BSNL calling a wrong number

PSU company: Its uncertain future will make disinvestment plan difficult

Bharat Sanchar Nigam Ltd’s slogan, “Connecting India” seems to have gone woefully off tune.  As the government-owned company’s profits nosedived to a new low and the firm caved in to aggressive private competitors, it is sending desperate SOS signals.

The third largest employer after the Indian Army and the Indian Railways, BSNL recorded a staggering 80 per cent drop in its net profit in 2008-09 to Rs 575 crore from Rs 3,009 crore in 2007-08. Its revenue at Rs 35,812 crore in 2008-09 was 10 per cent higher.
Even more alarming is the fact that BSNL is actually making losses in its telecom operations as the company earned an interest income of Rs 3,900 crore contributing to its profits. In the last Fiscal too BSNL’s interest income was Rs 4,004 crore, providing for its profit of Rs 3009 crore. Its reserves of Rs 35,337 crore was the saving grace. The financial mess plaguing the telecom giant was amply demonstrated by the recent statement of Gurudas Kamat, Minister of State for Telecom and Information Technology, in Parliament where he said BSNL’s revenue from basic services dipped by 20.65 per cent in 2008-09, recording a plunge to Rs 11,505 crore from Rs 14,499 crore in 2007-08.

The company has fared badly even in its stronghold of landline connections, where it holds 76 per cent of the total market. The number of consumers using BSNL connections has fallen in the last six months by 7.27 lakhs from 297.03 lakh in November 2008 to 289.76 lakh in May 2009.

In the last five years, BSNL’s revenues from landline connections has dipped by more than 45 per cent — from Rs 22,814 crore in 2004-05 to Rs 11,505 crore in 2008-09. Contrast this with the private sector player Bharti Airtel which tripled its net profit in the last four years to Rs 7,744 crore in 2008-09 on a turnover of Rs 37,000 crore.

While its traditional stronghold has fallen apart, the Public Sector Undertaking has failed to make a dent in the mobile sector, losing out to private service providers.
From second position in 2003 in the mobile phone segment, the company is now ranked fourth with rival companies Reliance and Vodafone overtaking it. Airtel, however, continues to hold the top position.

Higher expenses
Of course, one of the major reasons for BSNL’s poor profit in 2008-09 was a sharp increase meeting enhanced salary commitments due to implementation of the Sixth Pay Commission. Yet another reason was high depreciation charges of Rs 8,500 crore in 2008-09 and Rs 9,696 crore in 2007-08. BSNL has claimed that its earnings before interest, depreciation, taxes and amortisation (EBIDTA), was positive at Rs 7,000 crore.  
Intense competition following the opening up of the telecom sector to mobile operators, is another reason that has caused BSNL’s downfall.

Lifetime schemes for mobile subscribers, sharp fall in average revenue per subscribers, steep increase in operating expenses and higher customer acquisition cost are factors eating up its profits.

One representative example of intense competition is the Karnataka telecom circle where there are now 10 mobile and four landline operators.The circle leader is Bharti Airtel with 10.55 million mobile subscribers at the end of June 2009 and BSNL is a distant third with 2.54 millon subscribers.

Government apathy

While competitors are expanding and growing fast, BSNL is strangled by the non-availability of capacity.

Knowing fully well that the explosive growth in mobile telephony will call for a rapid expansion of telecom network, former IT and Telecom minister Dayanidhi Maran had floated a tender for 45 million GSM mobile lines three years ago. Unfortunately for BSNL, soon after the finalisation of the order, Maran was replaced by A Raja who scraped the order on grounds of higher price per line. 

Though BSNL under Raja made another tender offer and shortlisted two vendors for new lines, the whole process was stuck again because one of the rejected vendors took BSNL to court questioning its rejection on technical grounds. As BSNL’s expansion plans are bogged down with litigations, many new private players were allowed by the government to enter the mobile market creating more competition for the PSU. While private companies are on an expansion spree adding 10 to 15 lakh new subscribers every month, BSNL could only provide connection to five lakh new customers a month due to shortage of mobilephone lines.

Promises unfulfilled

The company recently floated tender for rolling out WiMax services on a franchise basis. The WiMax services have already been launched in 1,000 blocks and this will be extended to 5,000 blocks soon. But it was forced to defer its launch as five of the bidders turned out to be fake. The needle of suspicion points towards a top boss in the ministry.
“These are incidents, which reflect that there is a systematic attempt to sabotage the company,” says V A N Namboodiri, Convenor, Joint Forum of BSNL Associations.   When the telecom sector was opened to private operators, the Centre had promised that the license fee collected from subscribers would be ploughed back to the company. But Namboodiri alleges that an amount of Rs 3,000 crore was never transferred to BSNL.
The company also suffered loss of another Rs 3,000 crore as the Access Deficit Charge (ADC) collected by the Department of Telecom from private telecom operators for giving connection to less attractive rural areas, was not channeled back to the company as promised by the Government, he said.

The union leader also claimed that BSNL suffered financially as it was mandated by the government to set up mobile network in rural areas where revenue per user is very low but capital expenditure is more.
The private players, on the other hand, concentrated much more on large cities where revenue generation and profits are higher.  As a result, Bharti Airtel today is the undisputed leader in the mobile market with a country wide subscriber base of 102 million at the end of June 2009. BSNL is a distant third with 49 million subscribers.

Call of the day

However, BSNL Chairman and Managing Director Kuldeep Goyal is upbeat about the future of the company and confident of making a turnaround. “We will add 100 million subscribers and double the turnover in the next three to five years. This should be done through management restructuring exercise, expansion of mobile and broadband networks,” he said.   

In addition, there are several plans in the pipeline, including sharing of towers and optical fibre backbone with competitors, venturing into new businesses like managed networks and providing IT services like security (firewalls) and managed network services to other companies. 

The government also has plans to sell 10 per cent of BSNL’s stake to raise Rs 10,000 crore for its mega GSM plan. But given the opposition from workers’ union and the company poor financial performance, an equity sale is unlikely to happen in the near future.

“The Government is keen to list BSNL, but the deadline is yet to be decided,” Telecom Secretary Siddharth Behuria said in a recent press meet. But Namboodiri feels that selling shares to raise money is unwarranted as BSNL has a reserve of Rs 35,337 crore.
Financial management of the company is also under the scanner as it is yet to recover Rs 3,092 crore of dues from its customers, including government departments. The Comptroller and Auditor General (CAG) had pulled up the company for not returning government loan of Rs 7,500 crore despite having a cash-reserve of Rs 18,829 crore as on March 2005 leading to an excess expenditure of Rs 1,089 crore on interest payment during the year 2005-2007.

Merger plan

There is a proposal to merge BSNL with Mahanagar Telephone Nigam Ltd (MTNL) which operates in Delhi and Mumbai. “As MTNL is providing services only in Delhi and Mumbai, its scope of expansion has reached saturation. If the two companies merged, it would create the country’s largest telecom company,” said Goyal. 

A consortium of consultants led by ICICI Securities was appointed by the government to advice and aid in restructuring MTNL and BSNL for achieving higher synergies in their operations.

Telecom Minister A Raja, who recently reviewed the performance of the company, asked it to overhaul by listing out its priority to turnaround. First, push for an IPO as it would bring in money for improving its services to face competition from private players. The Minister has already asked the BSNL management to talk to labour unions on this issue.

Secondly, a major overhaul in branding, marketing and distribution network is required. For this task, Boston Consulting Group’s report for restructuring the company is under consideration. A market research company, IMRB, has been hired to study and offer solutions to check plummeting landline subscriptions.

Thirdly, the number of subscribers has to be increased by increasing mobile lines. The tender process for purchasing equipment should be transparent to ensure it is not embroiled in any litigation.

BSNL has announced a list of measures to retain landline connections. The measures are as follows: offer broadband services bundled with landline, introduce value added services like Voice over IP (VOIP), Games on Demand, IPTV, SMS etc for promoting land line services. The other initiatives include introducing alternate tariff plans & improving customer service.

But Rajya Sabha member and the former promoter of BPL Mobiles Rajiv Chandrashekar feels that “The BSNL board must include outside technology and marketing experts to guide its management team. Its organisational structure should be simplified to allow faster decision making.”  Clearly, there is an attempt to make the elephant dance again. But the question that remains is: are the efforts sincere and strong enough to make BSNL profitable and a market leader again?