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!
Random facts: Vodafone bought orange at high valuation and made sure that RCOM is given tough competition apart from air tel. The most aggressive businessmen , Mukesh Ambani knew inside out of RCOM so obviously he will come with better strategy. RCom may have faced first mover disadvantage in aggressive bidding for spectrum as well as cheap call rates where Rcom made mistakes and other players might have learnt on Rcom's mistake. Rcom never had highly motivated founder(sunil mittal) or mgmt( tata plus birla) combo. It may have faced pure bad luck like the way kingfisher airlines had in aviation field( high oil cost- major cost= high spectrum cost- major cost).
ReplyDeleteAgreed in part to what you said, Leadership is important but now Tata even with motivated leadership has sold business to Airtel.
ReplyDeleteIn context with pure bad luck, to an extent yes entire Telecom sector is facing it not only Rcom.
But sector needs rejig otherwise in future Govt's revenue will be at stake, & banks will again face lot of NPA from Teleco and such dynamism of telecom sector will lead to survival of only few & big in long run.. not good for competition & customers.
Thanks for the blog, it was worth reading it!!!
ReplyDeletePleasure!
DeleteThough having technology guys, do not understand many terms but good analysis. Tell me if you want any data analysis help ever. Thank you and Good analysis once again.
ReplyDeleteThanks Chintan, sure will tell you.
ReplyDelete