The aggressive launch by Mukesh Ambani's Reliance Jio, which is putting pressure on earnings of rival telecom companies, has now pushed the Tata Group to explore plans to exit the loss making telecom business. Tata Group is reported to have held exploratory talks with Bharti Airtel in this regard. It's a move that could give Airtel more firepower in the form of spectrum and subscribers and further consolidate the market.
The developments come at a time when rivals Vodafone and Idea Cellular are also in merger talks and Anil Ambani's Reliance Communications is merging its telecom operations with Aircel.
The Tata Group had a joint venture in the telecom space with Japan's NTT Docomo. However, the JV fell-off and after a bitter dispute, the two sides reached a settlement earlier this year.
Bharti Airtel could be interested in a deal, as it will get further spectrum in the 800 MHz band Tata's telecom tower assets and more importantly 45 million active subscribers. This will help it cut the gap with Vodafone-Idea combine.
On the other hand, merging the company with a rival, will help Tatas to pare the huge debt of around Rs 30,000 crore on Tata Teleservices books. The huge investments that are required to sustain in this business could also be used elsewhere.
The huge debt could become a bone of contention though. Bharti Airtel saw its fourth quarter net profit plummed 72 per cent to Rs 373 crore, its lowest in four years, on the back of a price war unleashed by Reliance Jio. With weakening earnings, the company may not want to take over the huge debt of Tata Teslservices.
Neither Airtel, nor Tata Teleservices have commented on the reported talks.
Separately, the two sides, may have also discussed plans to merge their two direct-to-home satellite TV businesses—Tata Sky and Airtel DTH. Zee's Subhash Chandra-owned Dish TV is the current market leader and it has already announced a merger with Videocon D2H.
A merged Tata-Airtel DTH business could have the edge over Dish-Videocon combine, with more subscribers.
Analysts are not too surprised with Tata's plan to exit the telecom market, where already there have been a few exits. Earlier this year, Bharti Airtel, itself, acquired the Indian assets of smaller rival Telenor of Norway. Reliance Communications is already merging its telecom business into a separate company with Aircel and is also expected to complete a deal later this year to acquire Sistema Shyam, the Indian unit of Russia's Sistema.
Telecom players in India were struggling with high costs to acquire spectrum and capital expenditure spends. However, Reliance Jio changed the dynamics all together. It launched 4G telecom services last year, making voice calls free for life and extremely cheap data prices (it was free till March 31). In order to stem the loss of subscribers, incumbents including Airtel, Vodafone, Idea and others also announced new plans, which were aggressively priced to match those of Jio.
This, though, has hurt earnings. While Airtel's earnings plunged, Idea Cellular posted its first full year loss in 2016-17.
According to data released by Telecom Regulatory Authority of India (TRAI), the telecom industry's adjusted gross revenue declined 16 per cent year-on-year to Rs 40,831 crore.
"Industry revenue declined in the quarters ended December 2016 and March 2017 on account of free services offered by Jio. Industry revenue will be at risk as blended average revenue per user is expected to reduce unless compensated by high data usage. This, coupled with a pressure on EBITDA margin will impact the sector's debt servicing and financial flexibility," said Tanu Sharma, associate director, corporates at India Ratings and Research.
Analysts expect revenues of top telecom operators to continue to decline quarter-on-quarter as well as year-on-year in the April-June quarter as well.
"A return to growth could still be a couple of quarters away. EBITDA (earnings before interest, taxes, depreciation and amortization) prints are likely to be weak on account of the typical large upward swing in operational expenses in the first quarter of a fiscal," said Rohit Chordia, analyst at Kotak Institutional Equities.
If the said mergers go through, then Indian telecom market will be left with only four large players - Vodafone-Idea, Airtel-Tata, Jio and Reliance Communications-Aircel-SSTL combine.
Sharma of India Ratings said that consolidation may help market dynamics improve, however revenue pressure would remain in the short-term and the key challenge for companies would be to retain their high revenue generating customers.
On Friday, Bharti Airtel was up 0.9 per cent to Rs 384.65, while Tata Teleservices (Maharashtra), the unit of unlisted Tata Teleservices, surged 17 per cent to Rs 8.56. Idea Cellular was also up 1 per cent to Rs 83.40.
