Indian Telcos Ready For Merger, A New Chapter To Begin

indian telcos

Sistema Shyam Teleservices is expected to get a final nod for its merger with Reliance Communications in a few days. But this is one merger deal which the Russian company may not like to remember as part of its Indian telecom journey. Sistema, which launched CDMA (code division multiple access) services under the MTS brand in 2010, had invested over $3.5 billion (Rs 22,750 crore) to set up a pan-India network. Now, under the deal with RCom, it gets a 10 per cent stake in the company, in return for merging its business along with the valuable 800 MHz spectrum. Taking the current market cap of RCom, its shares are valued at only Rs 420 crore. It could get another $200 million (Rs 1,300 crore) from RCom once the spectrum is made contiguous, but that is still uncertain because the Anil Ambani company faces new challenges in its debt reduction plan after its merger deal with Aircel collapsed. Most foreign telcos, which earlier made a beeline for the high-growth industry, have hardly found any return on India investments. The process of their exit at a substantial loss is being accentuated by the onslaught of Reliance Jio in the market. Telenor India is another example of a serious player losing its India investment. The Norwegian company is estimated to have invested around $3 billion in its India venture. When it sold its business to Bharti Airtel, which finally got clearance a few weeks ago, it got no cash in return.

Airtel agreed to take over its outstanding spectrum payments of Rs 1,650 crore and obligation of the leases of the towers it owned. Telenor also agreed to pay back its debts in the company. The parent company in Norway, meanwhile, took an impairment of over Rs 5,800 crore in 2016 on its books after revaluing some of its installations, radio switches as well as licences in India. Earlier in 2012 too, it had written off Rs 3,500 crore on account of Indian operations. The financial mayhem in the sector is reflected in Bharti Airtel CEO Gopal Vittal’s recent statement that with an industry debt of Rs 4.5 lakh crore, the return on capital is as low as one per cent. In effect, companies which put their money in telecom in India would have done much better to keep the cash in bank and earn interest.

Vodafone, the second-largest telco in the country has faced tough times too. Earlier this year, it decided to merge with Idea Cellular and make the combined entity the largest telco in the country. Over a decade ago Vodafone plc had paid $10.9 billion (Rs 71,000 crore at current conversion rate, but it was around Rs 47,000 crore at 2007 prices when the deal was done) to acquire Hutchison’s stake in India, but it took two large impairments on its books— in 2010 of around Rs 20,000 crore and another just a year ago of Rs 38,400 crore, which is nearly what it paid for the initial acquisition. In a financial statement last year, Vodafone plc stated it had recorded a non-cash impairment of ^5 billion, net of tax, in the period (first half ending September 2016) relating to the Indian business, driven by lower projected cash flows and increased competition (with the launch of Jio). As a result, the UK company’s losses soared and it eventually decided to merge its Indian business with Idea Cellular.

Analysts say Vodafone put in around Rs 150,000 crore (which includes cost of acquisition, buying out Essar stake and picking up spectrum and licences) in the country. And in 2016 it injected fresh equity of Rs 47,700 crore to expand and take on Jio as well as retire debt. But its Ebitda in FY17 was a mere Rs 13,115 crore, according to their own declared figures.

Among others losing out in the India market, Malaysian telco Maxis, which acquired Aircel in 2006, has put in over Rs 47,000 crore till now. This includes the cost of acquisition from its former promoter C Sivasankaran. With its adjusted gross revenue for Q1 2017 declining by over 32 per cent due to pricing pressure with the entry of Jio, the group has been looking at ways to get out of the mess, and the proposed merger with RCom was one such route. But with that deal collapsing, Aircel with a debt of over Rs 15,500 crore (which was reduced by Rs 2,394 crore from sale of 2,300 MHz to Airtel last year) has limited options despite funding support from the promoters.

But with that deal collapsing, Aircel with a debt of over Rs 15,500 crore, which was reduced by Rs 2,394 crore from sale of 2,300 MHz to Airtel last year, has limited options despite funding support from the promoters. But an ICRA report says that while it has a moratorium on debt servicing till March 2018, their cushion is now very limited due to the weak outlet. According to analysts, the options could well include winding down of its operations and then going to lenders with a proposal for a debt restructuring under the SDR (strategic debt restructuring) rules.

Financial crisis

Recent reports that Tata Teleservices is headed for closure has once again underlined the tremendous stress India’s telecom sector is under — and the need for quick government intervention to bail out what was once a booming business. The fate of Tata Tele, which is reeling under a debt of over Rs 34,000 crore and may shut shop as early as this month, is symptomatic of what the sector is facing because of unsustainable spectrum prices and crippling price wars that have resulted in plunging profitability and high debt. According to industry sources, telecom companies together carry a debt of approximately Rs 5 lakh crore. However, the total sectoral liability — if one takes into account loans from domestic banks, overseas borrowings and annual spectrum instalments — is pegged at nearly Rs 8 lakh crore.

Tata Tele, with about 45 million users or about four per cent of the market share, has seen its net worth fall by over Rs 11,600 crore in FY17, and losses increase from Rs 2,409 crore to Rs 4,617 crore year-on-year. Revenues, meanwhile were down 10 per cent to under Rs 10,000 crore. With its proposed merger being called off due to regulatory and legal hurdles, Aircel will find itself hard put to pay off its debts. RCom, meanwhile, has in its communications spoken of a revised plan to pay off its debt by the sale of its tower business, sale of fibre, monetising its real estate and spectrum trading.

The stress in the sector is such that most foreign players — who once flocked to the Indian market sensing a huge opportunity — are now fleeing the country. Telenor has been taken over by Bharti Airtel, Systema exited in favour of RCom, Tata still has to pay Docomo for their parting of ways and now with the RCom merger off, Aircel may have no option but to pack up. The only foreign player left is Vodafone, which is itself in the process of merging with Idea.

How did a once-upbeat sector — the second biggest and fastest growing after China — come to such a pass? One of the reasons is the high levies imposed on the sector. Industry bodies have often in the past bemoaned the fact that the Indian levy on the sector is in the 30 per cent-plus range. Compare this with China, where it is in the 11-12 per cent range, or even other South Asian countries such as Pakistan, Bangladesh and Sri Lanka, where they are in the early 20s. Successive spectrum auctions over the past seven years — aimed at increasing government revenue — have also contributed significantly to the sector’s woes.

The price of spectrum in India is among the highest in the world and telecom firms have no option but to participate in the auctions and buy this expensive “raw material” if they want to stay relevant and competitive in the business. The companies are, however, finding it extremely difficult to recover the crores of rupees spent in the auctions at a time tariffs have plunged. In India, average revenue per user (ARPU) is a measly $2 a month — perhaps the lowest in the world.

Revenues from data services were supposed to flow in with the spectrum in place. But that has not materialised either. Global rating agency Fitch had earlier noted that monthly data consumption levels in Asian markets such as China, Hong Kong, Korea and Japan were nearly three to five times higher than in India.

The entry of Jio last September has added to the troubles of existing players as their primary revenue earner — voice, accounting for over 80 per cent of revenues — was suddenly being given away free. Companies like RCom, Bharti Airtel, Vodafone and Idea have been compelled to match Jio’s offers to maintain market share — to the detriment of their bottom lines. According to figures put out by CLSA, a brokerage, and quoted by media, India’s mobile industry revenue fell for the first time in FY17 to Rs 1.88 lakh crore and will decline further to Rs 1.84 lakh crore in FY18.

The industry is seeking to counter these setbacks by consolidating. Vodafone India and Idea are likely to complete their merger by March next year. While Bharti Airtel has acquired Telenor’s business, the RCom-Aircel deal has suffered a setback. Industry insiders say it is time the government stepped in to help out the stressed telecom sector — even adopting “drastic” steps like cutting spectrum usage charge, revenue share and abolishing the Universal Services Obligation Fund. A Fitch official was quoted as saying in news reports that banks should treat spectrum funding as project financing and extend longer-tenure loans of 10 to 20 years. Whatever solution the government decides on, industry insiders believe, must be executed quickly — else the telecom sector will suffer irreparable damage.

Various critical issues

Not just fiscal policy support but a structural one is needed to ease the massive debt burden which is “slowly strangulating” the telecom sector, opined experts. Industry observers stated that at stake is not only the telcos ability to employ manpower and resources for introduction of next-gen communication technology, but severe consequences for lenders and nearly 150,000 jobs. Among the solutions prescribed by experts are setting up of a Telecom Finance Corporation and giving the industry priority sector lending (PSL) status.

If PSL status is allowed, then borrowing, overall cash-flow and debt management will become easier for all telecommunications service providers (TSPs), some experts told. Others believe the government should look at setting up a Telecom Finance Corporation to ensure priority lending and also give the sector a tax holiday as it transitions from voice to data.

According to Arpita Pal Agrawal, Partner and Leader, PwC India, the government “can additionally look at declaring the sector as a priority to facilitate the future network expansion requirements of the sector”. “Government could also review the hyper-competitive situation in the sector in light of customer interest in the medium- to long-term which is best served, in a market of this size, with at least three-four operating telcos actively competing on factors such as price, quality, innovation, etc,” Agrawal said.

Interestingly, nearly half the sector debt is in the form of deferred spectrum liabilities to the Department of Telecommunications (DoT), said Tanu Sharma, Associate Director, India Ratings & Research. “Rationalisation of spectrum pricing and elongation of DoT debt maturities could be options used by government to ease the stress on the sector.” Besides high spectrum and infrastructure costs, the total levy paid out by the telecom sector is about 29 to 32 per cent — which is one of the highest in the world. “Incentivise private or public players to invest in broadband infrastructure and allow flexibility of export of redundant active equipment,” elaborated Hemant Joshi, Partner, Deloitte Haskins & Sells LLP. He added: “Relax single-borrower exposure limits on banks for credit-worthy telecom companies and allow issuance of tax free bonds.”

The TSPs can also balance debt levels through monetising of non-core and tower assets to mitigate the pressure on their credit profiles, Sharma noted. On its part, the government has formed an inter-ministerial group (IMG) to look into the issues faced by the sector.

The IMG has reportedly recommended to the Telecom Commission that the period of deferred spectrum liability payment be increased to 16 years from the current 10 years. Another recommendation by the IMG is that the telcos may be allowed to pay for the spectrum with interest calculated marginal cost of funds-based lending rate rather than the prime lending rate. At present, the sector is burdened with astronomical debt — to the tune of nearly Rs 8 lakh crore by some estimates — and heavy losses due to a slew of freebies which are being doled out by incumbent telecom players to retain their customer base.

The grim reality that the sector faces can be gauged by the comments made by Communications Minister Manoj Sinha at the recently held India Mobile Congress: “The government is aware of the stress in the sector… We will make sure that the sector does not die.” Currently, India’s telecom network is the second-largest in the world after China, in terms of the number of telephone connections. As per the Annual Report 2016-17 of the Department of Telecommunications, the country had 1,124.41 million telephone connections, including 1,099.97 million wireless telephone connections with an overall tele-density of 87.85 per cent. Other estimates show that the mobile industry in India contributes 6.5 per cent ($140 billion) to the country’s GDP, and employs over four million people.

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