Telecom: In Deep Financial Mess
Debt-laden telecom operators face a dark future unless revenue increases. Will tariff increase alone solve this mess?
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The Data And statistics of the Indian telecom sector are widely known. It ain’t a rosy picture by any imagination despite India having 110 crore active mobile subscribers with one of the lowest average revenues per user (around Rs 63 per month recorded for one operator as on March 31, 2019). The entry of Reliance Jio has also not helped the business, even though, it has empowered more subscribers with the cheapest data rates and free voice services. Data from sector regulator—Telecom Regulatory Authority of India—shows that price-per-GB of data declined by 95 per cent to under Rs 12 in 2018 compared with Rs 226 in 2016. Therefore, the competition post-Jio entry has added to the misery of the sector, whose combined debt is expected to touch Rs 10-lakh crore in the next few months.
Sample this: As on March-end 2019, the combined debt of the three mobile services operators — Bharti Airtel, Vodafone-Idea and Reliance Jio — stood at around Rs 4 lakh crore. Add to it the unpaid licence fee, the outstanding Spectrum Usage Charge (SUC), arrears, penalty and interest payments, etc, the figure jumps to Rs 5.5 lakh crore. Further, add the losses etc. of the incumbent players, the resulting figures have now crossed the Rs 9-lakh-crore mark.
Then comes the Supreme Court order on October 24, which mandates the incumbent to cough-up Rs 92,642 crore in unpaid licence fee, and another Rs 55,054 crore in outstanding SUC. The SC order came in a long-pending case, whereby the telecom companies had argued that the adjusted gross revenue or AGR should comprise of revenue accrued from core services, while the government had argued that AGR needs to include all revenue, including non-telecom revenue (like money from rent, land sales or sale of scrap etc.)
The Cellular Operators Association of India (COAI) has sought an easier payment schedule for spectrum bought in previous auctions, waiving penalty and interest arising out of AGR dues, and a 14-year period to pay the principal amount of AGR dues.
“We expect they will independently evaluate the situation and make the right decision for the country, its citizens and the industry,” Rajan Mathews, Director General, COAI, said.
The loss-making Bharti Airtel and Vodafone Idea appear to be worst hit by the SC order. Vodafone Idea will need to pay at least Rs 28,309 crore, while rival Bharti Airtel’s dues are roughly Rs 21,682 crore. Jio reportedly owes around Rs 13 crore and there is no other operational operator. Remember Reliance Communications and Aircel went bankrupt and Airtel bought the telecom business of Tatas.
With over 1.19 billion subscribers, the telecom sector is a key contributor to the Indian economy in terms of consumer benefit, employment, revenue generation and contributes 6.5 per cent to the GDP. It is a well-known fact that in India, the telecom sector has the lowest tariffs in the world backed by the investment of over Rs 10 lakh crore in setting up of world-class mobile networks over the last 20 years. “Today it is going through one of its most disruptive phases. The sector is already reeling under a daunting debt of Rs 4 lakh crore and is in dire financial straits as operators are making negative returns on their investments,” Mathew added. The financial data of the telecom operators clearly depicts that the telecom Earnings before interest, tax, depreciation and amortisation (EBITDA) continues to contract, while the interest expense of the industry continues to increase.
On November 21, the Union Finance Minister Nirmala Sitharaman announced that the government has decided to grant a 2-year moratorium for telecom companies to pay their spectrum dues. While the move will give Rs 42,000 crore relief to Bharti Airtel, Vodafone Idea and Reliance Jio, the government is unlikely to intervene in the Supreme Court-mandated statutory payments, government officials say informally. This move will give Vodafone Idea and Bharti Airtel a cash flow breather of Rs 23,920 crore and Rs 11,746 crore, respectively.
Reacting to it, Mathews of COAI said: “We welcome the fact that the government recognises the financial distress of the telecom sector and has provided relief in the form of deferments of spectrum payments. This will certainly provide some immediate cash flow relief to the industry.”
However, Mathews pointed out to the high level of levies and taxes that continues to be a challenge for the sector. He said the telcos pay up to 30 per cent of their revenues to the government, by way of various levies and taxes, which is an enormous burden on the industry. “We have been requesting the government that these levies and taxes be rationalised and the same is also one of the important goals of National Digital Communications Policy,” he added.
Tariff hike impact
Bharti and Vodafone Idea announced tariff revision in the range of 15-50 per cent from 1 December. The revised hike in tariff has been spread among various plans with the introduction of voice fair use policy limits on voice calls using unlimited plans. This was however dropped later in the month. The free voice calls were earlier limited to 1,000 minutes for the more affordable plans, while the pricier long-term plans had the FUP of 3,000 minutes for off-net calls. Bottom line is that the tariff has been increased for voice and data services by all three operators. One analyst said the average increase in tariff currently varies from 15-41 per cent across different plans. “It is projected that the rise in tariffs would give the sector a significant boost in topline and bottom-line. Hypothesis indicates that these rises are “structural positives” for the sector weighted down by poor cash flows and rising levels of debt,” the analyst said.
The Department of Telecommunications reckons that a small increase in tariffs could provide big relief. The calculations are based on the current ARPU of Rs 120-130. A senior DoT official said if the telcos increase their respective tariff by even 10 per cent, which works out to Rs 11, then the total impact will be around Rs 11,000 crore per year. In three years, the operators could raise an additional Rs 33,000 crore, presuming the demand remains constant. And if there is a slight increase in data consumption in the next three year despite a rise in tariff, the combined figure could cross Rs 35,000 crore at the minimum, it said.
Responding to the hike in tariff, Naval Seth, a telecom analyst with Emkay Global, a leading research and investment firm, said: “The quantum of the tariff hike is higher than expected and it also comes with a strategy to restrict down-trading which should augur well if the hikes are absorbed by consumers smoothly.” He said that the data stickiness through content consumption will be proven with tariff hike absorption by subscribers and it should also pave the way for incremental tariff revisions. “The tariff increase and SIM consolidation are positive for Bharti and Jio,” said Seth. VIL is still in the network integration phase and might continue to lose higher-than-estimated subscribers, he added.
Whatever may be the case, a lot is riding on this sector to start generating cash revenue if we do not want to see the shutdown of any more service provider. If that happens at all, are we ready for a near-monopolistic business environment? Perhaps Not.