A nod to risk-takers

Policy makers are recognizing that the shareholders can no longer be ignored to favor consumers

There is an 80-pound gorilla in the room and the policy makers are finally acknowledging its presence after a bruising price war and an imminent auction of the next-generation airwaves. A committee of bureaucrats will decide how to revive a once-emerging sector gasping for breath. Judicial interventions, policy muddles and cut-throat competition have contracted the marketplace to three universal telecom services providers. What needs to be determined is if the sector is so critical to the economy that there is a need for a life-support system. After all, aviation is none the worse for the wear and tear after passing through an identically tumultuous phase. Many fly-by-night operators folded or sold out just like in the telecom space. If budget carriers IndiGo and SpiceJet shone a light on the flawed business model of full-service carriers Kingfisher Airlines and Jet Airways, eventually resulting in their grounding, free voice calls and low data offered by RelianceJio  since September 2016 and slashing by over half the fee paid by the call-generating teleco in October 2017 hastened Idea Cellular’s merger with a stronger and dominant partner Vodafone India in August 2018 and the shift in Bharti Airtel’s focus on Africa to hedge the domestic margins. If the first-come-first-served process adopted in awarding licences for 2G spectrum distorted the field, so will providing a breather to ailing participants to pay the discovered price in the 5G spectrum auction, because they have to share more revenues with government as per the recent SC ruling, interfere with market forces. Lenders did not roll over Jet Airways’ debt on losing hope of recovery but due to doubts of eventual de-leveraging without the promoters diluting their stake for capital infusion and ceding management control.

Unlike automobile makers facing a slump in demand across the board due to transition to a stricter pollution emission standard and global slowdown, telecom services providers’ woes do not stem from faltering usage. The market has in fact exploded, with the mobile subscribers using the GSM platform expanding more than 90% in the three years till end 2018. Their problems have similarities as well as differences with those of airlines. Low tariffs as against surging overheads bind the two sectors. Idea Cellular dipped into red in FY 2018 for the first time since its IPO 11 years ago as revenue growth faltered and operating profit dipped. Though the consolidated loss of Vodafone Idea has stabilized at the Rs 4870-crore level in the June 2019 quarter from a peak of Rs 5005 crore in the December 2018 quarter, its equity and debt papers have turned into junk. Standalone Bharti Airtel made a loss in the December 2017 quarter for the first time since its IPO in 2002.  If high Central and state taxes, going up to 40%, on volatile aviation turbine fuel are weighing down airlines, backbreaking bidding for circles are draining telecom players. Barti Airel paid nearly half its standalone revenues and double its net profit and Idea Cellular over 30% of its standalone revenues and three times its profit in FY 2016 to bag spectrum at the last auction in October 2016. Vodafone Idea’s consolidated debt stood at Rs 1.18 lakh crore and Bharti Airtel’s Rs 1.08 lakh crore end March 2019.

It will be tempting to view RelianceJio’s eventual consolidation to monopoly status as inevitable. That need not be so. Green shoots are visible. The 16% slide in the average revenue per user in the year to the December 2018 quarter indicates the beginning of the slowing of RelianceJio’s momentum. Incremental additions on the largest base of over 330 million subscribers end June 2019 will not be necessarily accompanied by higher margins. In contrast, Bharti and Vodfone are showing signs of bottoming out, recording a slight improvement in the revenue provided by an average user. RelianceJio has started imposing a nominal six paise per minute for calls from October to put pressure on Trai to totally abolish interconnect usage levy. The players are undertaking financial engineering to reduce leverage. Bharti Airtel is merging its tower arm and its tower joint venture with Vodfaone. To become debt-free to raise Rs 20000 crore for investment in the telecom business, RIL is transferring its fibre and tower business to an investment trust and equity investment in RelianceJio to a wholly owned digital subsidiary. What these developments signify is that the attention is now shifting from the consumers to the shareholders who contribute the risk capital. Making available goods and services at the lowest price is possible as long as investors’ pain threshold is not crossed. The political leadership has understood that the beast needs to be tamed without subduing the animal spirits.

-Mohan Sule

Click and bait

The strategy to entice investors with underpriced IPOs to offer richly-valued FPOs going ahead can backfire

What the slashing of the corporate tax did to the secondary market, the IRCTC IPO has done to the primary market. The cloud of pessimism has given way to giddy euphoria. If the flight of foreign investors slowed down in the aftermath of India’s transit to a competitive economy with a 22% peak base rate, the more-than-100-times subscription and over cent-per-cent listing gain, a rare feat for a PSU, dispelled the myth of a liquidity crunch. Overseas and local investors’ appetite for Indian paper was amid, or despite, a flurry of downward revision of growth projections by domestic and global institutions for the current and the next fiscal year. The market is sentimental but practical. The Indian Railways’ catering and online booking provider and tour operator was sought after not only for its monopoly but also for its impressive core performance. Such debuts are rare. The last one that was greeted with a similarly rapturous reception was in 2017. Since then, the enthusiasm has partially evaporated save for exceptions such as IndiaMart InterMesh, a B2B e-commerce platform that was 36% oversubscribed, opened at 34% over the offer price and has returned 48% in the four months since then. Leadership position of a company is a strong motivator for investors to part with their money. The concern is sustainability.

The rise and fall of MTNL is a chilling reminder of how fortunes of in-favour themes can deteriorate on changes in the composition of the market and government neglect. The IPO of BSNL, the government-controlled supplier of telecom services, except to Mumbai and Delhi, did not materialize. Instead MTNL will become a listed subsidiary of BSNL in a mega merger. VSNL was a crown jewel before it was completely absorbed by the Tatas in February 2008, six years after buying a 45% stake. The stock has shed half of its value at the current market price. Air India’s descent accelerated after the sky was thrown open. The problem once again was cannibalization of the business by new-age operators and indifference of policy makers. Slowly but surely IR is being dismantled. Private players can operate freight and some passenger routes. What needs to be seen is if the latest success story will consolidate and continue to create wealth for the shareholders like Avenue Supermarts or fizzle out like Astron Paper and Board Mill and Career Point, among the few whose collection exceeded 100 times the issue size.  When the operator of offline retailer D-Mart entered the market, doubts were raised about its dated business model despite its conservative approach to cash management. Digital marketplaces were gaining popularity. Departing from the favorable view of businesses with asset-light model, the market found virtue in owned outlets in prime residential localities, a hedge in a worst-case scenario. Justifying the confidence, the grocer has appreciated 85% in over 32 months.  The diluted EPS has expanded 74% in four years. In contrast, struggling Flipkart was bought lock-stock-and-barrel by Walmart. Amazon has to be satisfied with 51% multi-brand FDI cap.

That the stunning performance of Avenue Supermarts and IRCTC will encourage sound companies to raise capital even in a hostile market will be a welcome outcome. What is not is the unease about discovery. Book-building is undertaken to assess demand from long-term institutional investors, who balance the past with the outlook. The process aims to eliminate over- or under-pricing. A manageable contribution sees securities getting credited in the demat accounts of most participants. The modest payoff on debut attracts new investors. There is no hurry to tap the market. It is puzzling how investment bankers could be so horribly out of tune with the mood on the street in determining the offer band. Besides undermining the proportionate allotment model, the exercise has turned into a lottery for speculators looking to book quick profit. A lower valuation restricts capital expenditure or debt clearance, affecting growth plans. The recipe to entice investors with a discount to come out with richly-valued FPOs going ahead can go wrong if earnings do not keep pace with the enlarged base. The Astrom Paper and Board Mill IPO mopped up more than 240 times the issue size. The 58% opening advance end 2017 has slumped to about 15%. In retrospect, the cautious approach of Avenue Supermarkets seems justified. The promoters were diluting their stake to stay listed through issue of new shares. The premium was accrued to the company for de-leveraging. The railway ministry has short-charged tax payers funding the enterprise by agreeing for below-par collection. The government will get the entire proceedings of the divestment. Benefits to IRCTC, if any, going ahead are uncertain if does not turn into another MTNL in the meantime.  

-Mohan Sule