DISTRESS CALL
Cut-throat competition and regulatory uncertainty have scarred the telecom sector. The recent tariff hike may rescue telcos for now, but subscribers will bear the brunt
Competition and regulatory uncertainty have scarred the telecom sector. The tariff hike will keep it above water, but subscribers will pay
When the erstwhile Reliance Infocomm launched its landmark service in December 2002 with the catchline ‘Kar lo duniya mutthi mein (The world in your fist)’, many called it a revolution in the Indian telecom sector. For the first time, mobile telephony had been made affordable, unleashing its potential to connect Indians irrespective of where they lived or worked. Fourteen years later, when the Mukesh Ambani-led Reliance Jio launched its 4G service with VoLTE (voice over long-term evolution) technology in September 2016, the focus was on data, with high-speed video downloads and live-streaming of news, sports and entertainment becoming the new normal. But Jio’s entry also shook up the giant incumbents—Vodafone, Idea and Bharti Airtel—and uprooted Reliance Communications (what Reliance Infocomm came to be known as, and ironically, belonging to Mukesh’s brother Anil), which, saddled with gargantuan debt and obsolete CDMA technology, was easy game. With its rivals in the doldrums, Jio does indeed have the Indian telecom sector in its grip—but this has also raised serious questions for consumers. How will customers fare in a monopolistic or a duopolistic situation, with just one or two telecom players? Will they be vulnerable to serial price hikes? Is this the end of low tariffs, which have been mostly responsible for the large-scale use of value-added services such as data?
Consumers are not the only ones facing uncertainty. Though most players in the telecom sector had been under stress for some
time, no one was prepared for the recent shock administered by the Supreme Court. On October 24, with the court favouring a DoT (department of telecommunications) directive on a new method of calculating licence fees and spectrum charges, telcos were suddenly faced with a combined liability of Rs 1.33 lakh crore (including interest), to be paid within three months. This would have been a crippling blow, coming as it did in the wake of the stiff competition from Reliance Jio, which had, with its aggressive tariffs, severely dented the bottom lines of its rivals.
Vodafone Idea and Bharti Airtel, declaring their second-quarter results for this fiscal, reported record losses after making provisions for dues to be paid to the government under the new calculation for adjusted gross revenue (AGR). The former posted losses of about Rs 50,922 crore, while the latter’s losses were around Rs 23,045 crore for the July-September quarter. Vodafone Idea has set aside Rs 25,680 crore for its AGR liability, while Bharti Airtel has provided for Rs 28,450 crore on that count.
As an immediate consequence of the court order, Reliance Jio, Vodafone Idea and Bharti Airtel announced tariff hikes—the first in five years for the latter two companies. While Bharti Airtel and Vodafone Idea will hike rates on pre-paid plans by up to 42 per cent beginning December 3, Jio has said it will be introducing ‘all-in-one’ plans that will cost 40 per cent more than previous plans, effective December 6. These tariff changes are likely to impact around 900 million telecom subscribers. ‘Jio was at the forefront of aggressive pricing in the sector, resulting in the bankruptcy of weaker players and increasing financial stress for Bharti Airtel and Vodafone Idea,’ says a research note from Axis Capital. ‘The price hike is likely to set the stage for improvement in the financial health of telcos, with incumbents also [announcing] a price hike (without risk of subscriber loss).’ The hike will help increase telcos’ average revenue per user, which may be amplified by operating leverage, it adds.
‘Subscribers can expect an increase in their bills,’ writes Bhagyashree C. Bhati, a research analyst with Care Ratings, in a note. ‘However, to offset the impact, some may reduce their data use, moving to 1.5 GB data plans from 2 GB data plans and to 2GB data plans from 3 GB data plans.’
An SOS call
While consumers may feel unfairly hit by these price hikes, the AGR issue likely has telcos feeling the same way. In their disagreement with the DoT, telcos had argued that they should be charged on the basis of the core business they conduct using their allotted spectrum. The DoT had
maintained that the definition of AGR included other items, such as dividends, interest, capital gains on account of profits on sales of assets and securities, and gains from foreign exchange fluctuations, among others.
For a sector with a debt overhang of Rs 4 lakh crore, such a huge fee, to be paid within three months, had spelled disaster. This might have left just one major player in the fray—Reliance Jio—with Bharti Airtel and Vodafone Idea facing big trouble. On November 12, when asked about its India business, Vodafone chief executive Nick Read had forecast a bleak future, reportedly saying: “If you’re not a going concern, you’re moving into a liquidation scenario—can’t get any clearer than that.” That led to fears that the UK firm was considering winding up operations in India, sending Vodafone Idea’s stock price tumbling. Though Read later said his comments had been misread, it is no secret that, saddled with a debt of Rs 98,000 crore and with subscriber numbers falling, the company has been finding the going tough in India, despite its merger with Idea Cellular in August 2018. Similarly, Airtel, with debt of over Rs 1 lakh crore, owes Rs 21,682.13 crore in licence fees to the government. Reliance Communications, which ceased mobile telephony operations as debt mounted, owed Rs 16,456.47 crore to the DoT. (Since the AGR dispute dates back to 2005, the total claim amount has ballooned because of interest and penalties levied since.)
‘This decision [by the Supreme Court] has come at a time when the sector is facing severe financial stress and may further weaken the viability of the sector,’ Airtel had said in an October 24 statement, adding that the government needed to find a way to reduce the burden on the industry. The government did step in, if late—on November 20, the Centre announced a two-year moratorium on spectrum payments. Telcos now need to make the next spectrum payment in fiscal 2022-23. This has given Vodafone
Idea and Bharti Airtel breathing room, but they still have their work cut out to come out of the red.
Battle lines
At the end of October, the Cellular Operators Association of India had taken up cudgels on behalf of the incumbents, writing to telecom minister Ravi Shankar Prasad about the crisis in the sector and the possible negative consequences on the industry of extracting the AGR dues. However, this led to a war of words with Reliance Jio, which in its letter said its rivals should not be bailed out of their own ‘commercial failure and financial mismanagement’.
These tussles between telcos and the government (and between telcos themselves) highlight the overall turmoil in the industry. The sector, already in a muddle after the infamous 2G scam—which was not subsequently upheld by the courts—turned into a war zone with the entry of Reliance Jio Infocomm in late 2016. As private sector players Vodafone and Idea (which merged in 2018) and Bharti Airtel reduced tariffs to match Jio’s heavily discounted inaugural offers, their profits took a beating. Public sector behemoths Bharat Sanchar Nigam Ltd (BSNL) and Mahanagar Telecom Nigam Ltd (MTNL), also saddled with losses, are awaiting a government bailout. The high spectrum charges that private players needed to cough up as the government went in for auctioning airwaves did not help them either. A telecom company that wishes to offer services in any of India’s 22 telecom circles must purchase a unified access services licence to operate that circle through an auction. Telecom players have often aired grievances about this. “On the one hand, we have the prime minister’s vision of a digitally enabled India, which requires tremendous investment and, on the other, we keep spectrum prices very high. The licence fees are high, the spectrum charges are high
and GST is at 18 per cent, which is almost the highest tax bracket,” said Bharti Airtel chairman Sunil Mittal at an event in New Delhi last year. Clearly, the pain is showing— in August this year, Airtel posted its first quarterly loss in 14 years (in the June quarter), swinging to a Rs 2,866 crore loss compared to the Rs 97 crore net profit it posted a year ago. Vodafone’s losses also grew—it reported a net loss of Rs 4,067 crore in the quarter ending June 2019, down further from a net loss of Rs 2,758 crore in the year-ago period.
Losses of other kinds
The incumbents have been steadily losing customers too. According to a TRAI (Telecom Regulatory Authority of India) report, Vodafone Idea lost 4.95 million subscribers in August this year, while Bharti Airtel lost 0.56 million. This has happened at a time when the total number of wireless subscribers has increased by 2.68 million, to 1.17 billion in August. Their loss has been Jio’s gain—it has already overtaken Airtel in total subscribers, and is within striking distance of Vodafone Idea. As of August, Vodafone Idea had 375 million subscribers, Jio had 348.2 million and Airtel 327.9 million. Meanwhile, BSNL and MTNL lost 0.21 million and 6,701 subscribers, respectively, in August.
Why have things come to such a distressing pass for the telcos? One reason is the exorbitant sums that companies have had to pay for spectrum. Another is the frequent changes in policy and regulations. For instance, spectrum is currently sold though auctions, with the result that costs are often prohibitively high. As a measure, the government earned Rs 1.09 lakh crore through spectrum auctions in 2015. Yet another issue is the price war that began with the entry of cash-rich Reliance Jio into the telecom market. Jio’s objectives were simple—first, to carpetbomb the mobile telephony space, which had become a potential hot-bed for value-added services by using LTE technology, a form of high-speed wireless communication for mobile phones and data terminals. Second, it would upend the 4G (4th generation mobile telecom technology, which allows high-speed data transfer) market—largely serviced at the time by Bharti Airtel, Vodafone India and Idea Cellular—by acquiring 100 million customers in the first year of operations. Thereafter, it would retain those customers and keep adding more and, in the process, strive to achieve what China’s stateowned mobile telephony provider China Mobile has in recent years. (China Mobile converted 400 million users to LTE in a matter of 18 months from 2014, sometimes adding 22-23 million subscribers to the new network in a single month.) According to media reports, Jio’s entry saw an unprecedented rise in data consumption, with the average user consuming 11 GB of data per month. Jio’s journey has panned out as analysts had surmised, with its growth coming at the expense of the other telecom players. Jio also benefited hugely from the government’s drive to make Aadhaar mandatory for various services—at one point, even for a mundane mobile subscription. The Supreme Court later put curbs on such e-Aadhaar enrolments, but not before Jio had made significant inroads in the telecom space.
Behemoth on the back foot
Vodafone Plc had big plans for India when it bought a majority stake in Hutchison Essar in 2007. Those plans did not pan out—the company was hamstrung by stiff competition, high spectrum charges and changes in government policy. The company got tangled in a legal battle with the government on retrospective taxation of its acquisition of a majority stake—it was required to cough up Rs 20,000 crore, a matter currently under arbitration. Another regulatory issue was the UPA government’s policy of issuing spectrum licences on a first-come-first-serve basis—a move that pushed down tariffs but led to a court battle, in which the Supreme Court struck down over 100 licences. The entry of Jio into the market was a further blow, as it offered free voice and cheap data on its more efficient 4G network, adding subscribers by the millions every month. When Vodafone Idea tried to upgrade its network to take on Jio, its debt pile grew.
In the second quarter of FY20, Vodafone Idea’s average revenue per user declined from Rs 108 to Rs 107. Despite total synergy benefits between Vodafone and Idea estimated at Rs 6,300 crore on an annual basis—the gains from redeploying equipment from sites where both Vodafone and Idea had infrastructure to increase coverage and services without additional cost—EBITDA (earnings before interest, tax, depreciation and amortisation) margins were still 10 per cent. The company’s net debt rose quarter-on-quarter from Rs 99,300 crore to Rs 1.01 lakh crore. According to a report from Citibank, Vodafone Idea
THE GOVERNMENT HAS RELAXED AGR PAYMENT TERMS, BUT THAT’S STILL ONLY A LIFELINE AT BEST
faces ‘significant uncertainties’, given weak operating performance, high leverage and the additional AGR liability.
A note from SBI Caps says that the recent Supreme Court ruling in the AGR case ‘poses significant survival concerns for Vodafone-Idea with [its] exhausted balance sheet’. The note goes on to add: ‘Given this situation, raising equity or debt remains extremely tricky, in our view. The ability to invest in networks, which has been the single largest reason for the company’s loss of subscribers, is likely to take a back seat and subscriber losses may continue.’ Stating that Vodafone-Idea’s woes mostly relate to its balance sheet and cash flows and that incremental steps are unlikely to solve the problem, SBI Caps says ‘it is not merely the number of players but the ability of players to invest’ that matters.
A slender lifeline
Although the government has relaxed AGR payment terms, it has only given the indebted telcos some breathing room. A revision of M&A guidelines may help—further consolidation could ensure that there is no loss of spectrum dues owed by telcos to the government. The introduction of floor tariffs for services could also improve sector cash flows as would restructuring the debt burden of telcos.
The sector is going through trying times, matched only perhaps by the crisis that followed the 2G scam. As mentioned, the moratorium on AGR dues will bring only temporary relief. And while technology disruptions are unavoidable, the sector can surely do without unpredictable shifts in policy, which could put players literally out of business. ■