The Final Bet

For years now, Reliance Communications has been a fringe player, more in news for its debt and plans to trim it, than rising profits or market share. But just when it appeared to be quietly walking off the limelight - leaving the market to Airtel, Idea, Vodafone and Reliance Industries' Jio - it came up with a plan to stay in the game, and that too as a serious contender.

RCom is working on a merger with Sistema Shyam Teleservices and Aircel, the two other also-rans, to create an entity that will be the country's second-largest after Airtel in subscriber base. "On a standalone basis, if these companies had continued to operate in the same way, they would become inconsequential in the next three-four years. We had to do this, otherwise we would have been wiped out," says an RCom executive who did not want to be quoted. Sistema Shyam runs operations under the MTS name.

The new entity is expected to have 211.7 million subscribers, RCom's 118 million, MTS' 8.7 million and Aircel's 85 million (in September), more than Vodafone's 191.95 million and Idea's 170.66 million (in November). In addition, RCom said in October that it was discussing trading and sharing of the 800-850 MHz spectrum with Reliance Jio.

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Numbers May Lie

However, the finer details of the deal don't excite analysts and investors. Take debt, for instance. RCom's debt was Rs 39,984 crore at the end of September. The figures were Rs 4,535 crore for Sistema and around Rs 20,000 crore for Aircel. These are huge numbers, though company officials claim that the combined entity will have just Rs 20,000 crore debt, half of it RCom's and the other half Aircel's. It is believed that Aircel's Rs 10,000-crore debt will be paid off by its parent Maxis Communications, while RCom is expected to cut debt by selling optic fibre and tower businesses. MTS's debt is expected to be paid off by majority shareholder Sistema JSFC. RCom owns around 96 per cent stake in Reliance Infratel, which runs its tower business. The sale of towers alone could fetch some Rs 22,000 crore. Plus, Rs 7,000 crore could come from the sale of related infrastructure, including optic fibre assets. Reliance Infratel has some 45,000 towers and over 1.2 lakh km intra and inter-circle fibre network.

Experts, however, say that there has to be a compelling reason for Maxis to pay off Aircel's debt. While Maxis is expected to get around 40 per cent stake in the new entity, MTS is expected to get 9 per cent in RCom.

"More than the battle for survival, these deals show that foreign investors in Indian telecom companies aren't getting exit routes. Clearly, there is a dearth of opportunities for them," says a telecom analyst.

Also, although RCom's strategy is to gain market share, there is a question mark over the kind of customers it will acquire from Aircel and MTS. There are already concerns around the quality of customers in RCom's portfolio. RCom's average revenue per user, also called ARPU, as well as the number of post-paid subscribers, are fairly low compared to the market leaders. Post-paid subscribers spend more than pre-paid customers. In India, a vast majority, over 95 per cent, of subscribers are pre-paid. That is why RCom's blended (voice & data combined) ARPU was Rs 138 during July-September 2015, compared to Airtel's Rs 193 and Idea's Rs 144. On the quality of customers, an MTS spokesperson, requesting anonymity, said, "It is mostly RCom officials who will be calling the shots in the new entity. Customer quality is something that they have to deal with. As far as we are concerned, we are giving them high-quality data customers."

Analysts, too, are not convinced. "How many Reliance numbers do you have in your contact list?" asks one. "I guess it would be much less than the subscribers of other telcos. This shows the number of customers with them," he says, adding that high-value customers usually gravitate towards bigger players such as Airtel or Vodafone.

"Their customer base is not as high-value as that of others. Also, when you merge three different networks, a lot of complexities emerge which may not be visible at the moment," says Shobhit Khare, Research Analyst, Motilal Oswal Securities. The deals will require approval from the Competition Commission of India. They will also have to go to high courts before getting the final approval from the Department of Telecommunications.

Its the Spectrum, Stupid

RCom is betting big on the spectrum that the new entity will hold. According to estimates, it will have 19.3 per cent of the country's total spectrum, the highest among all telecom companies. The prized possession will be the 800/ 850-MHz spectrum, which works best for 4G services. The other spectrum bands for 4G include 1,800 MHz and 2,300 MHz. So far, RCom has a nationwide footprint of at least five MHz 800/ 850 MHz spectrum whereas MTS has spectrum in this band in nine circles. "The 850 MHz spectrum holding of the new entity will be tremendous. It will have at least five MHz in all circles. In some circles, it will have 10 MHz. If you add Jio, then between the two of them they will have at least 12 MHz spectrum across the country," says an analyst.

RCom is also hoping that the Jio tie-up will help it bolster 4G services. However, industry watchers express caution and say that voice customers still make a large chunk of the market. 3G or mobile broadband subscribers account for less than 10 per cent (90 million) of the country's total subscribers (over 1,000 million). Once 4G comes, these 3G customers are expected to be the first ones to migrate to 4G. And, in 4G the big battle is going to be between large players such as Airtel and Jio that have made huge investments in technology. Jio alone has, for instance, spent around Rs 1 lakh crore for rolling out 4G services so far.

"Why would someone go for RCom when there is Jio in the market with a much wider network, marketing push and content strategy? The kind of positive rub-off that RCom is expecting from the Jio partnership may just be imaginary," says a telecom analyst.

So, while the new entity will have much lower debt, some of the biggest issues will remain. Historically, low capital investment has marred RCom's growth prospects. It has also not been able to compete with the likes of Airtel, Vodafone and Idea in terms of both trade and customer perceptions. In the telecom business, operators need to invest huge sums of money to upgrade or expand networks. Even if RCom is able to form a new entity, its ability to invest will not substantially improve.

"All these claims look good on paper but, in reality, things could be entirely different. The biggest problem with these players is investments. You can increase market share by aggregating subscribers, but that is hardly the way to improve cash flow and margins. In the services sector, things move slowly. In the next three-four years, you will find RCom still struggling for survival," says an analyst.

Over the past two quarters, RCom's net profits have dipping with a corresponding decline in revenues. For instance, in the September quarter, it posted a net income of Rs 5,260 crore, down 7.4 per cent from the March quarter, and net profit of Rs 156 crore, down 31.6 per cent from the March quarter. It's not going to be easy for RCom to keep going in a market that's expected to undergo dramatic changes in the near future. It needs to work on multiple areas, such as brand building, capital expenditure and focused customer acquisition strategy, to make the merger a success in the long run.