News of BSNL’s abandoned IPO should come as no surprise to anyone who’s been tracking the sinking fortunes of a company once seen as a national champion.
Now India’s fifth-largest telco, telecom officials worry that the state-owned operator will not attract much investor interest in a market where investors are still wary of sinking money. Another state enterprise, National Thermal Power Corporation, received a poor response to its follow-on offer this month.
Talks of a BSNL IPO have been doing the rounds since India’s cabinet approved divestment of a 10% stake two years ago. But with the collapse of BSNL’s IPO plans the giant will most likely seek a private placement.
Minister of State for Communications and IT, Sachin Pilot, told reporters at an industry conference last week that a private placement was “under consideration… the final decision will come from the Cabinet.”
But a bad equity market isn’t the only challenge BSNL is facing. “Their networks are comparable to private sector companies,” says Amit Gupta, principal analyst for Emerging Markets at market research firm Ovum. “But the organization needs to change fundamentally, to become customer-centric. They still have a very bureaucratic structure and you need to fill in tons of paperwork to get anything done.”
In an intensely competitive marketplace, BSNL is feeling the pinch of that bureaucratic reputation, both internationally and within India. Earlier this month, it lost a bid to manage the telecom networks of Ethiopian Telecom, a state monopoly. France Telecom, which reportedly made a less competitive offer financially, won the deal. The New Delhi-headquartered BSNL didn’t qualify on some other parameters, said an official in the know, including its performance in the domestic market.
Risky strategy
Managing Director Kuldeep Goyal has frequently spoken of BSNL’s desire to expand internationally, especially in Africa. And though it doesn’t make public the information, the company is reported to have a strong balance sheet.
But “international expansion is a risky strategy for BSNL,” says Gupta. “[BSNL] are trying to run before they can walk. An acquisition overseas takes lot of effort, so guess where the management’s focus would be if it were to happen. Such an acquisition could further hit BSNL’s Indian operations.”
A domestic acquisition won’t to be easy either. “In a competitive global as well as domestic market, BSNL will find it difficult to pull off an M&A because of its present structure,” said a telecom analyst close to the company. “Management needs to be able to take decisions and run with those, there needs to be structures in place to support an acquisition. BSNL has none of that.”
The company’s $10 billion tender for 93 million GSM lines has now been delayed for over 18 months, putting its network expansion plans on ice at a time the country’s mobile subscriber base is rapidly growing. The result has been a further loss of market share.
The Central Vigilance Commission is investigating the deal for possible irregularities amid reports BSNL agreed in post tender negotiations to pay Ericsson 130% more than it had earlier quoted for the north and east region contracts. If BSNL is made to junk the tender it will push back its network upgrade timetable even further.
As of December 2009, BSNL had a subscriber base of 59.5 million, or 15% of the market, compared to 30.9% held by market leader Bharti Airtel, according to figures from the Cellular Operators Association of India (COAI).
Generous advantage
In addition to losing ground to aggressive new operators, BSNL hasn’t been able to capitalize on its early-mover 3G advantage. As a state-run company it was granted 3G spectrum early in 2009 – a generous advantage in a market desperately short of spectrum.
Its privately-owned rivals must wait for the government’s long-delayed 3G spectrum auction, originally proposed for January 2009 and now deferred to at August or September 2010 at the earliest.
In a market as large and untapped as India, BSNL’s 3G services should have been a roaring success. But that hasn’t happened.
One reason is value-added services are more for high-end customers, most of whom are unlikely to have BSNL connections because of its reputation for poor customer service, Gupta says. Moreover, Reliance and Tata already offer some services that BSNL does over 3G, so customers have other value-added service provider options.
“The initial response had been slow, but sales have picked up gradually with the expansion of the service to new areas,” Goyal told telecomasia.net.
Since the 3G launch last March, BSNL has rolled out 3G services in 318 cities, with 856,000 subscribers, he said. BSNL is adding around 2 million new mobile subscribers every month.
BSNL is said to have failed to market its 3G services effectively. “In India 3G is often mistakenly viewed as an infrastructure play, but it is really a content and value-added services play,” says Sridhar T Pai, head of market research consultancy Tonse Telecom.
“And it [3G] hasn’t been marketed like that by BSNL.”
“I’m a BSNL customer and I haven’t been approached about any new offerings post the introduction of 3G services. Apart from movies and music, there are other services like video streaming, enterprise 3G and mobile broadband services they can introduce.
But they haven’t. And there hasn’t been an attempt to market the benefits of 3G even to existing customers,” points out Sridhar.
While it has an unparalleled network and resources, BSNL’s “assets are under-monetized,” says Sridhar. “State-run organizations globally at some point change in terms of the work culture, energy, people autonomy etc to become effective corporate structures.
But that hasn’t happened with BSNL.”