The telecom services industry may effectively become a duopoly. This would be a huge transformation, given that there were eight service providers till as recently as 2016. The major players currently offering voice and data services to retail customers are Reliance Jio (part of Reliance Industries’ digital arm, Jio Platforms), Bharti Airtel, Vodafone Idea (Vi) and the public sector undertakings Bharat Sanchar Nigam Limited (BSNL) and Mahanagar Telephone Nigam Limited.
Of these, Vi is in a deep financial crisis, as is BSNL. Although the government has announced some relief measures, neither BSNL nor Vi is out of the woods yet. Vi has a lot of debt on its balance sheet and has accumulated losses. The telco is finding it hard to raise more resources, and it cannot compete in a rapidly changing technological landscape without recapitalising substantially. BSNL has an awkward combination of a large, unionised workforce and red on the balance sheet.
If these two companies are to remain operational, the government must find a way to reduce Vi’s debt burden, and take hard decisions regarding BSNL. The cabinet has decided on some relief measures, which may help but may not be enough. The relief package includes a four-year moratorium on the adjusted gross revenue (AGR) dues of the telcos. However, the dues will remain payable with interest, etc. It also announced a rationalisation of the definition of AGR, providing clarity for the future. The penalties and interest payable on penalties for licence fees, spectrum, etc. have been rationalised, and the interest calculated will be compounded annually instead of monthly. Spectrum sharing will be allowed and free of charges to the government. Moreover, 100 per cent foreign direct investment in telecom has been approved through the automatic route.
Analysing the package, Akshat Jain, partner, J. Sagar Associates says, “The package aims to usher in structural reforms by infusing investor confidence and provides flexibility to telecom operators with respect to spectrum sharing, surrendering spectrum usage rights, etc. However, the liability to pay AGR dues continues. The deferment of AGR dues cannot be construed as a waiver since the package only envisages a moratorium of four years with interest and penalties accruing for such deferral. While this will temporarily provide some relief, it does not essentially alleviate the already bleeding balance sheets of telecom operators.”
There are multiple political and geopolitical dimensions, as well as business dynamics, to be considered. The exit of a global multinational, Vodafone, would send a bad signal, which could be a deterrent to potential investors.
A telecom duopoly would not be healthy. Given the positive externalities of the telecom sector, which drives growth across the economy, a two-company structure would constrain GDP growth. Highly concentrated telecom markets see less innovation, higher tariffs and poorer service quality. This could retard the adoption of new technologies such as 5G, satellite connectivity, internet of things, and digitalisation of other services. There is a reluctance to invest in 5G spectrum, for example, and auctions have been deferred. Only recently has some clarity been received from the cabinet decision.
If both these companies do go out of business, their subscriber base of 390 million users would lose connectivity, unless they could be seamlessly migrated to the other operators. The capacity to absorb around 300 million active users will only exist if some entity can quickly take over the BSNL and Vi networks and spectrum (which the cabinet decision might help to enable, given the easing of spectrum sharing norms).
There would also be job losses. BSNL and Vi directly employ large workforces and indirectly provide employment to many more. In addition, there would be problems in the financial sector, due to the debt owed to the banking sector and other lenders. There would also be a problem with balancing public finances due to the combination of spectrum licensing dues and AGR payments, which would not be easily recoverable. Every budget so far has assumed big earnings from these heads.
The numbers for these two service providers are stark. In both these cases, debt far exceeds annual revenues. It is impossible to generate the cash-flows required to service debt, let alone find enough surplus to invest in upgrading networks. Vi declared revenues of Rs 421 billion in financial year 2020-21, and it had operating losses of Rs 26.17 billion. After depreciation (Rs 236.4 billion) and financing costs (Rs 179.9 billion), the losses amounted to Rs 442.5 billion. Vi has a debt of Rs 1,867 billion on its balance sheet, apart from AGR liabilities of about Rs 504 billion. Its net worth is a negative Rs 38.23 billion. The debt mentioned above includes around Rs 230 billion owed to banks and other lenders, alongside deferred spectrum dues of Rs 962 billion. In the same fiscal year, BSNL declared consolidated revenues of Rs 174 billion, with an operating profit of Rs 11.77 billion. After depreciation (Rs 60.5 billion) and financing costs (Rs 25.7 billion), it had losses of Rs 74.5 billion. It has Rs 326.8 billion of debt (current and long term) and other financial liabilities, amounting to about Rs 138 billion.
In contrast, Bharti Airtel had consolidated revenues of Rs 1,012 billion in 2020-21, with operating profits of Rs 460 billion. After depreciation (Rs 294 billion), financing costs (Rs 150.9 billion) and taxes, it had profits of Rs 14.3 billion before deduction of exceptional items and tax. It declared a loss of Rs 140 billion after exceptional items, with provisions for spectrum charges and AGR demands. This is a healthier picture. The Bharti Airtel Group is profitable at the operational level and its overseas networks in Africa are showing improved performance. It can service its obligations, even if the AGR demands have placed stress on the balance sheet.
Jio is also comfortable. It does not have AGR dues as a newcomer. The parent, Reliance Industries, raised Rs 1,520 billion in equity for the unlisted subsidiary, Jio Platforms, including commitments from marquee investors such as Facebook, Google, Silver Lake, Vista Equity Partners, General Atlantic, KKR, Mubadala, the Abu Dhabi Investment Authority, TPG, L Catterton, the Public Investment Fund, Intel Capital and Qualcomm Ventures. The digital services segment of Reliance Industries registered Rs 902 billion in revenues, and operating profits of Rs 340 billion. The much-awaited launch of the affordable JioPhone may further drive uptake of the service.
In terms of subscriber counts, Airtel has a subscriber base of 352 million (June 2021), of which 97 per cent is active. Jio has a base of 436 million, of which 78 per cent is active. Vi has a subscriber base of 273 million, of which 88 per cent is active. BSNL has 116 million subscribers, of whom 50.6 per cent are active. This means Airtel and Jio have roughly 340 million active subscribers each, while VIL has around 240 million and BSNL has around 58 million.
By end-March 2021, the overall industry blended average revenue per user (ARPU) was Rs 103.6-Rs 97 for prepaid and Rs 226 for post-paid subscribers. Over 95 per cent of subscribers were on prepaid plans. Airtel had an ARPU of around Rs 146 as of June 2021 and aims to push this to Rs 200 in the current fiscal year. Jio had an ARPU of Rs 138 as of June 2021, while Vi had an ARPU of Rs 104. BSNL’s ARPU is well below the industry average, in double figures. All operators are attempting to raise minimum tariffs for the prepaid segment to try and push up ARPUs.
In business terms, the equations are simple enough. Vi has unsustainable debt, which it cannot service at the current revenue levels. It is finding it difficult to raise the Rs 250 billion it urgently needs to continue operations. Vi’s erstwhile chairperson, Kumar Mangalam Birla, has resigned and written a letter in which he has reportedly offered to hand over the 27 per cent stake held by his group (which promoted Idea).
BSNL has huge accumulated losses. While it has made an operating profit in the recent past, it does not have 4G networks. It cannot raise its ARPU meaningfully or retain its subscriber base without 4G. It also has to reduce its workforce, which still amounts to over 65,000 permanent employees, despite around 80,000 employees opting for a voluntary retirement scheme. It has also had issues with delayed salary payments and union opposition.
The choices in front of the government are few and not easy. The multiple negative consequences of Vi and BSNL going out of business would put great stress on an economy already hard hit by the pandemic. The relief package does offer slightly easier financial terms for Vi, simply by giving it time via the moratorium. But it may not be enough, since the dues will continue to mount. For BSNL, there is a need to work out a more concrete divestment plan. The government would ideally prefer to disinvest BSNL as soon as possible, given that it is a drain on public finances. But finding a strategic investor is tough, given the bloated workforce. If the government cannot work out an acceptable way to reduce this, it will be difficult to find a strategic investor. One also cannot forget that considerable capex will be required to upgrade to 4G services – a challenge any strategic investor would have to face as well.
The telecom sector has huge positive externalities, especially since all sorts of services, including public services, are increasingly being offered digitally. Falling behind technologically would mean poor service delivery while translating into higher costs for citizens. The relief package does not go far enough in terms of finding solutions.
By Devangshu Datta