.
While RJIL is profitable, it is cash flow negative due to massive investments, although it says the investment cycle is now coming to a close. The parent, RIL, has invested over Rs 2.1 trillion so far and it appears that it is getting set to spin off RJIL and is now trying to raise cash. Tower assets, for example, have been spun off into other subsidiaries in which RIL could sell stakes. In theory, however, RJIL could pay the AGR without too much trouble since RIL could easily raise the required amount or even pay it out of internal accruals.
It is easy to envisage a future where four operators, including the merged PSU, continue to service subscribers. Of these, three are likely to continue having shaky finances. RJIL is much better placed now than any of its competitors.
In the meantime, the merger and rescue plan for BSNL and MTNL is estimated to cost Rs 560 billion. Both PSUs are enormously overstaffed and are making huge losses. BSNL has 176,000 employees and MTNL has 22,000. Employee costs account for 75 per cent and 87 per cent of the two companies’ respective total incomes.
BSNL’s net losses in 2017-18 stood at Rs 79.9 billion on revenues of Rs 226.7 billion. In 2018-19, BSNL is estimated to have lost Rs 142 billion, as per a parliamentary statement, with revenues down to Rs 193 billion. BSNL has 115 million mobile subscribers and an asset base valued at Rs 425 billion on its books (in 2017-18). Its optic fibre cable (OFC) network of 750,000 route km would be worth over Rs 500 billion in commercial terms. The rescue plan speaks of a VRS and hopes to monetise assets worth Rs 380 billion. Upfront, the government would pay for 4G spectrum and raise Rs 150 billion in bonds to be serviced by the PSUs.
The brutal price war has led to a shakeout in an already highly concentrated industry. The PSUs’ revival plan may not be enough to trigger a turnaround for the merged entity, which means that there would effectively be three private service providers left in the fray. ICRA reckons that “in case the AGR has to be funded through debt, it has the potential to derail the deleveraging attempts by the industry”.
A quasi-monopolistic or monopolistic situation may easily arise if either Airtel or VIL becomes financially unviable. The combined subscriber base of VIL and Airtel amounts to over 700 million subscribers. If the companies collapse, those subscribers would have to be ported out, which would have significant ramifications for the industry.
In a broader sense, what is happening has negative repercussions for the macro-economy. The sector has strong externalities. A healthy telecom sector enables economic activity and growth. A weak telecom sector implies negative externalities across the board.