Why it won't be a happy new year for India's telecom sector
As you enter the first-floor offices of Reliance Industries at Maker Chamber IV in Mumbai's Nariman Point, you are greeted by a set of photographs on the wall. Most are about the various industries the group is into. Petrochemicals, refining and energy security are the dominant themes. However, there is no photo that represents Jio, Reliance's latest and probably the biggest gambit in telecom. Or, maybe there is.
In the centre, right above the receptionist is a photo of smiling schoolchildren rushing out — a scene from one of the many schools Reliance Foundation runs. It may be symbolic of catch 'em young and watch 'em grow market that Jio envisages in India's demographic dividend.
Well-funded by petrochem and refining profits, Reliance has already invested in excess of Rs 2 lakh crore in Jio and will continue to pump in Rs 7,000 crore to Rs 10,000 crore every quarter.
The company is often called the bada babu (top honcho) or the bada bhai (elder brother) for precipitating the inevitable consolidation in the Indian telecom sector.
The consolidation sparked by Jio's entry in September 2016 has already acquired clear contours with only three large private sector players — Bharti-Airtel, Idea-Vodafone merged entity and Reliance Jio — and the public sector BSNL-MTNL left standing. The rest have fallen or gobbled up by one of these.
Aircel, Tata Teleservices, Anil Ambani- promoted Reliance Communications are expected to either merge into one of the larger entities or survive as niche players. But is this enough for the industry or will the inevitable asset and manpower rationalisation bring in further pain? With revenues moving southwards across industry (see "Under Pressure"), the sector is desperately seeking some answers.
Raja Balakrishnan, MD and co-head of India investment banking at Bank of America Merrill Lynch (BofAML), feels this is a phase of "normalisation" for the Indian telecom industry.
BofAML has been an adviser in the Idea-Vodafone merger in March as well as in the sale of their tower assets to American Towers Company (ATC) recently. Balakrishnan feels Jio entered the market as a low-cost player, the only way possible.
"Jio's entry put pressure on the larger players, but made the business case of the smaller players completely unviable."
Ripe for Rationalisation
March 2017 onwards, there has been a spate of mergers and acquisitions among telecom operators (See Deal Street), and it included the telecom tower players as well. Telecom towers are a crucial piece of the business.
Some more consolidation is awaited in this part of the sector. Towers started off as being part of the operator setups in the 1990s but through the decade of 2000-10, most tower assets were hived off. Bharti Infratel, Indus Towers and GTL Infra are the major players. As suppliers to telecom operators, it's time for these companies to feel the squeeze.
In a November 2017 report titled "Telecom India", Kotak Institutional Equities analyst Rohit Chordia wrote that since tower rentals are the single largest cost-line item, telecom operators would do well to look for savings there. Chordia points out that the leading tower company Bharti Infratel shows a return on capital employed at 30% plus, while India's leading telecom operator Bharti's RoCE struggles to get to 5%. Clearly, there is a case for squeezing the tower operators a little more.
Manpower is the next area for cutting costs. With large mergers ahead, like Idea-Vodafone or where Bharti is expected to take over the wireless business of Tata Teleservices, duplication of roles would be inevitable. However, having already shed almost 75,000 jobs over the last year as ET reported last week, job cuts may have already peaked for the sector.
What will definitely happen, point out senior officials in two of the telcos that are going through the process of merging, is that the vacated positions will not be filled up. With a 15-18% attrition rate for manpower, that can mean significant passive job reduction in a year. "You have to reap the benefits of synergies of a merger.
This doesn't stop here," points out Raja Lahiri, partner, Grant Thornton India. He says this is a sector where pricing has gone down while capital expenditure has gone up and the industry will have to leverage synergies through cost optimisation and network infrastructure to achieve improved financial results.
A debt overhang is another problem flagged in June this year by the then SBI chairman Arundhati Bhattacharya. She said that with Rs 4 lakh crore of debt and earnings before interest, depreciation, tax and amortisation (EBITDA) of Rs 65,000 crore only, the sector was unstable.
Networks too can be optimised and the industry can benefit from a better tax structure. P Balaji, Vodafone India's executive director for external affairs, CSR and regulatory, suggests that the government allow the licence fee and spectrum usage charges to be subsumed in the GST as one measure to ease pressure on the industry.
Only Big Fish Win
Most telecom industry experts recall nostalgically the early 2000s, when there were only four operators per circle, and one round of consolidation was paving the way for pan-India telecom players to emerge. The subsequent 2008-15 period, where many more players were allowed to get spectrum, distorted the industry and restarted a second round of consolidation, they point out.
Now, it is back to four operators. However, Jio entered a sector that was being largely dominated by three players: Bharti, Vodafone and Idea Cellular. The trio had certain advantages over others.
By virtue of being pan-India players, these operators could price calls within their own network differently. The second advantage was their domination of the towers, either directly or indirectly. Any new entrant would end up getting unfavourable slots on towers, typically lower in height than the incumbent's.
Jio's two-pronged strategy was designed to counter these advantages of the incumbent. First, it went with zero charge for voice calls, nullifying any advantage any other operator could offer for within-network calls. The second was to invest heavily in infrastructure. It built 65,000 towers of its own while also signing up on an equal number of towers. With its deep pockets, Reliance Jio could afford such a strategy.
The other obvious play was to focus on data, provide humongous amounts of data at much lower cost and force existing players to respond. Average data consumption in India shot up to 10 GB/ month from 700 MB/ month a year ago, says an industry expert, not willing to be quoted for this story.
He says that all operators have ultimately benefitted.
India's top telco Bharti announced its own Rs 25,000 crore investment programme, while for the next two, Idea and Vodafone, the March merger pooled resources. Vodafone's Balaji says: "Telecom in India is a game of scale. It's a large market and it needs a low-price, low-margin strategy with a large setup."
Two Can Play the Game
In this mix, though, not all success stories have to be large. A consolidation phase means smaller players can look at better chances of being bought out by larger players. One turnaround story, still unfinished, is GTL Infra and CNIL, the towers companies promoted by Manoj Tirodkar that were in severe trouble. In September 2016, the lenders of the two companies invoked the strategic debt restructuring (SDR) mechanism and, in March 2017, converted parts of their debt to equity and now lenders own 61% in the company.
In a way of redeeming itself and also a testimony to the success of the SDR process, the company in October did an exchange of bonds, effectively reducing its bond debt level to $86 million from a high of $207 million in 2012. Tirodkar says that the only saving grace for him, when caught up in a debt trap, was to focus solely on improving the quality of debt.
"Over the last six years Global Group, across its companies, has discharged over Rs 18,000 crore towards repayment of interest and principal without raising any new debt and equity. We remain committed to recovering full value of debt and enhanced value of equity for our lenders and investors," says Tirodkar.
The process of finding a strategic investor in the company to buy out the banks is on and Tirodkar is hopeful of a favourable outcome soon. It has to be completed within 18 months of the start of the SDR process. It has been reported that Aircel was the first choice of lenders to pick up the towers.
Yet, there seems to be many other options today. The current atmosphere of consolidation in the sector works for Tirodkar.Smaller consolidations have also happened in the industry. Bharti has picked up spectrum assets from Telenor, Aircel, Tikona and Tata Teleservices. In June Vodafone picked up a cable internet company called You Broadband. Reliance Jio has yet to dip its toes into the consolidation waters yet — mainly because it uses only 4G and does not want to be saddled with 2G or 3G assets.
However, if RCom's assets are in the market, it might be interested. As Kotak's Chordia says in his report, "Uncertainty remains the only certainty in the Indian wireless space."
In the centre, right above the receptionist is a photo of smiling schoolchildren rushing out — a scene from one of the many schools Reliance Foundation runs. It may be symbolic of catch 'em young and watch 'em grow market that Jio envisages in India's demographic dividend.
Well-funded by petrochem and refining profits, Reliance has already invested in excess of Rs 2 lakh crore in Jio and will continue to pump in Rs 7,000 crore to Rs 10,000 crore every quarter.
The company is often called the bada babu (top honcho) or the bada bhai (elder brother) for precipitating the inevitable consolidation in the Indian telecom sector.
The consolidation sparked by Jio's entry in September 2016 has already acquired clear contours with only three large private sector players — Bharti-Airtel, Idea-Vodafone merged entity and Reliance Jio — and the public sector BSNL-MTNL left standing. The rest have fallen or gobbled up by one of these.
Aircel, Tata Teleservices, Anil Ambani- promoted Reliance Communications are expected to either merge into one of the larger entities or survive as niche players. But is this enough for the industry or will the inevitable asset and manpower rationalisation bring in further pain? With revenues moving southwards across industry (see "Under Pressure"), the sector is desperately seeking some answers.
Raja Balakrishnan, MD and co-head of India investment banking at Bank of America Merrill Lynch (BofAML), feels this is a phase of "normalisation" for the Indian telecom industry.
BofAML has been an adviser in the Idea-Vodafone merger in March as well as in the sale of their tower assets to American Towers Company (ATC) recently. Balakrishnan feels Jio entered the market as a low-cost player, the only way possible.
"Jio's entry put pressure on the larger players, but made the business case of the smaller players completely unviable."
Ripe for Rationalisation
March 2017 onwards, there has been a spate of mergers and acquisitions among telecom operators (See Deal Street), and it included the telecom tower players as well. Telecom towers are a crucial piece of the business.
Some more consolidation is awaited in this part of the sector. Towers started off as being part of the operator setups in the 1990s but through the decade of 2000-10, most tower assets were hived off. Bharti Infratel, Indus Towers and GTL Infra are the major players. As suppliers to telecom operators, it's time for these companies to feel the squeeze.
In a November 2017 report titled "Telecom India", Kotak Institutional Equities analyst Rohit Chordia wrote that since tower rentals are the single largest cost-line item, telecom operators would do well to look for savings there. Chordia points out that the leading tower company Bharti Infratel shows a return on capital employed at 30% plus, while India's leading telecom operator Bharti's RoCE struggles to get to 5%. Clearly, there is a case for squeezing the tower operators a little more.
Manpower is the next area for cutting costs. With large mergers ahead, like Idea-Vodafone or where Bharti is expected to take over the wireless business of Tata Teleservices, duplication of roles would be inevitable. However, having already shed almost 75,000 jobs over the last year as ET reported last week, job cuts may have already peaked for the sector.
What will definitely happen, point out senior officials in two of the telcos that are going through the process of merging, is that the vacated positions will not be filled up. With a 15-18% attrition rate for manpower, that can mean significant passive job reduction in a year. "You have to reap the benefits of synergies of a merger.
This doesn't stop here," points out Raja Lahiri, partner, Grant Thornton India. He says this is a sector where pricing has gone down while capital expenditure has gone up and the industry will have to leverage synergies through cost optimisation and network infrastructure to achieve improved financial results.
A debt overhang is another problem flagged in June this year by the then SBI chairman Arundhati Bhattacharya. She said that with Rs 4 lakh crore of debt and earnings before interest, depreciation, tax and amortisation (EBITDA) of Rs 65,000 crore only, the sector was unstable.
Networks too can be optimised and the industry can benefit from a better tax structure. P Balaji, Vodafone India's executive director for external affairs, CSR and regulatory, suggests that the government allow the licence fee and spectrum usage charges to be subsumed in the GST as one measure to ease pressure on the industry.
Only Big Fish Win
Most telecom industry experts recall nostalgically the early 2000s, when there were only four operators per circle, and one round of consolidation was paving the way for pan-India telecom players to emerge. The subsequent 2008-15 period, where many more players were allowed to get spectrum, distorted the industry and restarted a second round of consolidation, they point out.
Now, it is back to four operators. However, Jio entered a sector that was being largely dominated by three players: Bharti, Vodafone and Idea Cellular. The trio had certain advantages over others.
By virtue of being pan-India players, these operators could price calls within their own network differently. The second advantage was their domination of the towers, either directly or indirectly. Any new entrant would end up getting unfavourable slots on towers, typically lower in height than the incumbent's.
Jio's two-pronged strategy was designed to counter these advantages of the incumbent. First, it went with zero charge for voice calls, nullifying any advantage any other operator could offer for within-network calls. The second was to invest heavily in infrastructure. It built 65,000 towers of its own while also signing up on an equal number of towers. With its deep pockets, Reliance Jio could afford such a strategy.
The other obvious play was to focus on data, provide humongous amounts of data at much lower cost and force existing players to respond. Average data consumption in India shot up to 10 GB/ month from 700 MB/ month a year ago, says an industry expert, not willing to be quoted for this story.
He says that all operators have ultimately benefitted.
India's top telco Bharti announced its own Rs 25,000 crore investment programme, while for the next two, Idea and Vodafone, the March merger pooled resources. Vodafone's Balaji says: "Telecom in India is a game of scale. It's a large market and it needs a low-price, low-margin strategy with a large setup."
Two Can Play the Game
In this mix, though, not all success stories have to be large. A consolidation phase means smaller players can look at better chances of being bought out by larger players. One turnaround story, still unfinished, is GTL Infra and CNIL, the towers companies promoted by Manoj Tirodkar that were in severe trouble. In September 2016, the lenders of the two companies invoked the strategic debt restructuring (SDR) mechanism and, in March 2017, converted parts of their debt to equity and now lenders own 61% in the company.
In a way of redeeming itself and also a testimony to the success of the SDR process, the company in October did an exchange of bonds, effectively reducing its bond debt level to $86 million from a high of $207 million in 2012. Tirodkar says that the only saving grace for him, when caught up in a debt trap, was to focus solely on improving the quality of debt.
The process of finding a strategic investor in the company to buy out the banks is on and Tirodkar is hopeful of a favourable outcome soon. It has to be completed within 18 months of the start of the SDR process. It has been reported that Aircel was the first choice of lenders to pick up the towers.
Yet, there seems to be many other options today. The current atmosphere of consolidation in the sector works for Tirodkar.Smaller consolidations have also happened in the industry. Bharti has picked up spectrum assets from Telenor, Aircel, Tikona and Tata Teleservices. In June Vodafone picked up a cable internet company called You Broadband. Reliance Jio has yet to dip its toes into the consolidation waters yet — mainly because it uses only 4G and does not want to be saddled with 2G or 3G assets.
However, if RCom's assets are in the market, it might be interested. As Kotak's Chordia says in his report, "Uncertainty remains the only certainty in the Indian wireless space."
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