In today’s world, the role of the telecom sector is indisputable. It lays the foundation for our world going towards digital by cutting horizontally across all businesses. The advent of Covid19 has catalyzed this trend further. Hence it is important for all of us that the sector stays healthy so that resources available are efficiently and optimally used without any wastage. Doing so will elevate the contribution of all stakeholders, thereby enhancing the growth of the Indian economy. The purpose of this note is to analyze how the health of the telecom sector will get impacted if VI is unable to survive due to the burden of its huge debt (mostly on account of License fees and spectrum auction payments), and what are the possible solutions to bail VI out of this situation.
VI’s Debt Obligations
To understand VI's debt obligation one needs to look at page 280 of its annual report of 31st March 2022. This is reproduced in the following table as under.
Note, understanding VI’s government debt is important as this is the bulk of their liability, as bank debt is a meager Rs 15K Cr. Most of the government debt is under moratorium till Sept 2025 (outcome of telecom reforms announced by the government). Now this number will expand to Rs 2.6 Lakh Cr by the time the debt becomes alive again (@9.02% for 3.5 years on the overall outstanding counting forward from 31st Mar 2022).
And as soon as this payment kicks in VI will have a payment obligation to GOI of approximately Rs 19K Cr annually.
A Total Mismatch
One can take a peak at the financials of VI from its quarterly report of Sept 22. VI makes a gross revenue of Rs 40 K Cr / annum and an approximate EBITDA margin of 40% (approximately Rs 16 to 18K Cr). Hence, if this trend continues it is clear that VI will not be able to afford an annual payment of Rs 19 K Cr only on this account. Note — this amount will be on top of the license and spectrum fee payments (approx Rs 3.5 K Cr/year) that GOI makes (which is currently not under any moratorium).
Thus one can clearly see that VI can in no way repay GOI’s debt unless they are able to somehow double their EBITDA. And the only way they can do that is by raising tariffs. And by how much? Not in percentages, but in multiples. Then only it can bail VI out of this situation.
Collateral Damage
The collateral damage of VI closing business will be on multiple stakeholders. Let’s analyze the impact individually.
Government’s Collections
The biggest loss will be on the government. All the past auction collection numbers will need revision. For example, 50% of the total collection (Rs 61 K Cr) of 2014 auctions was on account of VI. This means 83% of VI dues emanating from this auction (Rs 25 K Cr) are still alive and unpaid by VI. 51% of the total collection of the 2015 auction (109 K Cr) was on VI. Almost all of it is dues are still unpaid. 51% of dues on account of the Oct 2016 auction is on VI, and 66% is still unpaid by VI.
To summarize, the GOI’s total collection numbers on spectrum auctions (from 2010 till date) will need to be diluted down by 30%.
The following tables (2a & 2b) below provide all the details.
Spectrum Wastage
VI has been able to aggregate a decent spectrum tally through all the past auctions. A summary of VI’s spectrum holding compared to all others is listed in the figure below.
A huge amount of VI’s spectrum will get locked out of usage, just as it has happened for RCOM and Aircel’s spectrum. This will prevent the operators from enhancing the capacity of their network, and deprive the consumers of a better quality service.
A lot of spectrum in 900, 1800 & 2100 MHz bands are lying waste as these are stuck in litigating under the NCLT process. You can see the allocations here.
5G Network’s Quality
The fallout of VI will impact the quality of the 5G network. How? Please note VI has a huge amount of spectrum in key bands like 900 & 1800 MHz. These bands (especially 900 MHz) are important for strengthening 5G network quality in India. If VI’s 900 MHz spectrum is combined with that of Bharti (through spectrum sharing and leasing), then together they can drive a block of 2x15 MHz in most circles. 5 MHz from this tally can be used to drive a combined 4G network that can host the legacy subscribers, and the rest of the 10 MHz can be used to create a standalone 5G network which can help improve the quality of 5G significantly.
Note — even if the VI’s spectrum goes back to the government’s kitty and is available in future auctions, it will serve little purpose unless its price is reduced drastically. Else there will be no takers for this spectrum, as 2x10 MHz of 700 band was priced at Rs 50 K Cr in the last auctions, and 900 MHz can’t be priced differently to ensure parity.
Sharing of Resources
VI’s unwinding will have a huge impact on sharing of network resources. The impact will trickle down to tower companies as their revenues and operations will suffer. VI contributes to 40% of Indus’s revenue — which stands at approximately Rs 30 K Cr / annum. The average sharing factor (the main driver of efficiency) will drive down from 1.8 to 1.
The operators will no longer be able to take advantage of the Zero % license fees obligation on tower companies.
Note — the lack of license and spectrum fees on tower companies is the key reason why the operators were driven towards aggregating resources into them, as by doing so they had a path to prevent double taxes on revenue — a hallmark of the current license fee regime. And with the demise of VI, this option will become less useful for the operators.
Consumer’s Choice
Duopoly will shrink the choice of Indian consumers significantly. VI’s subscriber market share is 21%. The following chart captures India’s subscriber trend.
Note VI is rapidly losing subscribers, and last 12 months lost 21 million. Unless this trend is not reversed immediately the current situation will only worsen in the future, thereby further diluting the chance of any revival.
Possible Solutions
Following are the possible solutions in view my view which might help VI to contain subscriber flight out of their network so that their revenue and margins can be prevented from eroding further.
Managing GOI Debt
I my view, GOI has to relax and refresh the moratorium on its debt till the time VI becomes capable enough to handle it. Though the moratorium period is still 2.5 years away, given the situation with VI, more time will be needed for it to enable a turnaround. Also, to prevent VI from falling into a debt trap, the accumulated interest needs to be properly restructured. The current telecom bill has some provisions, but not sure these will be sufficient.
Bottom line — Given the far-reaching impact the VI’s demise will have on the sector, earnest efforts need to be made by the GOI to restructure VI’s debt in the interest of all the stakeholders. Else all other remedies will result in no benefit.
The path toward 5G
What VI needs is a path towards 5G and that too without requiring to make any substantial investments. This is possible by enabling one of the existing operators (let us say Bharti) to roll out a 5G network for VI. But why would Bharti roll out a 5G network for VI? The following picture tells the story.
In order for the operator to leverage the full value of 5G, they need to light at least one low-frequency band with 5G capability. Why? This will ensure coverage and reach of 5G networks — improving voice and data quality and reducing call drops. And the operators will not be required to depend on their 4G networks for ensuring the same. Bharti has publically announced that they do not any plans to acquire the 700 MHz in near future. This means it has no other choice but to rely on its existing spectrum bands like 900 MHz. But this band is currently occupied with 4G subscribers. Unless these legacy subscribers are parked into an alternate band, it can’t be re-farmed for this purpose.
However, sharing the 900 MHz spectrum with VI provides Bharti with this opportunity. Together, they can get 2x15 MHz in almost all the important circles. This they can bifurcate into two different blocks — 2x5 MHz to park all the legacy 4G subscribers into it, and 2x10 MHz block for deployment of a new 5G networks. In other words, a common 4G and 5G network for both VI and Bharti.
Under this plan, VI will share all its 5G spectrum resources into a common pool. Bharti will roll in its own 5G spectrum in the same pool and make all the needed investments. Bharti will get the advantage of a “Standalone” 5G network, and VI will get to use a portion of this capacity, and it continues to maintain and run its legacy networks. A win win for both.
Note — Unless VI’s 900 MHz spectrum is available, it will be difficult for Bharti to refarm 900 MHz without totally disconnecting its legacy 4G subscribers. And if VI goes out of business, then 900 MH spectrum will get locked out of use as has happened in the case of RCOM and Aircel.
Supporting Tariff Rise
Ideally, GOI needs to support a rise in consumer tariffs. As India’s mobile tariff is the lowest in the world. We all know that even if tariffs are increased they won’t be sufficiently large enough for helping resolve VI’s GOI debt problems. Hence, other means need to explore. Another option for increasing ARPU is by enhancing data consumption.
Now that isn’t possible under the 4G network cover as the capacity is not large enough to unlock that potential. Only 5G can trigger higher data consumption by bringing much-needed value to the table in terms of applications and speeds.
Hence, VI urgently needs a path toward 5G. Else they won’t be able to drive their consumer towards high data consumption, thereby leading to higher revenues.
Summary
It is clear from the above discussion that the implications of VI’s going out of business are huge for India and its stakeholders. Valuable spectrum resources will be wasted and lie unused for a long time — impacting the quality and reach of 5G services. Sharing will lose total relevance — damaging the telecom sector irreparably, thereby impacting the dream of digital India.
However, the problem is not trivial to resolve. It will require many unconventional approaches (from all, including the GOI) which were not tried and tested in the past. But given the impact on the stakeholders, we should altogether make an earnest attempt to help VI revive. Doing so will be in the interest of India and its people.
(Views expressed are my own and do not reflect that of my employer)
PS: Find the list of other relevant articles in the embedded link.
