Tariffs should have been raised yesterday

Written by Anandita Singh Mankotia | Rishi Raj | Updated: Dec 22 2012, 01:38am hrs
Telcos in India are grappling not just with fierce competition or high customer acquisition costs, but a tough regulatory environment in which the soaring cost of spectrum is pressuring their balance sheets. As the market leader, Bharti Airtel has coped fairly well, though the September 2012 quarter saw its eleventh consecutive y-o-y decline in net profits. Also, the telcos Africa operations are yet to turn profitable. The one-time charge for the spectrum it holds beyond 4.4 Mhz and 6.2 Mhz could cost it an estimated R6,000 crore. Moreover, it will need to cough up an additional amount when it vacates the more efficient spectrum in the 900 Mhz band and bids for it again. Sanjay Kapoor, who heads the Indian and South Asian businesses, tells Anandita Singh Mankotia & Rishi Raj that spectrum is not being priced right and that a one-India, one-licence plan needs to be thought through, before it takes off. However, Kapoor is optimistic that consolidation in the industry could kick up tariffs.

With the auctions for 1800 Mhz spectrum not really a hit since four circles didnt find takers and of the remaining 18, excluding Bihar, the spectrum got sold at the reserve price, would you say that consolidation has begun

There were certain structural defects in the sector, in the sense of too many players, and the market had become too fragmented. We believe consolidation probably first began in the minds of the subscribers as we saw the top three or four operators continuing to hold sway over the market, leaving newer players with little market share. The second aspect related to consolidation was the cancellation of the licences, of players who entered the market in 2008, by the Supreme Court. The third phase seems to have begun now with some new operators reducing their play to a few circles. The fourth and final phase will start when, within those few circles, they restrict themselves to a few cities.

Do you think Arpus have bottomed out

Arpus are a function of reported numbers, which have a lot of multiplicity and duplicity in them. As consolidation sets in, the real numbers will emerge, the denominator will shrink, driving up the Arpus.

You have been talking about the need for raising tariffs, when do you see this happening

They should ideally have moved up yesterday. Having said that, the problem currently has less to do with headline tariffs and more to do with realised tariffs. The headline tariffs vary from circle to circle and operator to operator ranging between 1.2 paisa per second and 1.5 paisa per second. But what actually comes into the hands of the operators is a very small amount. For instance, on voice it is 35 paisa per minute. There has been an uptick in realised rates with gross subscriber additions coming down but as to when headline tariffs will start rising, I cant give a definitive answer. We are assessing opportunities in all the markets, even where we are not the market leader. However, there has been some correction in all markets since August and the trend has been accentuated with the implementation of the new verification norms.

Bharti bid very conservatively, for only one circle of Assam, in the November auctions. What will be the company's bidding strategy in the upcoming auctions

I can't talk about bidding strategy but I can tell you that the reserve price is very steep and given that India has aspirations to digitise the nation, we will need tonnes of spectrum. Also, the business needs to be viable in the long term for us to be a part of the industry.

Will Bhartis high debt act as a constraint to participating in the auctions

This is a spectrum-hungry industry and we need spectrum to grow. But we had clearly said in the last auctions too that the reserve price was very high and so we participated only in one circle. Although the government reduced the reserve price for a slab of the pan-India spectrum from R18,000 crore to R14,000 crore, that still didn't make it viable and so we kept away. Take the example of the previously conducted 3G spectrum auctions, the price was viable and so it was a resounding success.

What is your basis for calling the reserve price unviable Your Ebitda is close to 30% and you are posting a fairly decent PAT.

We had a much healthier PAT before the onslaught in the sector happened. Losing 40% of prices in a three-year time period cannot keep a company healthy. Secondly, the aspirations of the stakeholders and investors is much higher than what we are delivering today.

The balance sheet shows that Bhartis biggest problem isnt really the Arpu or the realised rates but actually the debt, because you are paying R5,000 crore as interest. And had Zain not been acquired, even that cost would have been far lower.

Well, I dont agree. On the other hand, the profits could have been higher if the pricing was better, if tariffs hadn't eroded by 40%, squeezing our margins. As far as the debt and Zain are concerned, I can't really comment. When you look at the number one player in other emerging markets, they are making a lot more money than us, both in terms of both Ebidta as well as PAT. As any prudent company, we are weighing all options available to us to pare our debt.

In cities like Delhi and Mumbai, Bharti has a capacity-led network rather than a coverage-based network, so is it possible you could forgo spectrum in the costly 900 Mhz and opt for 1800 Mhz at half the price

This is not correct. In bigger cities, the network architecture provides deeper in-building coverage using 900 Mhz to penetrate deep into the buildings. This deep coverage will be lost if we switch over to 1800 Mhz and coverage will become patchy. Similarly, in rural areas, the span of coverage that is there due to 900 Mhz will suddenly suffer if you were to switch it off and you will see large holes emerging. So, how it works is that, be it a Bharti or any other player who has a mix of both 900 Mhz and 1800 Mhz, one makes money on the 900 Mhz network and then splurges it on 1800 Mhz network. The new operators havent gone rural because they dont have any 900 Mhz spectrum to cross-subsidise their 1800 Mhz network.

Are you worried about the one-nation, one-licence regime, which would abolish national roaming

Firstly, this hasn't happened yet and secondly, its complicated. Spectrum prices vary from one circle to anotherin some instances, by as much as 700 times. The tariffs in different parts of the country too vary depending on the user base. If there was no roaming, a user with a SIM in one part of the country would begin to use it somewhere else. This could also mean that the national long-distance rate comes to an end. Also, in the current model, high-end or the rich customers subsidise the others. But if there is no roaming charge, this will get disturbed.

What are the other regulatory concerns for the company other than the spectrum related issues

Regulation can play a big role in sustaining the industry and it has to play an important role of protecting the customers while keeping the industry healthy. Policymaking should allow the market mechanism to take care of tariffs and, so far, regulation has allowed for that. However, in the past, some actions have hit the industry, but I am happy to report that dialogue between us and the government has been encouraging and products like combo packs are returning. Only if the industry is healthy and is able to plough back profits can tariffs come down.