Losses push new telcos towards bailout

A few years back, many foreign and domestic companies made a beeline to get spectrum licences in India. But since last year, after new players entered the market by offering reduced rates, they have fallen prey to their own strategy. Most of them are bleeding as profit margins reduced.

“We believe tarriffs, which are already the lowest in the world, may not be sustainable for smaller players. It is evident that the fully-integrated players will continue to remain stronger,” Satish Seth, group managing director, Reliance Communications, said at an analyst conference call.

The telecom ministry is now mulling a bailout package, wherein companies can return the spectrum and take back the licence fees. Some analysts said this could be one of the last options left for companies that had not launched operations despite holding a spectrum.

Companies that recently launched operations have made no dent in terms of market share. Such companies as Loop, Videocon, Stel, HFCL and Sistema Shyam have a market share of less than one per cent. Ten-month-old Uninor has garnered 1.05 per cent share, while Etisalat has the lowest share of 0.005 per cent.

“If they have to quickly increase their market share, newer companies will have to practically go free, which is not possible. Companies will struggle more if they have to compete with Idea, Airtel and Vodafone,” said Vaibhav Agarwal, vice-president, research, Angel Broking.

While new companies are struggling, losses are mounting. In the second quarter, Sistema Shyam posted a net loss of Rs 493 crore, which is more than three times its last year loss of Rs 106 crore. Also, Uninor reported a net loss of Rs 850 crore. These companies are yet to achieve breakeven, which is years away.

Reeling under losses, these companies have a few options to sustain their businesses. “There has been a lot of equity-value destruction in the Indian telecom market. Vodafone has written-off the value of its Indian assets and Telenor shareholders are asking it to quit India. There is very less foreign interest in India,” said Alok Shende, principal analyst, Ascentius Consulting.

Under the present regulations, spectrum cannot be transferred as an asset in an acquisition. And, as these newer companies have not built a huge subscriber base, there are no assets to buy even if domestic companies were interested.

However, Mrityunjay Kapoor, country-head, Protiviti India, said mobile number portability (MNP) could give an opportunity for newer companies to get a substantial market share. “There will be a churn among most people – who are high-value customers – to operators that can promise better service. If new operators can differentiate themselves in terms of service quality, MNP will provide an attraction to switch,” he added.