Three telecom players needed

Duopoly, with only Jio and Airtel, will be unhealthy and lead to job losses in the sector

The enormous investments lined up for Jio Platforms, takes the Reliance Industries (RIL) group closer to its target of being debt-free. RIL had net debt of about Rs 1.61 trillion on the books, as of March. 

Jio Platforms, which is the holding company for Reliance Jio Infocomm (RJIL) has in the last two months seen investments from Facebook, Silver Lake, Vista Equity, General Atlantic, KKR, and the Abu Dhabi state investment vehicle.  Microsoft is also believed to discussing an investment in Jio platforms. 

These investments so far amount to over $13 billion (about Rs 90,000 cr) for Jio Platforms, at valuations ranging from $66bn to $72 bn.  In addition, RIL has raised over Rs 53,000 cr in a mega-rights issue with a staggered payment option. The Rights Entitlement mechanism is being tested for the first time and the rights are trading at premium. Hence, RIL will be close to achieving debt-free status by the end of the fiscal. 

The telecom service provider RJIL, is technically profitable but the group isn’t making money off RJIL. While RJIL easily service debt on its own books, the Reliance Group, which owns Jio Plaforms and RJIL, (99+ per cent equity ownership), has to pay interest on debt incurred to invest in RJIL via the equity route. 

RIL is cash-flow negative but that will change with the mega investments Platforms has attracted. The group is positioning Jio Platforms as a sort of digital one-stop shop with a dominating presence in retail, entertainment, etc. 

But what does this burst of investments mean for the telecom services sector in general? There are three other players in telecom services. Two appear to be in terminally poor shape, while one is grappling with serious problems. Is Platforms receiving investments because it is seen as a likely telecom monopoly, or are investors factoring in an overall telecom turnaround? 

Of the other players, Bharti Airtel has delivered relatively encouraging results and guidances in Q4, 2019-20. Revenues were up 15.5 per cent and India revenues were up 14.5 per cent. India Average Revenues Per User (ARPU) jumped to Rs 154 from Rs 135 in Q3. 

Operating Profits jumped by 51 per cent year-on-year to Rs 10,236 cr with an EBITDA margin of 43.5 per cent. 

However, Airtel still registered a net loss of Rs 471 cr before Exceptional Items of Rs 7004 cr. Exceptional Items included charges on account of reassessment of regulatory cost based on a recent order on one time spectrum charge, interest on provision of license fee and spectrum usage charges, and other heads. Citing the Adjusted Gross Revenue (AGR) liabilities, Airtel said the group has further recorded interest of Rs 870.6 crore as part of Exceptional Items. Taking that into account, losses for the quarter hit Rs 5,237 cr.

Vodafone Idea is likely to be in even worse shape than Airtel, though Q4 results are awaited. It has a much weaker balance sheet and a far lower percentage of smartphone users compared to the other two private players. We don’t know if ARPU improved significantly for Voda-Idea in Q4. 

There are credible rumours that Google is eyeing a stake in Voda-Idea, which has pushed up share price. There are also rumours, denied by Bharti Airtel that Amazon is looking at investing in Airtel. If there’s any basis, this must mean the Silicon Valley giants see a future for India’s telecom sector. 

The sector dynamics are heavily depen­dent on government policy. If the government decides to ease off on aggressive AGR claims, it can retroactively fix problems. Airtel and Voda-Idea would do a lot better if that weight was lifted off balance sheets. 

There is every reason for policy-makers to ease off. It can’t collect the demanded amount from Voda-Idea anyhow though Airtel will just about be able to cough up. If Voda-Idea closes down, not only will many jobs disappear, the telecom sector would head into very dangerous territory. BSNL is bankrupt and its assets are more or less on the block. 

If RJIL and Airtel are the only players left, the duopoly would not be healthy for the industry. RJIL and Airtel cannot instantly absorb 500 million new subscribers if Voda-Idea and BSNL disappear and there would be further problems in the medium-to-long term. Policymakers need to ensure at least three private players remain viable.