The Curious case of Rcom: Part-1- Journey of Rcom : from Zenith to Nadir

From being the company which was dreamed by Dhirubhai for bringing digital revolution in India to becoming company which is facing strategic debt restructuring & default on International debt – Reliance communication Ltd. (formerly Reliance Infocomm) has come a long way. I have been following for last six months the twists and turns in the story of  Rcom, which makes me (any many others) wonder, how come Rcom which was considered to be flagship company of one of the biggest business houses in India with supposedly good leadership & strong financial muscle ended up in such a bad mess! Let’s dig deeper & investigate how Rcom has reached this stage;

This blog is divided into two parts: 1) Journey of Rcom : from Zenith to Nadir 2) Handling of Rcom’s bankruptcy & Strategic debt restructuring(SDR)

1.   Journey of  Rcom : from Zenith to Nadir

I. Problem of telecom sector, capex requirement & weird govt. auction structure: Telecom sector has always been capital expenditure heavy. Any company in telecom sector is required to have strong financial muscle & ability to keep on raising additional capital (Equity or debt) to fund constantly growing network/towers expansion, bidding of auctions of spectrum and upgradation of changing technology. The sector which has grown 20 times in terms of subscribers over last ten years, has also seen rapid increase in no. of competitors. I believe the biggest threat the telecom sector has faced is the macro issues such as inconsistent telecom policy, extremely high cost of acquiring spectrum, impact of 2G scam etc. As per Sanjay kapoor(industry expert) , COAI and other players we have probably highest spectrum cost in the world & lowest prices for customer, this leads to the very unsustainable business model. Extremely high reserve price for spectrum auction is making entire industry debt-laden. If I try to fit Porter’s five forces model for telecom industry at cursory level after factoring recent years’ macro level changes it may look like as below;

II.What numbers say: As per this article, Industry‘s debt level has risen 6 times in last 8 years, currently total debt for the industry is around 4.5 trillion (INR).  Rcom’s interest service coverage ratio has gone negative. In last 10 years if we see financials of Rcom the total debt has doubled in which long term debt has risen by around 46% and short term debt has gone up by whopping 158%, the total revenue has decreased by 26%. While EBITDA,PAT and share price has gone down by 90%, 174% (current PAT is negative) and 98% respectively. Simple observation from the below table can be made that, on debt front actually Rcom is not the most leveraged firm. Airtel & Idea are far ahead in having more debt but real blow to Rcom’s survival has come from Revenue, EBITDA & PAT front. Airtel & Idea has done quite a good in terms of revenue generation & EBITDA growth which is very important for any firm to cover at least variable cost. 

	Airtel	Idea	Rcom
Total debt	447%	1011%	96%
Total revenue	247%	707%	-26%
EBITDA	28%	872%	-90%
PAT	-346%	-269%	-174%
Share price	-0.40	-32%	-98%
Data Source: Money control- last 10 year % change standalone

Many companies including Rcom go for short term debt more than long term for various reasons (either by force or by willingness). But as short term debt has lower maturity if company has improper liquidity mgt. which may lead to failure of payment or delay in payment, it rings the bell immediately. Again habit of borrowing more to repay previous borrowed capital has always brought death spell. If we look at the company-wise market share in the figure below we realize that Jio is sending tremors to big players and it is already killing small Players like Telenor (just barely surviving), Tata ( already gone), Aircel ( fighting to retain), Rcom ( many services are closed).

III. Self-inflicted wounds of Rcom: Back in 2002 under unified brand of RIL in the age when incoming was not free, Rcom is credited with introduction of incoming free services (called monsoon hungama plan). When in 2006 Reliance got split, Rcom came under the leadership of Anil Ambani, during that time the key strategy adopted by Rcom was to flood the market with dirt cheap CDMA phones to capture the higher market share. It worked initially but this has contributed to the ever increasing mountain of debt for Rcom. To hold on to the market share gained, Rcom introduced predatory pricing by making call rates at 50 paisa per minute in 2009. In 2014 Rcom realized & divided its’ CDMA & GSM business in order to safeguard its’ growing business which was GSM and planning to sell CDMA to reduce some debt. As per this data, Rcom’s market share which was 13.71% in Jan-2013 has halved to 6.51% in Aug-2017. In this same time period Rcom’s cost has gone up and so as borrowing (to take care of rising cost if revenue source is not sufficient firm has to raise extra capital) while revenue, EBITDA, PAT & share price has significantly come down. Rcom’s strategy of extreme low pricing & selling CDMA phone at very low price has contributed along with high auction prices for spectrum to its’ mountain of debt, this strategy gave Rcom initially big chunk of subscriber base but Its’ failure to retain this subscribers & eventually convert this low-revenue generating subscribers to high revenue generating subscribers has led to big down fall. At the end I would say, the strategy of predatory pricing (extreme low pricing) to acquire bigger market share & generate higher revenue generally leads to unsustainable business model (I can recall Flipkart, Snapdeal, Amazon’s e-platform biz to name a few).

IV.Last nail to the coffin by Reliance Jio: Entry of Reliance Jio has made sure that weaker & small players are out of the business and bigger players bleed significantly. Since Reliance jio’s entry in 2015, Rcom is going through the worst time period. But I disagree with Anil Ambani’s statement that Reliance Jio has to be blamed for what has happened to the company & sector at large. Rcom was already on sort of ventilator and Jio’s entry expedited the process of ‘pulling the plug’. Rcom had huge debt pile before Jio came & Jio is repeated the same strategy of low price which Rcom relied upon in its initial years. Similarly Telecom sector was already in big debt burden due to high spectrum prices & ever increasing infra requirement but it is also true that Jio has disrupted the telecom sector by impacting revenue flow of major players which has added one more issue to tackle with in the long list of issues pending in telecom sector need to be addressed.

 I believe Government has also played its part in making telecom sector very turbulent & risky due to high auctions prices for spectrum along with complexity & uncertainly of regulation of telecom. Government should certainly look at more ‘reasonable revenue generating and long term sustainable auction model’ instead of ‘extremely high revenue generating short term unsustainable auction model’. Several factors as describe above is making many banks nervous as their huge lending to telecom companies can turn into NPA. 

It is high time for telecom ministry to intervene!