Going For Broke

On February 10, the announcement came with a lot of fanfare. It made Union minister for telecom Dayanidhi Maran, who had been rooting for the OneIndia scheme for 20 months, very happy. For, he believes that it'll enable India to achieve an optimistic target of 250 million telephone subscribers by 2007, or almost twice the current figure. For Maran, it was important that it happened much before the forthcoming state elections in his home state Tamil Nadu this year and, hence, prior to the date from when the Election Commission's code of conduct comes into effect.

Under OneIndia, the state-owned BSNL and MTNL will technically charge a single tariff (Re 1 per minute for STD calls and Re 1 for three minutes for local calls) across the country. It's definitely a boon for the consumers. But how will it affect BSNL's operational and financial fortunes? Says a Delhi-based telecom analyst, "If anyone gains, it is the users who'll have to pay much less and the minister who can get political mileage out of it. BSNL will continue to bow to political diktats and lose."

Politics, more than economics or competition, is steering BSNL, India's largest telecom firm, towards a path that'll lead to a slow and painful death. In the near future, BSNL may go the now-privatised VSNL way. After the government opened up long distance for private players, VSNL lost its entire value as its share in its most profitable business was eroded. With competition biting at BSNL's heels, the first signs that the telecom PSU may take a terrible beating in terms of both marketshare and profitability are already visible. And political interference is now forcing BSNL to get into areas where profits are minimal or non-existent.

Take the case of OneIndia. Analysts estimate that the scheme will shave off 58 per cent from BSNL's call revenues, as long distance rates will drop from Rs 2.40 to Re 1 per minute from March 1. This will translate into a hit of Rs 3,500-4,000 crore on its topline. There'll also be additional costs to upgrade the existing network and add new infrastructure. BSNL officials, however, counter this by saying that the possible revenue loss will be more than offset by a surge in volumes from fixed lines due to lower tariffs. In addition, BSNL is simultaneously hiking the monthly rentals—from Rs 180 to Rs 299—to reduce the negative impact.

Explains BSNL CMD A.K. Sinha, who expects a 30 per cent increase in traffic, "OneIndia will dispel the myth that mobiles are cheaper than landlines and revive the use of the latter." Adds S.D. Saxena, director (finance), BSNL: "Telecom is a volumes game and we will achieve the growth (in STD calls) to neutralise the cut in tariffs." Analysts tend to disagree. Says Kobita Desai, principal analyst (mobile devices and consumer services), Gartner Group: "Increase in volumes will not really compensate for the huge drop. We project a compounded annual growth rate (CAGR) of only 2-2.2 per cent in fixed lines." Prashant Singhal of Ernst & Young foresees an increase of 15-20 per cent in fixed lines volumes due to OneIndia. An additional problem: it's projected that the share of local calls, which comprised 56 per cent of all calls in 2005, too will go up to 70 per cent.

Although BSNL claims that OneIndia will boost volumes, it had written to the DoT in December 2005 that the scheme will impact BSNL's future. The PSU's bottomline has been dented by private competition and the boom in mobile telephony. In the recent past, the bulk of the growth has happened in the mobile space; of the 32 million new connections between April 2005 and January 2006, 31 million were mobiles. Mobiles constitute a whopping 63 per cent of the total 130.8 million connections in India. Last year, over 20 lakh BSNL subscribers surrendered their landlines, and the new additions were minimal. However, talking about it, Maran said, "The Re 1 a minute STD tariff should be able to check the surrender of fixed phones of the PSUs which happened on a large scale last year due to the surge in mobile usage. Now mobile and landline tariffs are the same in the plan. This will plug in surrenders."

Of course, BSNL also provides mobile services and it can always boost its revenues by becoming a major player in that segment. The advantage that the state-owned entity enjoys is its presence in all the mobile circles. However, in the past few years, the growth in its mobile connections has been lower than those of the private players. Today, Reliance Infocomm boasts of more connections (16.59 million subscribers) than BSNL (15.37 million). Not to forget that the latter has lost the cost advantage it enjoyed over others.

Another area where OneIndia will burden BSNL is in its thriving PCOs business, which is responsible for a significant portion of its revenues. It owns over 95 per cent of India's PCOs, but since the lower OneIndia tariffs have not been extended to PCOs, analysts feel the future revenues from this business may fall by 50-60 per cent. At present, local calls from PCOs are charged at Rs 1.40 for three minutes, and STD ones at Rs 2.70 a minute. Therefore, BSNL will need to rethink its PCO strategy to make it viable and profitable.

These are not the only issues that BSNL's Sinha has to grapple with. There's a growing pressure—from both Maran and the telecom regulator—to change the access deficit charge (ADC) regime. ADC, a levy paid by mobile users in case of long distance calls to BSNL to subsidise its unviable operations in rural areas, contributes Rs 5,000 crore annually to the PSU's kitty. Now, the government wishes to reduce it by shifting from the fixed charge (30 paise per minute) regime to a revenue-sharing arrangement with the private operators. While BSNL has demanded a 7-8 per cent share of the operators' revenues, the DoT has proposed to set it at 3 per cent. The decision will knock off nearly Rs 4,000 crore from BSNL's topline.

Agrees Singhal, "The change in the ADC regime will be a huge development as it'll enable the private players to offer better rates. It may also take away the advantages that BSNL may get through OneIndia (due to lower tariffs) as every service provider will match the low long-distance rates." This is why BSNL is fighting hard to keep the ADC at a higher rate.

With the ADC reduced, BSNL will find it difficult to fund rural connectivity. As it is, the returns from rural areas, which constitute a third of BSNL's connections, are negligible. On a per line basis, the cost of setting up a rural line is 50 per cent higher than in urban areas and the revenues are a third less. Still, BSNL has to oblige the politicians by providing connectivity in all parts of the country. Of late, the PSU has complained about it, but rural areas are significant votebanks. Therefore, things are unlikely to change in the near future.

Even BSNL's Saxena is worried. "I'm concerned. Our future profits may not be good as a lot of factors are affecting our operations. Apart from OneIndia and the ADC, we are burdened with spectrum charges and high income tax. And we don't get benefits like other companies," he complains. Although BSNL's net profits crossed Rs 10,000 crore last fiscal, the return on an asset base of Rs 1,30,000 crore was less than 6 per cent. Last year, the firm also paid an income tax of Rs 1,100 crore, service tax of Rs 3,000 crore on collections and a Rs 500 crore to the exchequer.

According to telecom experts, the only way out for BSNL is to formulate an aggressive growth strategy. Now that it's clear that BSNL can't compete with private players in the voice space, it should seriously look at the potentially lucrative data services segment. It should also expand furiously in broadband services by taking advantage of its huge infrastructure base. What the company has to do is to basically leverage its strengths. Finally, its social responsibilities need to be pruned, or the private sector should be asked to share the burden, and BSNL should opt for private partnerships (through strategic disinvestment). But that's something that politics will decide and dictate, not Sinha and Saxena.