The seriousness of the problem can be gauged from the fact that the industry’s interest burden as a percentage of EBITDA (earnings before interest, taxation, depreciation and amortisation) has doubled from 41 per cent in Q3 FY 2018 to 80 per cent in Q4 2019. To be sure, the government was, like customers, a key beneficiary. But unlike the latter, the contribution of the industry to the exchequer peaked at Rs 51 billion in Q1 2017 but dramatically fell to Rs 31 billion in Q4 2019, as revenues fell, the interest burden soared, and profits careened downhill.
Rewinding to the past, two decisions taken by A Raja as communications minister were to shape the beginning of the tumultuous decade. By limiting the amount of 3G spectrum to 5 MHz (globally it was 20 MHz) in the first big auction at the end of 2009, Raja ensured fierce competition. Telcos shelled out Rs 67,000 crore. Despite that, players like Airtel, who bid aggressively, were not able to win pan-Indian spectrum.
The decision did three things: It forced telcos to borrow more to finance spectrum and triggered a debt cycle, which never ended; kept 3G tariffs high, making data unattractive; and slowed the roll-out of mobile services.
Raja’s second decision had a catastrophic impact. He changed the rules to allow granting licences to new operators on a first-come-first-served basis, allegedly to help his friends. With four to five new players entering the field, what ensued was fierce competition as ARPU (average revenue per user) fell below Rs 100 in June 2011 when 15 players slugged it out for market share by dropping tariffs.
But the worst happened when, taking cognizance of a Comptroller and Auditor General report that the exchequer had lost Rs 1.76 trillion by giving away licence and spectrum free, the Supreme Court cancelled 122 licences, which included those of Telenor, Sistema, and Etisalat. Raja went to jail.
For those who survived, there was some relief that with the number of players coming down after the cancellation, they were able to marginally increase tariffs and improve realisation per minute without losing customers.
But it was clear that all spectrum would be auctioned by the government and with the introduction of the UASL licence, spectrum would be de-linked from services so that telcos could use any spectrum for any service — 2G, 3G or 4G.
The auctions that followed in 2015 saw a massacre, especially in the 900 MHz band (the licence for this band was expiring for incumbents but it was a popular band for 4G), and prices went up by three to five times. The telcos spent more on spectrum — Rs 1.75 trillion in just two years, 2015 and 2016 — than what they had done since they launched services (Rs 1.5 trillion). Their debt shot up.
Another challenge came with the commercial launch of Jio. It offered voice free and data prices which were 95 per cent cheaper than competitors. Data usage shot up by eight times in just a year.
The regulator also lent a helping hand by allowing Jio to offer free services to customers for six months, adversely impacting incumbent operators. The incumbents had no choice but to match tariffs and increase investments to catch up quickly with Jio in building their 4G reach.
While Bharti Airtel was able to maintain its revenue share turf even though it also lost money, Vodafone Idea, immersed in a merger process, has been losing customers as well as revenue share and sinking deeper into debt. Then came the proverbial straw. Towards the end of the year, the Supreme Court directed the telcos to pay a staggering Rs 1.44 trillion as AGR (adjusted gross revenues). Vodafone Idea has made it clear that if the government does not provide relief on the payments, it will pack up. Bharti Airtel, in a far better position, is raising $3 billion through debt and equity to pay for the dues. Both are waiting for their review petitions to be heard by the courts. While the telcos have hiked tariffs between 15per cent and 40 per cent, it won’t be enough to absorb the Supreme Court hit.
The future play in the market is contingent on two things. If Vodafone Idea goes under, Reliance Jio and Bharti Airtel can grab its over 300 million customers. This in turn hinges on whether the Supreme Court gives a favourable decision on the review petitions and whether the government follows it up by allowing staggered payments for the AGR dues.