City Sunday

Lessons from telecom saga

India’s telecom sector grapples with the latest bout of bad news regarding the sustainability of business models, debt-levels, and lenders’ issues. There are lessons to be learnt, and they must be used to ensure the non-recurrence of such problems in the future. Policymakers have two primary lessons on pricing and further developing capital markets with depth and liquidity.
Pricing here refers to policies that determine taxation and revenue sharing agreements. In the case of the telecom sector, while the price of the spectrum or the definition of adjusted gross revenue were issues that required much in-depth debate and attention, the fact that Public Sector Banks (PSBs) hold a significant portion of telecom debt implies that the government has no option other than finding a solution to the woes of the telecom companies, one way or another.
Primarily, public policy needs to ensure that for large sectors entailing substantial capital expenditure, there is clarity that the “pricing” policy must provide for building, as far as possible, a robust sector. Issues that the industry may face, eventually end up creating problems for the government and the public at large. For instance, if the telecom companies were to face issues with restructuring their debt, PSBs would yet again saddled with more significant credit problems. Secondly, apart from pricing, the development of the credit markets, in general, is essential in India.
Current issues remind lenders of how the usage of primarily “plain vanilla” debt is unsustainable for ensuring long-term value for the lenders. Large debt piles with rapidly declining market capitalisations and net worth of companies have been a story that has played out repeatedly over the last few years.
For the above to happen, lenders need to get more “sophisticated”, and security design needs a relook. Additionally, we need to improve regulations that determine security design and security return. In common parlance, simply lending through vanilla debt may not be ideal for complex large businesses. As has been opined by experts before, credit markets and credit market participants need to expand in India. The entire government machinery must further speed up capital markets design, security design and effective security taxation.
Reducing friction around capital markets is essential. For instance, how to make a tower stake monetisation through an Infrastructure Investment Trust (InvIT) more accessible for a telecom operator? Is the taxation of returns on InvIT assets competitive? Is the regulatory environment conducive to a frictionless capital market? These are all questions that merit significant attention. Businesses, especially foreign ones, also need to realize that one of the primary skills required to operate a business in India successfully is the “art of connecting the micro with the macro”. Innovation needs to be such that the large consumer base, albeit with low per capita consumption power vis a vis the developed economies, can be monetised. Merely throwing money at the problem isn’t necessarily the best solution.
While innovative models have been used earlier, such as the one by Unilever through Hindustan Lever’s use of smaller consumer packs, more such models will be required for going forward. Additionally, we must not forget the adage “cash is king”. For industries or companies where there is a lack of clarity on “cash flow generation”, paying big bucks through an auction bidding process cannot be blamed on a policy. Foreign investors will have to take a hard look at some of the investment decision making.
Essentially, at the beginning of a recovery cycle, a rising tide lifts all boats. However, as capital flows in, individual asset selection assumes prime importance as the returns dive down as an obvious outcome of the increased capital. While some investors excel at investing in sectors right around the turnaround period, others excel at individual asset selection. At the outset for any investor, the strategy needs to be precise.
For instance, the early movers into Indian commercial real estate at the beginning of the current decade did very well as the sector recovered. But, now, with asset returns pushing lower and money pouring into the commercial real estate sector, asset quality selection becomes a crucial factor. Therefore, the investment strategy in the industry must account for the change in the landscape.
Primarily, lessons from one sector apply to all. Eventually, the crucial component of a conducive investment environment is “effective signalling” by all stakeholders. The ability of policymakers to show the consistent attractiveness of sectors, the capacity of investors to invest in attractive areas while incentivising better policies where needed, the competency of lenders to structure debt according to the borrower’s requirements and consumer satisfaction are all intertwined.
Investor money flowing into a specific sector at a rapid pace often would lead to the conclusion that both the investment case is compelling, and policies are conducive. Investors must also contribute to ensuring that the policies are indeed favourable. As India looks to resolve the issues facing the telecom sector, lessons learnt must be used to improve the investment landscape. More importantly, all stakeholders must contribute in equal measure. (MR, Inputs: Agencies).

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