Safawi has the task to steer RCom clear of debt

Written by MG Arun | Nikita Upadhyay | Nikita Upadhyay | Mumbai | Updated: Sep 27 2011, 22:31pm hrs
Reliance Communications or RCom, Indias second largest mobile telephony company by subscribers, has its cup full of woes heavy debt, a federal agency probe into governments 2G spectrum sale, subscribers switching to rivals and investors averse to own its shares. But, Syed Safawi, 47, president of wireless business, an avid golfer, is practising his swings to play what is, perhaps, the most challenging round of his career by far after turning around Coca-Cola Companys Indo-China business.

The only way forward for Safawi, who joined RCom from rival Bharti Airtel two years back, is to overhaul the firm owned by the eighth richest Indian Anil Dhirubhai Ambani. Safawi, who is reading Mahatma Gandhis The Story of My Experiments with Truth, has flagged off a three-year vision to pare down debt, stop the mad rush to win subscribers, and instead, focus on high quality ones. He needs to tighten his ship, make it leaner by bringing all businesses under one roof, trim cost and earn more from data usage, driven by third generation spectrum or 3G.

RComs rescue plan began by breaking its old structure of too many heads running its 22 mobile circles. The mobile telephony company merged some of its circles and created 12 hubs. The exercise released 700 employees to hunt for quality operators. Two years back, when we made an organisational structure, between then and now, the needs for the next two to three years were different from what they were earlier, says Safawi. RComs new nimble structure can squeeze more revenues, with every employee aligned to the measures of success.

So if its revenue and earnings before interest, tax and depreciation or operating profit, health indicators of a company, then everybody, from my level to the cluster level, will be rewarded on those same parameters, says Safawi, a post graduate from Wharton like his boss Ambani. To top it all is commitment of Ambani, who says Safawi, is ambulance and police to the brass.

The revamp led to a strategy of using RComs mobile towers as the fulcrum of profitability, ending chasing subscribers. Towers are factories generating minutes, says Safawi. If that is profitable, you are anyway profitable. So you have to churn out 50,000 or 1,00,000 factories, and you have to make each one profitable.

Chasing subscribers have left many large mobile telephony companies with a haphazard structure, say consultants. Many large telcos are now looking at their operational and organisational models because the market has grown very rapidly and telcos have been focused on somehow capturing this growth, says Mohammad Chowdhury, ED and telecom industry leader at consulting firm PricewaterhouseCoopers India. As maturity seeps in, telcos are increasingly feeling the need to restructure to get ready for the next phase, which is to operate, rather than just be growth-driven.

RComs numbers also warranted emergency measures. Its net profit declined in last eight quarters and market value nearly halved to R16,336.72 crore until September 23, 2011 from R30,526.86 crore in January 3, 2011. Bharti has a market value of R1,42,350 crore.

Analysts turned critics. Inconsistent execution, weaker than expected operational results, concerns around 2G licence, a highly geared balance sheet and no success in offloading or restructuring a stake in many of its assets led to the steep fall, Sachin Gupta, Neeraja Natarajan, Pankaj Suri and Gopakumar Pullaikodi of Nomura Equity Research wrote in a report released on September 8.

Some analysts say the erosion of profits have put RCom in a spot inability to invest more. The company has slashed its capital expenditure to more than half to R1,500 crore for the financial year from R4,500 crore last year.

But efforts are on to cut costs. Our cost of capital is one of the lowest in the industry, says Safawi. We have redeemed foreign currency convertible bonds in May, the next one is coming up in March and we are fully ready to redeem that. RComs cash flows are more than adequate to meet its working capital requirements, as well as the pay out for FCCBs, he adds.

RCom urgently needed a pool of valuable customers to boost cash flows and margins, as many switched to rivals after government allowed number portability or allowing users to retain their numbers even as they switched carriers. RCom lost 10.7 lakh subscribers to rivals, data released on April 28, 2011 by Cellular Operators Association of India showed.

Safawi says there was no revenue loss to RCom due to this. Half of our churned subscribers are those who have contributed zero average revenue to us in the last three months, he clarifies.

The company reviews its earnings every week, a departure from monthly calls. We created an ecosystem where the person on the front line has complete access to his revenues, his customer base and his profitability, by site. We have to build up a quality business. This means moving away from sheer subscriber acquisition tactics and discontinuing with free minutes being offered on the network, Sawafi adds.

Mobile telephony companies should invest in the brand and in some level of customer segmentation to understand their target customers and work on being appealing to customers in those segments, says Prashant Singhal, telecom head at consulting firm Ernst & Young India. To make a company leaner and profitable, it cannot be selective on customers and only chase high or mid ARPU or the average revenue a user pays. He did not comment specific to RCom.

RCom now has a clear focus to get subscribers who would pay back in the first 90 days, says Safawi. Telecom, as an industry, sells around 50 million SIM cards a month. According to him, the net addition is just 10-15 million and so, the balance acquisition is not resulting in revenues.

A girdle around his neck is the companys debt. RCom has now chosen to hawk some of its assets, sell 95% ownership in towers and later a 26% stake in the parent.

After it failed to merge its 90,000 mobile towers with the listed GTL Infrastructure last year, RCom has again begun the sale process. For the past six weeks, a number of prospective buyers are in our data room, and in a few weeks, we expect that there will be commercial bids from them, says Safawi, who plays tennis often now, as he cannot find enough time for golf.

Hopefully, in the next quarter or so, we should be seeing a closure on the Infratel side and should halve its R33,000 crore debt, an analyst from a foreign brokerage says. RCom has an operating margin of 32%, excluding tower rentals and its rival Bharti Airtel earns the same margin including its tower rentals.

So once RCom sells its tower assets, it will begin paying rentals, and that would impact its operating margins, the analyst adds. RCom, being the main tenant, can squeeze the best rates, says Safawi.

Safawi finds two factors key to RComs growth. End of tariff war and thrust on data. Bleeding telcos have begun to hike its tariffs marginally, ending the war to win users. There is now more rationality in the pricing regime across the industry, argues Safawi. Telcos have cartelised to raise tariffs by 20% in July, but analysts say its impact on revenues will start showing up only after 2-3 quarters.

RComs focus has now clearly shifted on to promoting its 3G services and attracting high-end subscribers, says Kunal Bajaj, director, India at consulting firm Analysys Mason India.

One needs to have a right marketing strategy, right focus on profitability metrics, right organisational structure and right device strategy, he adds.

A June 2011 study by global research firm Frost & Sullivan said that innovative 3G applications and services targeted at different customer segments are expected to drive the revenues of the service providers from 3G services. Elite subscribers in the high-spending tech-savvy segment are likely to shift from 2G to 3G services and drive a higher growth with uptake of data-intensive applications.

However, the firm cautioned that in the initial stage, the average revenue from a customer for 3G services will be low. A June 2010 report by Wireless Intelligence, a global database of mobile market information, said 3G will account for 13% of the total mobile connects in India by 2014.

Data driven Code Division Multiple Access technology or CDMA has come handy for its data push. The companys data card is available in 1,000 towns and 3G services in 333 cities. We have improved our high speed data footprint about 20 times, Safawi says. Non-voice revenues contribute nearly 20% of RComs wireless revenues, but Safawi aspires to take that to around 35-40% in the coming few years.

To critics, Safawi has a piece of advice to see RCom on a journey rather than at a given point in time. Its important to see where we have come from, how we have evolved, and where we are going. In that context, you will see an organisation that is readying for the future, he says.

After two years, the company sees itself as one of the most profitable companies in India in the telecom space. We will be a leaner fighting machine with scale, and a clear leader in data, says Safawi. But time is ticking, with impatient investors expecting quicker results, even as boss Ambani lends a hand in the fire-fighting.

Our journey from being a company to an organisation, to being an institution, is what we are on, says Safawi. If the plan works, Safawi should be able to dedicate more time to golf.