BSNL: Navratna to sick PSU

Remember the operators who use to connect your calls from the erstwhile landline era or the lineman who repaired faults in your telephone connection. You might have forgotten them with the onset of mobile phones, but such people still work for the state-run telecom player BSNL despite a redundant profile.

No wonder, the high employee cost running into 55-60% of expenditure, along with factors such as heightened competition and lower tariffs, has brought down the telecom PSU.

Incorporated in 2000 out of the department of telecommunications, Bharat Sanchar Nigam Ltd (BSNL), once a number two mobile player, is now an ailing unit with a mammoth 1.76 lakh employees. From a profit of Rs 10,000 crore around 2005, it recorded a loss of Rs 8,000 crore last year.

Owing to stiff competition in the sector, every private player is facing the heat on their financials. But a quick look at the employee numbers would show how BSNL has a bloated staff over its private peers.

According to experts, the imminent downfall of the PSU started around 2007-2008 when the company failed to add network capacity due to various delays in tenders. Also, government interference, even at micro levels, made the decision making prolonged and different. Many earlier proposals of a stake sale were met with stiff opposition from BSNL unions, which also were a major hurdle towards the privatisation of the company. A voluntary retirement scheme (VRS) has been in the works since 2011, but a final decision is yet to be made.

FINANCIAL DECLINE

BSNL's inability to withstand the sector stress with its uncompetitive cost structure and an inferior network have hurt its financials over the years, according to analysts.

The telecom PSU's financial position has been deteriorating for a long time. In the past 14 years, it has moved from Navratna status to being declared as an 'Incipient Sick' PSU.

The financial year 2008 was the last year of positive operating profit for BSNL. Since then, the company has posted a cumulative -- FY2009-18, EBIT loss of Rs 82,000 crore, and would have crossed Rs 90,000 crore by end of December 2018, according to a note by Kotak Institutional Equities.

Employee expenses, including retirement benefit accruals, stood at 66% of operating revenues in FY2018 versus 21% in FY2006 and 27% in FY2008.

The operating revenues for FY2018 stood at Rs 22,700 crore, which is 37% lower than the peak FY2006 levels reflecting industry-wide challenges as well as loss of market share for BSNL, analysts at Kotak said.

Besides, it moved from a peak net cash position of Rs 37,200 crore at the end of FY2008 to a net debt position of Rs 8,600 crore in FY2018. The current annual cash loss run-rate for BSNL would be in excess of $1 billion, Kotak said.

The huge employee base no doubt is a big liability. Compared to Airtel, which has around 21,000 employees and Vodafone Idea's estimated 20,000, BSNL numbers stand like a skyscraper at 1.76 lakh.

Many jobs have become redundant with the change in technologies, though some employees have been reskilled and transferred to manage different tasks.

As per BSNL's internal estimates, 50,000-60,000 employee base is an ideal number.

LOOKING BEYOND MOBILE

BSNL has been taking proactive steps to generate additional revenue streams mainly from the enterprise segment, WiFi, spectrum and tower sharing and launch of its fibre to home services. In a bid to retain users, it has matched Reliance Jio's tariffs, the new entrant which has disrupted the telecom market. It has been adding new users as well on a monthly basis, but that is more to do with exit/closure of other telecom players, rather than on its own. It is also exploring new avenues like IoT and smart cities and looking to monetise its building assets.

The addition in new users does not mean an increase in revenues, as average revenue per user (ARPU) is on a constant decline. Until mobile tariffs are raised, it is difficult to sustain at such levels in the long term. And the decline is not limited to BSNL alone, incumbents like Airtel and Vodafone Idea are also struggling to sustain in such a market.

BSNL chairman and managing director Anupam Shrivastava, in an interview to DNA Money in February, had said, "Our focus is on preserving the market share. In the industry, a trend always comes where you have to preserve your market share and take a hit on your financials. So last year, we went ahead with this strategy of preserving the market share and match tariffs with the competition. As a result, we have taken a hit on our financials and with our employee costs being so high, it had become really difficult to remain in positive territory. Last year, we also booked losses. It is really difficult to manage our employee expenses in this environment, where tariffs have plummeted to a very low level."

For the first time, the company defaulted on employee salaries for the month of February. Though, it has now paid the salaries through its internal accruals. It also plans to raise a soft loan worth Rs 5,000 crore to meet operational expenses.

Since last year, the company has been on a cost-cutting drive, reducing electricity, administrative expenses and freezing employee benefits including LTC benefits, while curing medical expenses. With these cost-cutting measures, the company has saved Rs 2,500 crore last year and looks to save a similar amount in the ongoing fiscal. Out of Rs 2,500 crore savings annually, one fourth i.e Rs 625 crore has come from employee benefits.

However, BSNL remains far behind the three private operators in terms of network coverage, capacity and quality. With Jio's imminent FTTH foray, it is likely to impact BSNL's wireline business soon, which is the only growing segment for the company over the past few years.

IS REVIVAL POSSIBLE?

The department of telecommunications (DoT) is considering a revival package for BSNL, which it had submitted in 2017. The company had submitted a detailed project report to acquire 4G spectrum worth about Rs 13,885 crore. A preliminary report by IIM Ahmedabad has also been submitted by BSNL which suggests giving VRS (voluntary retirement scheme) to about 35,000 employees at a cost of Rs 13,000 crore. For BSNL, which has an employee base of over 1.76 lakh, a VRS package of Rs 6,365 crore is being considered. The proposal was discussed in the last Digital Communications Commission (earlier Telecom Commission) meeting in February.

However, it is unlikely that a final decision will be taken before June since the model code of conduct has come into force. A decision can only be expected after elections as the proposal needs a Cabinet approval as well.

Mahesh Uppal, a telecom expert, says BSNL is dying slowly since the government has been unable to resolve its issues."BSNL should not be allowed to die. It is a major public investment and offers an alternative business model for telecom. It has historically not functioned, or rather not been allowed to function, on a sufficiently commercial basis. The company needs commercial flexibility to be competitive as well as profitable"

The future does not look bright unless the government is willing to bite the bullet and deal with the pending issues, he said.

The telecom industry has been reeling under financial stress since the entry of Reliance Jio in late 2016. Low data tariffs and free voice calls offer from the new entrant pushed the financial of incumbents, including that of BSNL, on a downward spiral, apart from triggering a consolidation phase in the industry where now only three private players are left along with BSNL/MTNL. BSNL and MTNL have been posting losses and struggling to survive in a hyper-competitive market. In Q3 FY2019, Vodafone Idea posted a loss of about Rs 5,005 crore, while Airtel posted a 72% decline in profits and Reliance Communications knocked the doors of NCLT for insolvency, the second telecom firm (first one being Aircel) to do so in recent times. However, Reliance Jio has managed to turn profitable in just two years of its operations.

Uppal says BSNL minimally needs the power to hire and fire to buy equipment without the overbearing role of government bodies. One of the solutions could be to bring a strategic partner. This can help BSNL to transition to a commercially savvy player.

"There is a need to be able to access and retain a private talent pool. The constant interference and micromanagement by the government is a big problem. BSNL is unable to be responsive to customers. It could work better as a wholesaler of services – a B2B player," he said.

The days of supernormal exchequer surplus from the sector may be over. Hyper competition and smart spectrum auction design led to the generation of material surplus for the exchequer in the past decade. Low probability of 'blockbuster' spectrum auctions in the next few years, Kotak analysts said.

The government as the owner of BSNL needs to answer consistent equity calls to keep BSNL afloat, as preferential low/no-cost spectrum allocation alone will not solve the problem while a complete shut down too will involve material one-time