Indian MNOs hit by $13.9bn blow; last ditch rescue plan for state operators

India is close to being the second largest mobile subscriber base in the world and, with its hi-tech skills and economic growth, has the potential to be one of the globe’s most vibrant 5G economies. That is, if the government and regulator stop squeezing service providers’ ability to invest and make profits, by imposing huge spectrum costs and now, following a landmark Supreme Court decision, a set of charges and penalties totalling INR920bn ($13.9bn).

The court ruling is the final stage in a 15-year process related to rules on adjusted gross revenue (AGR), accounting rules which apply to activities governed by telecoms licences. The judges took the side of the government, which argued that private sector operators’ non-telecoms activities should also be included. That leads to imposition of additional licence fees plus penalties and interest payments – amounting to more than $3bn for Bharti Airtel, nearly $4bn for Vodafone Idea, and even $1.8bn for Reliance Jio, which has operating for only three years, but has a wider range of non-telecoms businesses.

The telcos have asked for a minimum of six months to make the payments, but the blow comes at a very bad time for their finances, since they are still paying for expensive 4G spectrum purchases and build-outs; and they are faced with the prospect of a 5G auction in which the regulator is holding out for higher reserve prices than in almost any other country. And of course, Bharti and Vodafone have been engaged in three years of price wars, market share loss and mergers, sparked by India’s challenging competitive conditions, which were made significantly worse for the incumbents by the arrival of the disruptive, cost-efficient Reliance Jio. Bharti and Vodafone Idea have been reporting losses for several quarters now.

All this bodes poorly for the operators being able to keep their ambitious network modernization schemes on track. These should eventually address their significant quality of service and cost of ownership problems, but will impose additional capex burden in the short term, compounded by 5G roll-out. In turn, that raises risks over the government’s goals of modernizing wider industries and promoting a digital economy via 5G.

Some analysts argue the latest financial blow could even threaten the survival of newly merged Vodafone Idea, clinging to its market lead in the face of Jio’s challenge. Its $4bn bill resulting from the court ruling would eliminate its whole cash balance of INR210bn ($2.9bn), and add to its debt mountain of $14bn.

“Clearly this judgment has significantly damaging implications for India’s telecom industry, which is already reeling under huge financial stress and is left with only four operators,” said Vodafone in a statement. “Significant investment of several billion dollars has been made in creating world class networks. Today’s order has huge impact on two private operators while most of the other impacted operators have exited the sector. We urgently request that the government engage on this matter in order to find ways to mitigate the financial stress for the industry.”

Bharti Airtel put out its own statement, saying: “The government must review the impact of this decision and find suitable ways to mitigate the financial burden on the already stressed industry”

If Vodafone Idea were to exit or file for bankruptcy – admittedly a long shot, since its parent company seems very committed to India – this huge country would be left with two private operators, reversing the situation of a decade ago, when it had an excessive number of providers which could not turn a profit or invest in quality networks.

With or without Vodafone, the market would benefit from a stronger state-owned player to provide alternative choices and to support some of the government objectives for universal broadband (mainly wireless) or smart cities. The government has been mulling over various rescue plans for the ailing state operators – MTNL, which has the Delhi and Mumbai territories, and BSNL everywhere elses.

Last week, it finally presented a plan to merge the two companies in a $10bn deal, though it is far from clear that this will be enough to revitalize operators which have been losing market share and suffering from huge debt and poor quality infrastructure for years.

The expensive turnaround plan would carry an overall value of about INR700bn (almost $10bn). It would involve merging the two companies, and awarding new spectrum to the operators, at free or preferential terms, unlike the fees which the private players are likely to pay at auction.

And it will refinance the new entity by issuing long term bonds to support debt reduction and network capex/opex; plus a voluntary redundancy scheme to help the MNOs reduce their massive workforces – BSNL has over 160,000 employees and spends about 75% of its revenues on staff, compared to about 5% for the private MNOs. This Voluntary Retirement Scheme (VRS) will cost the government almost INR300bn.

BSNL had previously announced plans to borrow INR120bn rupees (US$1.7bn) to finance a major expansion plan and said it would cut 80,000 jobs over the next year, but such schemes were not radical enough to rescue the company. The government plan may not be either. Equity analyst Ambareesh Baliga told clients, as reported by TelecomTV, that the VRS was “a lavish funeral budget for a terminally ill patient”. It is certainly not clear that the telcos are in a state to be restored to profitability, and able to make up enough ground to be credible competitors to the big three, especially the digitally-minded Jio.

BSNL’s losses have been increasing in recent years and in its last fiscal year, to March 2019, its deficit almost doubled to INR142bn while its revenues fell by 23% to about INR 190bn. MTNL has reported losses in 9 of the past 10 years, according to Bloomberg.

The spectrum plan would give the two state players INR201bn for 4G spectrum to expand their fixed and mobile broadband offerings, plus a INR36.7bn tax break on spectrum. “By using this spectrum allotment, BSNL and MTNL will be able to deliver 4G services, compete in the market and provide high speed data using their vast network including in rural areas,” the government said in a statement.

To help finance build-out, BSNL and MTNL will raise long term bonds worth INR150bn to restructure their existing debt “and also partly meet capex, opex and other requirements,” the government said.

Meanwhile, Jio’s parent, Reliance Industries plans to spin off its mobile unit into a separate subsidiary to give it greater capability to grow. The parent will take on INR1.08 trillion worth of debt from the new unit (reported to be named Jio Platforms Ltd to reflect its boast that it is not a telco, but a digital services provider). This will be in exchange for a shareholding worth the same amount in the new company.

That will reduce Jio’s net debt-to-equity ratio from 2.6 times to 0.3 times, and help it support its high rate of total capital employed, of INR 2.4 trillion, which reflects its rapid build-out of 4G and fiber to support mobile, fixed, quad play, video and digital services offerings.