New Delhi: Hyper-competition, rock-bottom tariffs and huge payouts for 3G spectrum have hammered telecom companies’ return on capital employed (ROCE), limiting their capacity for aggressive bidding in spectrum auctions and upsetting the government’s revenue calculations.
Consequently, the Budget target to raise R40,000 crore from spectrum auctions this fiscal may come a cropper, just like last fiscal’s ambitious target for PSU disinvestment that ended in a botched ONGC auction.
Bharti Airtel, India’s largest mobile operator by subscriber base and revenues, has seen a steady fall in ROCE: From 24.10% in Q3 of FY10 to 11.20% in Q3 of FY11 to a paltry 7.30% in Q3 of FY12.
The ROCE of Reliance Communications, which was in low single digits three years ago, has fallen further. However, Idea Cellular has made a marginal improvement over its Q3 FY10 numbers after witnessing a decline in FY11. Bharti, RCom and Idea are the top three listed telecom firms in the country.
While figures from Bharti and Idea are part of their regulatory filings, in the absence of any such filings by RCom, the number was calculated by dividing earnings by the capital employed as reflected in quarterly earnings.
Bharti has suffered more than RCom and Idea because apart from payments for 3G spectrum and investment in infrastructure, it borrowed heavily to finance the $9-billion acquisition of Zain Africa in 2010. Besides, 3G investments have not started paying off yet. “The 3G spectrum auction stretched us financially,” said a company official.
While Bharti paid Rs 15,609 crore for 3G and BWA spectrum, RCom paid Rs 8,585 crore and Idea Rs 5,768 crore. Analysts see little chance of aggressive bidding until companies consolidate their financial position.
This fiscal, the government hopes to auction 4G spectrum as well as 2G spectrum which will be available because of the cancellation of 122 licences by the Supreme Court.
“I don’t think any Indian firm is going to bid aggressively for spectrum and the government may find it difficult to meet its Budget target of Rs 40,000 crore,” Jagannathan Thunuguntla, equity research head at SMC Global said. “As regards the declining ROCE, once Bharti’s Africa operation stabilises, it should improve for them,” he added.
Telecom analyst at E&Y Prashant Singhal explains the decline in perspective. “The 3G and BWA auctions fetched Rs 1.06 lakh crore to the government but these services are yet to bring in returns for operators,” Singhal said. “Telecom services require continuous network upgradation and maintenance and there is no escaping that. Even if one weren’t going to make additional investments, the routine capital expenditure requirement to keep the network up and going would take something between Rs 300 to 500 crore for one nationwide network,” he added.
Even in basic voice services, with falling tariffs the average revenue per user is low and falling and has almost become inelastic to price changes. Simply put, this means while the companies are saddled with continuous investments, revenue isn’t looking up.
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