The seismic shift in the Indian telecom sector has been talk of the town for quite a while now. It was brought about by the big bang entry of deep-pocketed Reliance Jio in September 2016. With offer of free voice calls for life and data at dirt cheap rates, it forced other big players in the domain to follow suit in no time.
While this proved to be a bonanza for the general public, down the line it’s been bad news for most of the prominent telecom companies. Hard-pressed to retain customers and prevent their market shares from being dented, they entered into price wars that eventually squeezed their operating profits. Bharti Airtel, for example, saw its net profit plunge a mammoth 77 percent from a year earlier and Vodafone India reported a steep drop in its profit before taxes in the second quarter of this fiscal year of 2017-18. Idea Cellular, again, has posted losses for four straight quarters.
Reliance Jio, which led the market to such a juncture, has itself posted a staggering Rs.271 crore loss in the latest (second) quarter. Overall, the telecom sector has amassed a debt to the tune of Rs.4.6 lakh crore. Its operational profit has come down to Rs.45000 crore from Rs.75000 crore just two years back.
This has even prompted the formation of an inter-ministerial group to understand the ability of firms to repay loans and the viability of the overall telecom sector. And all this because of the financial stress resulting from the entry of Jio juggernaut which acquired 100 million customers in just five months.
Pertinent questions arise: Did the telecom sector like the ecommerce bite off more than it can chew? Will the companies become highly debt-laden and be forced to take the bankruptcy route? Is there a way out for them?
As telcos scramble to manage the financial hit, a few trends have emerged.
Quite predictably, as in any hyper-competitive market, smaller players have taken maximum hit. Reliance Communications, incidentally owned by Jio founder Mukesh Ambani’s brother Anil Ambani, has already gone bust and has been given until December 2017 to repay majority of its debt, on which it has defaulted. Aircel Ltd., another smaller player, is on the verge of evaporating too, having failed to repay loans.
Will the dominant ones bow out too eventually in such a cutthroat environment? While that may not happen, one thing is for certain – such players are definitely feeling the heat. Bharti Airtel had at one point in time even filed a complaint to the Competition Commission of India (CCI) against Jio’s predatory pricing. It was, however, dismissed by the CCI that felt ultra-low data price and free voice calls does not tantamount to anti-competitive actions.
So far, such cash-rich companies, namely Bharti Airtel, Vodafone India and Idea Cellular have been able to weather heavy losses. In order to tackle Jio’s onslaught on their market shares they are mostly banking upon strategic mergers and acquisitions. Vodafone and Idea, for instance, are on the verge of a merger that will likely create the world’s second largest and India’s largest telecom company, eroding Bharti Airtel’s stronghold. Bharti Airtel, on the other hand, is set to acquire Tata group’s loss making wireless phone business — almost for free.
With the consolidation, competition is expected to lessen and become more rational (it would serve to reduce the downward pressure on prices). It would also help the merged entities to bring in economies of scale and thereby offset some of the losses.
To shore up positions, sale of tower assets also seems to have emerged as an option. Vodafone India Ltd and Idea Cellular Ltd are on course to dispose of their standalone telecom tower by selling it to ATC Telecom Infrastructure Pvt. Ltd for $1.2 billion. Debt-saddled Reliance Communications too is renegotiating tower transactions with all interested parties, which fell through on account of its failed merger with Aircel.
But will all these help make the telecom sector more profitable in the near future? Before Reliance Jio’s entry, Bharti Airtel, Vodafone and Idea had managed to up revenue and earnings, even though their smaller counterparts struggled to make profit in an industry that needs massive capital in building infrastructure and spectrum purchase.
As of now, with steep taxes, license fees and spectrum usage charge, it may not be an easy way out for telcos in a highly disrupted industry. Consolidation, which so far is yet not realised, is already leading to job cuts. Over 75,000 employees in the telecom sector lost their job in a year and thousands more are expected to be shown the door soon. Overall, the horizon does not look very bright and gangbuster profit may remain elusive. Even ratings agency Moody’s has a negative outlook on the telecom sector, where it feels stiff competition will continue dampening organic revenues in the foreseeable future.