India’s GEs

Telecom assets acquired to accelerate growth have instead turned into capital- guzzlers

The directive of the telecom regulator to halve the interconnection charges billed by the telecom service provider of the recipient to the telecom operator whose subscriber originated the call has brought the focus back on a sector that was once sought by investors. Not that it was ever out of the limelight. A real estate tycoon and a minister landed in jail as a result of the scramble to bag licences on a first-come-first basis. Even as the law was running its course, whether auction was the right method to sell spectrum occupied considerable bandwith as successful bidders were left with huge debt. BhartiAirtel’s was more than Rs 45000 crore end March 2016 after splurging above Rs 43000 crore in 2016 and 2015.  Reliance Industries plonked Rs 11000 crore to bag licences in 14 circles early 2014. There is no telling when Reliance Jio will be able to recover the investment due to a long period of free run. It did show an operating profit in the September 2017 quarter on the back of price hikes taken after triggering a bloodbath and hastening consolidation that was in the offing following the CBI filing the 2G-scam charge sheet in April 2011. The buyout by Bharti of Videocon’s licences for six circles and Aircel’s for seven circles and the swallowing of Telenor early this year and the consumer business of Tata Teleservices recently and the Vodafone-Idea Cellular and the failed Reliance Communications-Aircel parlays to combine operations were viewed as inevitable when talk-time’s role in contributing to the average revenues per user had vanished and the cost of transporting data slid.

The developments saw a re-rating of the sector, where gaining market share is a race to offer cheap tariffs. With a huge treasury chest (Rs 1754-crore cash end March 2017) accumulated from refining operations, RIL  bought back shares to boost prices when oil  was sliding. Additional shares were distributed to mark confidence in servicing the enhanced equity base as its strategy of brutally taming competition drained out liquidity but improved the return ratios. The crucial issue is at what point will RIL shareholders question the deployment of resources in a business that is a capital-guzzler and demand more bonus issues and higher dividends as the stock climbs to new highs in anticipation of the diversification outperforming the sluggish core operations. Besides the turbulence and possible truce in the near future dictated by realism, there is another striking feature binding the players who are struggling to stay afloat. RJio, Idea and RCom are parts of conglomerates with diverse interests. For Idea (42% promoter holding) and RCom (60%), the telecom foray has been a stamina-sapping exercise. If not for the expensive mistake, RCom would not have had to embark on a de-leveraging spree: it is now pulling out of 2G operations.  Fortunately, the commodity upturn will offer support to the Aditya Birla group.

Bharti, the standalone Indian player (excluding British Vodafone, with a war chest of US$9.7 billion end March 2017, though down nearly 40% from the previous period) has presence along with RJio in 90% of the circles. Not that it is out of trouble. The costly African foray has bombed. The owners had to shed stake in some assets to shore up funds. There has been churn at the top.  When the dust settles, so will the unrealistic expectations of the small shareholders from the diversification forays of their companies. The telecom business, besides financial services and the Mumbai and Delhi power generation and distribution, was inherited by the younger Ambani sibling when Dhirubhai’s legacy was sliced. The emerging opportunity was expected to put the ADAG on a growth rate superior to the fossilized business of refining or electricity generation, where the return on asset is fixed. The difficulty of RCom in selling its transmission towers is a foretaste of what seemed like sensible allocation of capital for backward integration eventually turning out to be a wrong call due to shift to asset-light model. The focus will now be on defence. In contrast, RIL is darting in all directions. Entry into renewable energy is on the drawing board and so also manufacturing of lithium-ion batteries for electric vehicles with the Adani group. Besides exposure to TV and digital content to feed its telecom arm, there is presence in the retail space. An example of how companies straying into unrelated areas in search of growth lose their way is GE. It has divested the securities, banking, financial services, property, appliances, industrial solutions and TV and film businesses to concentrate on big-ticket manufacturing. The market does not seem to be impressed. Despite being a constituent of the Dow Jones Industrial Average for most of the time since its inception, less and less analysts are tracking the stock.

Mohan Sule