1. Reliance Jio aggravated Reliance Communications trouble, but government did everyone in; here’s how

Reliance Jio aggravated Reliance Communications trouble, but government did everyone in; here’s how

The specifics of RCom’s collapse, to the extent of not being able to service its debt, are different from that of, say, an Aircel.

By: | Published: June 5, 2017 4:59 AM
Reliance Communications, Reliance Communications news, Reliance Communications debt, reliance jio, aircel, anil ambani, mukesh ambani With telcos having spent upwards of Rs 9 lakh crore on capex, the industry needs around Rs 140,000 crore of ebitda just to meet interest and amortisation costs versus the Rs 50,000 crore or so of industry ebitda today. (Reuters)

The specifics of RCom’s collapse, to the extent of not being able to service its debt, are different from that of, say, an Aircel. RCom’s topline contracted 11% in FY17 as compared to Aircel’s 69% contraction in FY16 and profits fell from Rs 660 crore in FY16 to a loss of Rs 1,283 crore in FY17 versus, in the case of Aircel, a fall from Rs 154 crore in FY15 to Rs 91 crore in FY16. Both, however, along with many others in the industry, are affected by the same headwinds. Which is why, the government has finally set up an inter-ministerial group to find ways to help the beleaguered sector, the banks and itself—the industry owes banks/others Rs 4.6 lakh crore, has deferred payment liabilities to the government of Rs 3.1 lakh crore and, over the past five years, even without adding service tax payments, accounted for around 5% of all government revenues.

Most focus on RJio and its extraordinarily low pricing—incumbent telcos have alleged it is indulging in predatory pricing—for obvious reasons. Ever since RJio came in, charging for voice—rates here are significantly higher than for data—is becoming impossible, and data prices have come down by 80-90%. But to focus on RJio is to miss the wood for the trees. WhatsApp, for instance, killed the lucrative SMS business—given how the cost of sending SMS is almost nothing, such revenues flowed directly to the bottom-line and are what allowed telcos to offer competitive rates on voice calls (with RJio’s pricing, ironically, even those rates look usurious!).

While industry’s revenues used to double every year in the early 2000s, growth had fallen to a mere 6.8% in FY16, well before RJio came in—in FY17, industry revenues will contract marginally. So there is an RJio effect, but that’s just part of the story.

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This slowing of revenue was accompanied by the government getting more rapacious. In the initial days, the government never charged telcos an upfront fee for spectrum, but allotted them more once they reached a certain number of subscribers. But, it wasn’t as if the spectrum was free since the government asked industry to give it a certain portion of its revenue by way of spectrum charges and licence fees—instead of selling a car for upfront cash, it’s the equivalent of charging an annual lease rental. By 2010, however, it moved aggressively towards auctions—that was a good thing in that it reduced government discretion—and got good money from them. Except, with no change in annual rentals, industry ended up paying through its nose for both the spectrum auctions and annual levies. As a result, the share of revenue going to the government by way of recurring license/spectrum charges and auction-bids rose from 11% in FY07 to 32.4% in FY17—if service taxes are included, the number rose from 23.2% to 47.4%.

Though it is difficult to conclusively prove mala fide, this was worsened by the decisions of various regulators which were ratified by the government. So, too little spectrum was put on auction even though there were many players, the bids of the previous auction were mostly made the reserve price for the next one, and telcos whose licenses were expiring were told these would not be renewed, setting off a mad scramble for spectrum. As a result, auctions went haywire. In the case of the 3G auction for 2100MHz spectrum in 2010, for instance, a peculiar auction structure and the fact that eight telcos were chasing three pan-India slots meant the price for Delhi and Mumbai rose to 10 times the reserve price—while the two circles accounted for 13.7% of industry revenue, their spectrum price was 40% of that year’s auction.

With telcos having spent upwards of Rs 9 lakh crore on capex, the industry needs around Rs 140,000 crore of ebitda just to meet interest and amortisation costs versus the Rs 50,000 crore or so of industry ebitda today.

This is why—and this is where RCom comes in—telcos are in the kind of mess they are in today. This Rs 9 lakh crore of capex has meant industry’s debt (bank + non-bank) is over Rs 4.6 lakh crore, as a result of which its debt service coverage ratio is around 0.5. This is why it cannot meet its annual bank interest payments of around Rs 27,000 crore along with annual loan repayment obligations of around Rs 50,000 crore—and we’re not even talking of the capex expenditure required to keep the networks live.

This, then, is prime minister Narendra Modi’s Vajpayee moment. Will he, like Vajpayee be able to bail out a struggling industry—as Vajpayee did in 1999 when he moved to revenue-share licensing—by agreeing to something as dramatic as slashing annual licence fee/spectrum usage charge levies of 12-14% to a sensible 1-2%? If he does, the suit-boot-ki-sarkaar charges will get raised, but he will have saved a Rs 180,000-crore industry and creditors (including government) from sustaining huge losses on over Rs 750,000 crore of debt/liabilities.

  1. A
    Apte
    Jun 5, 2017 at 9:03 am
    1. The government policies may have been responsible for telecom companies’ current troubles. In case of Reliance Communications (R Com), however, it is something more. R Com had a good number of customers for its CDMA service. Before deciding to wind-up its CDMA service company could have offered to its customers a plan to migrate, without change of numbers, to company’s already existing GSM service. That did not happen. Then R Com offered R Jio sim cards to its CDMA customers. 2. R Com s financial difficulties and its inability to withstand compe ion are now in the public domain for quite some time. Recently R Com was in the news after the company failed to pay loan instalments. Indeed, these are challenging times for telecom companies like R Com, with low market share; even the top companies have to make efforts to retain customers, offer them compe ive tariffs, with almost free voice calls and higher data packages. Let us see how R Com faces compe ion in coming months.
    Reply
    1. J
      Jayesh Sheth
      Jun 5, 2017 at 8:21 am
      r is just giving a avery cheap plan and ultimatley so many factors are involved that the position of telecommunication has come on this wayEven another spectrum provider has also in a similar condition on r way but only the difference is that still they want to contibue due to goodwill and that is DOCOCMO.and nless and untill if they continue this type of method in the business sooner or later they have also a problemBecause at present whatever they have stock they add. wrong and people come in to there trap. iam the victim of this so i share this othereise it is not good for us as a business man person>they add that you will get double data,after puchaseing you will not get speed and automatically when you contacted him on helpline they told that with your request we are closing your service>only there motto is to sold out there remaing stock of PHOTON >I given the proofMY photon no. is 92270 11465.they damage the image of TATA>
      Reply
      1. S
        satya
        Jun 5, 2017 at 7:33 am
        And bankers file cases on hapless individuals for the recovery of insipid outstandings. Farmers are the mercy of nature and bankers.
        Reply

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