Another turnaround call rings for BSNL

In 2008-09, BSNL delivered a profit of around ₹575 crore. In every financial year since, it has incurred losses. The total losses from 2009-10 to 2021-22 stand at a whopping ₹1.03 trillion.

On 27 July, the central government announced a package of ₹1.64 trillion to revive BSNL. It wants to revive the company primarily because it believes telecom is a strategic sector where BSNL’s presence acts as a market balancer. The press release accompanying the decision stated that the company “plays a crucial role in expansion of telecom services in rural areas, development of indigenous technology and disaster relief".

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In lieu of these factors, the government plans to allot telecom spectrum in the 900/1800 MHz band at the cost of ₹44,933 crore to the company. This will help the company “to improve existing services and provide 4G services". Further, the government plans to fund capital expenditure of ₹22,471 crore for the next four years. It also plans to provide a sovereign guarantee to the company to help it borrow money.

With these and a few other steps, the government hopes that BSNL will become financially viable and earn a profit in 2026-27.

So, how good are BSNL’s chances of turning around? Should the government be bailing out the company? In this piece we try to look at some answers. But before we do that, let’s understand why the company ended up in trouble in the first place. In answering this question lie the answers to the questions raised earlier.

Accumulated losses

BSNL was incorporated in September 2000. The early years of the company were fairly successful. In 2005-06, the income from operations of BSNL peaked at ₹36,139 crore. In comparison, the income from operations of Bharti Airtel stood at ₹11,229 crore. Profits of BSNL peaked at ₹10,183 crore in 2004-05, when Airtel’s profit stood at ₹1,211 crore.

Things changed post 2008-09 and the company started making losses. The losses peaked at ₹15,500 crore in 2019-20 (See Chart 1).

At a broad level, the reason for this is fairly simple. The sales of the company slowed down, never overtaking the peak achieved in 2005-06. Falling sales weren’t accompanied by a fall in expenditure—in particular, the employee cost of the company. This led to high losses.

Take a look at Chart 2. It plots the employee cost of the company in absolute terms and as a percentage of the income from operations. In absolute terms, the employee cost peaked at ₹15,715 crore in 2016-17. But in percentage terms it peaked at close to 81% of income from operations in 2018-19. In comparison, in 2018-19, the employee cost of Bharti Airtel (consolidated) was 4.7% of its income from operations.

Why did income collapse?

Stock market investors talk about a concept called the moat. As Jason Zweig writes in The Devil’s Financial Dictionary: “A moat could be a powerful brand name, such as Walt Disney; a superior design, for instance, Apple."

In a similar sense, BSNL’s moat was its landline services, which couldn’t possibly be replicated by any other company. The trouble with moats is that they can get outdated. Nokia is a great example. It was so busy selling its sturdy mobile phones that it didn’t see the smart phone market exploding.

Similarly, BSNL lost its moat as landlines lost their popularity. In fact, in an answer to a question raised in the Lok Sabha in March 2013, the then communications minister Kapil Sibal had said that one reason for the rising losses of BSNL was the “fixed to mobile substitution," with the market having moved on from landline phones to mobile phones. Sibal had also said that stiff competition had led to rising losses of BSNL.

In August 2018, Manoj Sinha, the minister of state in the communications ministry, while answering a question raised in the Lok Sabha, had offered the same reason while explaining the losses of BSNL. He said: “The market dynamics have changed in last 5 to 6 years… because of the entry of more number of operators, which have garnered major market share."

The post 1991 history of the Indian economy clearly shows that public sector enterprises tend to do well as long as they don’t have to face competition. The moment they have to compete, their performance falters. The telecom sector is no exception to this, like the airline sector as well the banking sector.

Sinha offered other reasons for BSNL’s losses, including the company having to provide telecom services in non-profitable areas like remote and hilly regions, and inherent delays in taking decisions. He also said that BSNL could not invest in timely upgradation of their infrastructure.

A report by the Standing Committee on Information Technology, presented to the Parliament in December 2014, quotes a BSNL representative as saying: “As far as technical shortcomings are concerned…all other private operators started their mobile services in [the] late 90s whereas the BSNL only could start in 2002… By the time our expansions were going on in full swing by 2005-06, we were No. 1 or No. 2 in many of the states. After that, the problem began. That was a problem of non-procurement of mobile equipment."

This was a period when the “telecom network was also expanding at a very fast pace," and any company needed to procure equipment to be able to continue growing at a fast pace. BSNL did not. This led to the company losing the mobile race.

What now?

The losses of BSNL reached a high of ₹15,500 crore in 2019-20. They have fallen since and stood at ₹6,982 crore in 2021-22. This was primarily on account of the voluntary retirement scheme (VRS) run by the company in 2019-20–78,569 employees opted to leave the company. The company had an employee strength of 71,219 as of 1 February 2020.

This has led to the employee cost falling from ₹13,597 crore in 2019-20 to ₹7,169 crore in 2021-22. The falling employee cost has led to lower losses but the problem still remains. The employee cost in 2021-22 formed around 43% of its income from operations. While the costs are down from a peak of 81% in 2018-19, they are still very high. In comparison, Bharti Airtel’s employee cost in 2021-22 stood at 3.8% of its income from operations. In fact, BSNL’s employee cost is higher than that of Bharti Airtel while its income from operation is less than a sixth.

The only way for BSNL to become profitable from here on, while maintaining the current employee cost structure, is to increase its income from operations, which means selling more mobile phone connections.

Take a look at Chart 3, which plots the teledensity of mobile phones in India. In June 2017, five years back, the teledensity of mobile phones was 92.1. This meant that for every 1,000 people in the population, the number of mobile phones was 921. It has since fallen and stood at 83.2 in May 2022.

The urban teledensity has fallen from 168 to 129.8 in the five-year period. On the other hand, the rural teledensity has remained more or less flattish. It was at 57.3 in June 2017 and at 58.2 in May 2022.

Despite the fall in teledensity in urban India, there is more than one mobile phone connection for every individual in the urban population. In rural India, the number of mobile phone connections are under three-fifths of the population. This is where the potential for further expansion lies—one of the main reasons why the government is rescuing BSNL.

The trouble is that as of May, of the 52.1 crore mobile phone connections in rural areas, only around 7% used BSNL. Bharti Airtel and Reliance Jio had 17.6 crore and 17.9 crore subscribers, respectively. Both Bharti and Jio offer a 4G network; BSNL doesn’t.

In the recent 5G auction, Jio was a top bidder with a ₹88,078 crore bid, followed by Bharti Airtel and Vodafone Idea with bids of ₹43,084 crore and ₹18,799 crore, respectively. In fact, a report in the Business Standard says that Airtel is planning to launch 5G services in August. Hence, the chances are that by the time BSNL gets its 4G network up and running, its competitors would have moved on to 5G.

Also, selling mobile phone connections is now as much about marketing as it is about technology. First and foremost, a mobile phone connection is now more about data than voice. BSNL needs a bigger and better telecom infrastructure if it seriously wants to make a dent in this market. The press release accompanying the package to rescue BSNL said that the company is “in process of deploying [the] Atmanirbhar 4G technology stack". A July news report in The Economic Times suggests that BSNL’s 4G pan-India rollout could take 18-24 months.

Secondly, even within data, it’s not just about offering cheap data and a lot of it to consumers. Companies are thinking about the use cases of data.

Take the case of the Reliance Industries-controlled Viacom18. The company recently acquired the digital rights of the Indian Premier League (IPL) T20 tournament. This allows Jio, also controlled by Reliance Industries, to bundle their mobile phone connections with the live broadcast of IPL matches. Jio can bundle other group offerings like JioMart, JioSaavn, Reliance Digital etc., with a mobile phone connection as well. How will BSNL take on something like this?

In order to play this game, the company needs a modern and well-trained workforce. As the BSNL representative quoted earlier told the Standing Committee in 2014: “The legacy mindset, which the BSNL has, is one of the very big challenges in front of us." While BSNL has a smaller workforce now than in 2014, it is still the same workforce.

To conclude, it is understandable why the government is trying to rescue BSNL. First, there are just three major players left in the telecom market. With the continued presence of BSNL, the hope is that the company can offer some competition or, as the government put it, act as a market balancer. The company currently has less than a tenth of the total mobile phone subscribers. In order to compete, that proportion needs to go up. And that can’t possibly happen without the company offering 4G services.

Second, the government wants penetration in rural areas to improve. BSNL can again only play a role there once it has 4G services in place. Third, telecom is a strategic sector. We live in an era where the digital security of a country is of paramount importance and BSNL comes in there. Other than this, there is also the need for a well-functioning telecom network in far-flung areas. Further, the company fulfils an important role at the time of disaster relief.

Nonetheless, it is difficult to see how the company is going to get profitable any time soon in its current avatar. It has too many employees despite the VRS. It’s currently not in a position to take on its competitors either on the infrastructure or the marketing front.

In this situation, it is best for the government to offer an explicit subsidy to the company and clearly allocate it in the annual budget like the allocations towards the subsidies offered on food, oil and fertilizers. A strategic sector is going to come with a cost attached to it.

Vivek Kaul is an economic commentator and a writer.

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