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