Bharat Sanchar Nigam Ltd, or BSNL, is creating a buzz. After the removal of a key political obstacle—the Communists who broke up with the ruling coalition—the part-privatization of the subcontinent’s largest telecom operator is back on the agenda.
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The government and the BSNL board are pushing ahead with plans for an initial public offering, or IPO, of 5-10% of the group. It claims that the company would attract a whopping $100 billion (Rs4.24 trillion) market capitalization, and that the IPO could be India’s biggest.
Yet there are two big reasons for investors to be cautious. First, BSNL has scale—but in the wrong market. Half of its 73 million customers are for fixed-line services. That is a bad business. BSNL has almost an 85% share, but fixed-line revenues declined in 2007 and the operations were unprofitable.
Growth is likely to be limited from here. In India, as in many emerging markets, the limited fixed-line market is being superseded by wireless networks, which already have eight times as many subscribers. With the imminent roll-out of 3G licences, the government is even backing mobile as the route to increasing broadband penetration.
Second, while mobile is strong in India—new subscribers are up 60% in a year, bringing India ahead of the US—BSNL has struggled to keep apace in a fiercely competitive market. It rings in just fourth place with a measly 14% mobile share, having dropped two spots in as many years. Limited network capacity has delayed its ability to match competitors’ aggressive pricing. Leader Bharti Airtel Ltd now has almost twice as many subscribers, followed closely by Reliance Communications Ltd and Vodafone Essar Ltd.
In this context, it’s hard to see how BSNL could be worth anything like $100 billion. In 2007, the company generated roughly $4.1 billion in earnings before interest, taxes, depreciation and amortization, or Ebitda. Assume, very generously, that it grows as fast as its quoted Indian wireless peers and that it deserves their Ebitda multiple of around 10.5 times. That implies a market capitalization of just $60 billion.
Of course, the government hasn’t yet appointed advisers. It is still negotiating with the notoriously tricky unions and may yet merge BSNL with Mahanagar Telephone Nigam Ltd, a sister state-controlled, fixed-lined operator which covers India’s two biggest cities. In this murky situation, it might have been wiser not to throw around such a big number.