Indian Govt Diving Deep in Telecom, What It Means for the Sector

There’s no way of understanding how the investors/shareholders are going to perceive the government holding a significant chunk of the companies as of yet. By accepting the equity conversion, Vodafone Idea will likely have to give up 35.8% stake in the company which will make GoI the largest shareholder of the telco.

Highlights

  • BSNL and MTNL are already relying on the government for more funding and revival packages.
  • The Indian government through a FAQ has already shared its intentions about not getting involved in the operations of private businesses even though it has equity.
  • Vodafone Idea’s acceptance of giving away equity is a surprise for many in the industry.

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Indian Government

The Government of India (GoI) has been at the front actively helping out the telecom sector, which was severely stressed due to the low average revenue per user (ARPU) and huge amounts of statutory dues at every turn.

One of the biggest effects that all the help from the government will have on the telecom sector is that it will avoid any scenario of duopoly between two of the top private operators.

“Direct implication of the government bailing out operators is that it de-stresses the financially burdened telecom sector to a certain extent, saves the market from shrinking down to duopoly and supports India’s digital ambitions,” Charu Paliwal, an analyst at Counterpoint Research, told TelecomTalk.

Government Not Expected to Play Major Role in the Operations of Private Telcos

The Indian government, through a FAQ, has already shared its intentions about not getting involved in the operations of private businesses even though it has equity.

Ankit Jain, Assistant Vice President & Sector Head, Corporate Ratings, ICRA told TelecomTalk that the government is likely going to monitor the performance closely and take a call on divestment if the situation seems to be improving.

“We don’t expect the Government to play a major role in the operations of these telcos, however the performance is likely to be monitored more closely and a call on divestment will be taken once situation appears to be improving,” said Jain.

However, there’s no way of understanding how the investors/shareholders are going to perceive the government holding a significant chunk of the companies as of yet.

“How investors view this shareholding change and how this impacts the fund-raising exercise remains to be seen,” added Jain.

For the unaware, recently, Vodafone Idea (Vi), the third-largest telecom operator in the country and Tata Teleservices, a telecommunication solutions company, had exercised the option of converting their statutory debt into equity for the government. This allows the telcos in getting rid of their debt but also allows the government to get a significant stake in the private companies.

By accepting the equity conversion, Vodafone Idea will likely have to give up a 35.8% stake in the company which will make GoI the largest shareholder of the telco. Further, Tata Teleservices will also need to give up 9.5% of the company stake to the centre by going with the equity conversion option.

The government has already cleared its intentions of not making the private companies public sector units (PSUs).

Government Will Have More Pressure by Taking Stake in the Telcos

Vodafone Idea’s acceptance of giving away equity is a surprise for many in the industry. While the telco’s business will continue, it had to pay a big price for it. But it doesn’t solve all the problems for Vi. There’s still capital required for funding network expansions, investments into the 5G spectrum and related technologies, and more.

“The decision is quite surprising especially for Vi as it provides assurance around business continuity but at a big price tag. Now, the government becomes the single largest shareholder with 35.8% stake in the telecom company. The move will certainly offer some cash flow relief but eventually the operator would need more funds to expand the network, enter 5G race and compete with rivals,” said Paliwal from Counterpoint Research.

Bharat Sanchar Nigam Limited (BSNL) and Mahanagar Telephone Nigam Limited (MTNL) are already relying on the government for more funding and revival packages. With equity stakes in private telecom companies, the government will face more pressure for capital infusion in the future.

“Also, in the backdrop, we have BSNL and MTNL already relying on government relief packages but continuously failing to remain competitive. We can say taking stake in Vi, and Tata Teleservices will further mount pressure on the government for capital infusion in future,” Paliwal added.

Telecom Industry ARPU Levels to Reach New Heights

As for the telecom sector in general, the relief package is going to make a big positive difference. On top of that, the telcos recently implemented prepaid tariff hikes, which will further help with the rise of industry ARPU. Along with the rise in ARPU, the revenues in the coming financial year should also grow.

“The industry implemented long-awaited tariff hikes which has the potential to improve the industry ARPU levels to around Rs. 170 by the end of FY2023. ICRA expects the industry revenues to grow by 18-20% in FY2023, followed by a growth of 10-12% in FY2024, which given the high operating leverage, is likely to translate in healthy expansion in operating profits, the same are projected to grow by around 30% in FY2023,” said Jain from ICRA.

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