India's spectrum charges waiver not enough of a relief for telecom operators

Industry observers say the country’s debt-burdened companies need more support.

FILE PHOTO: Commuters use their mobile phones as they wait at a bus stop with an advertisement of Reliance Industries' Jio telecoms unit, in Mumbai, India July 10, 2017. REUTERS/Shailesh Andrade/File Photo

India’s telecom sector is in need of help as debt-laden operators hit hard by intense competition pressures are facing a three-month deadline to pay $13 billion (Dh47.7bn) in unpaid charges to the government.

The financial woes of Vodafone Idea, India’s third-largest operator by revenue, were recently laid bare as it posted the worst quarterly results in its history, recording a loss of $7bn in the three months to September, raising questions about its future viability.

The government extended some relief to telecom operators on Wednesday, as the Finance Minister, Nirmala Sitharaman, announced a two-year payment holiday on mobile spectrum charges. The initiative gives relief to the tune of $5.8bn to India's three major surviving telecom companies: Reliance Jio, Bharti Airtel and Vodafone Idea.

However, industry observers argue that although this is a step in the right direction, the country’s debt-burdened operators need more support.

“This initiative of government will not be enough, since the industry’s top three telecom service providers are reeling with liabilities,” says Rajan Mathews, the director general of the Cellular Operators Association of India (COAI), a telecom industry body in New Delhi. “We are hopeful of further relief and we believe that the government will announce more measures.”

Operators have run into trouble as they have failed to see eye-to-eye with the government's Department of Telecommunications on what is known as adjusted gross revenue – or AGR. The companies say that revenue only from core activities should be classified as AGR, but the telecoms department says AGR includes all revenue – including money earned through non-core products and services.

In October, India's Supreme Court backed the government and ruled against telecom operators, ordering them to pay $13bn in overdue charges within three months.

"The deferment of spectrum payments by the government is good news for the telecom sector," says Ajit Mishra, vice president of research at Religare Broking in New Delhi. "It is likely to reduce the cash outflows of the debt-laden telecom players in the short-term and enable them to honour other liabilities and service, interest and debt.

But the biggest risk of AGR dues to the government still lingers on, which would adversely impact financial [statements].”

Right now, there is no light at the end of the tunnel for operators who have grappled with numerous challenges over the past few years because of an intense price war that has led to mounting losses and higher debt levels.

The woes for the sector started in 2016 with the launch of telecom operator Reliance Jio, part of the oil-focused conglomerate Reliance Industries, which is controlled by India's richest man, Mukesh Ambani. Jio disrupted the industry landscape with its cut-price tariffs, which has made data charges in India the lowest in the world.

Jio’s aggressive strategy led to a decline in profitability and margins. Some operators ended up merging to stay afloat, while others were forced out of business. Once a market with about a dozen operators, there are only three major private companies left standing. Jio has risen to become the largest operator by revenue.

The price war also caused Reliance Communications, a telecoms company owned by Mukesh Ambani's brother, Anil Ambani, to file for bankruptcy in May last year. The company has been left struggling to sell off its assets, and this month Anil stepped down from his position as a director.

Survival for the remaining companies in such an intense market has come at a cost. The total debt for Vodafone Idea – which was formed by a merger between Vodafone India and Idea Cellular – Bharti Airtel, and Jio at the end of March stood at 3.9 trillion rupees (Dh199.5bn), according to India Ratings and Research, a part of Fitch Group.

“The telecom players are battling through a tough time since Reliance Jio came into the fray,” says Umesh Mehta, the head of research at Samco Securities, based in Mumbai.

“Hence any kind of deferral in payment is a welcome move for them. However, only delaying spectrum payments will not be sufficient to completely pick up these companies because there are other issues such as AGR payments, an existing truckload of debt, and the list goes on, which still need to be addressed before the companies manage to stand on their feet again.”

Telecom companies are now trying to improve their situation by raising prices. Last week, Bharti Airtel and Vodafone Idea said they will increase tariffs next month. Jio has also indicated plans to raise its prices within the next few weeks.

The operators have not yet revealed by how much prices will increase, but analysts say there is scope for hikes of up to 30 per cent.

“The event [tariff rise] gains significance in the backdrop of the vocal relief demands from Bharti Airtel and Vodafone Idea after the recent adverse Supreme Court judgment on the AGR case,” analysts at Kotak wrote in a research note. “One of the key demands, we note, has been a regulated floor on pricing.”

But “the extent of price recovery depends on the quantum of hikes and given the competitive intensity it may be difficult for the players to hike tariffs substantially”, Mr Mishra says.

“We believe price wars and competitive intensity are the structural issues that the telecom sector will continue to face. However, Reliance
Jio is better placed as it has less spectrum and AGR dues and a comparatively better financial position supported by continuous rise in market share,” he adds.

Jio is facing lower AGR dues as it has been in the market for the shortest amount of time. Bharti Airtel, however, recently made provisions of $4bn following the Supreme Court ruling as it declared a quarterly loss of around $11.67bn for the quarter to September. "We continue to engage with the government and are evaluating various options available to us,"
says Gopal Vittal, Bharti Airtel's managing director and chief executive, India and South Asia.

“We are hopeful that the government will take a considerate view in this matter given the fragile state of the industry.”

Vodafone Idea's provision led to its own significant loss, and Vodafone's group chief executive, Nick Read, describes the situation as "critical".

Analysts say that if Vodafone ends up exiting India, this would send a worrying signal to foreign investors.

As companies continue to seek respite, Mr Mathews at COAI says that among the steps it is lobbying for is a reduction in levies. Companies currently pay up to 30 per cent of their revenue to the government in levies and taxes, he explains. The industry wants licence fees to be reduced, the goods and services tax to be eased, and customs duties on 4G and 5G related products to be scrapped, he adds.

But as the future of the telecom sector hangs in the balance, the most pressing issue is the AGR dues the government is demanding, he says.

Bharti Airtel, Vodafone Idea and Tata Teleservices are fighting the recent ruling and filed a petition in the Supreme Court on Friday to review the AGR ruling.

“The government should consider the vexing issue of AGR,” says Mr Mathews. “We hope the government will consider this request of either eliminating or redefining this.”