IPO Not the Cure for BSNL's Ills

The long-proposed IPO of India's Bharat Sanchar Nigam Ltd. (BSNL) is unlikely to change the fortunes of the beleaguered incumbent operator, according to a former senior executive at the state-owned carrier. (See BSNL Considers $10B IPO.)

Critics of the move, which could involve the flotation of a 10 percent stake on India's stock exchanges, say BSNL doesn't need the cash: Indeed, government figures for the end of September 2009, put BSNL's cash reserves at 364 billion Indian rupees (US$7.9 billion).

In addition, with telecom stocks not performing well on the Indian exchanges, any near-term IPO is unlikely to attract a favorable valuation for BSNL.

"What is the point of an IPO?" asks Dr. SD Saxena, BSNL's former finance director. "The government will not get the right valuation. The telecom stocks are not doing well. Besides, BSNL is not doing well. The revenues are consistently coming down, and the ongoing tariff war has further put pressure, not just on BSNL, but on all operators. So there is hardly any likelihood of an IPO getting a good response," Dr. Saxena tells Light Reading.

According to The Economic Times, the IPO, which is strongly opposed by the trade unions that represent many of BSNL's 300,000-plus staff, could take place during the carrier's next fiscal year (April 2010 to March 2011).

Dr. Saxena's view is supported by analysts. "An IPO is hardly going to help. To begin with, BSNL is sitting on huge cash reserves, so it's not like it's a cash-starved company. Basically it will not address the cause of its problems," says Neeraj Jain, director of transaction services at KPMG International .

There are, however, some clear advantages to BSNL of an IPO. A stock listing would give it more visibility in the international market, which could help the carrier with any potential international acquisitions. (See Four Bid to Buy Zamtel and Zain's $13.7B Mystery Investors.)

And though BSNL has plenty of cash, notes Harit Shah, IT and telecom research analyst at Karvy Stock Brokers Ltd., an IPO would help make the operator "more transparent" and would "go a long way in making it accountable." BSNL's revenues and profits have been on the decline for the past three financial years. In 2005-2006, the carrier reported revenues of INR401.8 billion ($8.75 billion) and net profit of INR89.4 billion (1.95 billion), but by 2008-2009 its revenues had slipped to INR358.1 billion ($7.8 billion), and its profits had slumped to INR5.75 billion ($125 million).

And with the increasing pressure on the financial performance of all of India's operators, caused by intensive competition and the introduction of per-second billing, it's possible BSNL might not make a profit during the current financial year, which ends in March 2010.

The carrier has also been found wanting during the past few years of breathtaking mobile market growth: The Indian mobile market added 113 million new mobile lines in 2008, and is likely to have added more than 160 million in 2009, but BSNL's privately held rivals have been more reactive to the market and have grown more quickly. (See Tata Takes Summer Subs Lead and BSNL Struggles for Subs in May.)

BSNL is now only the fourth largest mobile operator in India, with more than 60 million customers, and in danger of slipping to fifth. Yet only a few years ago it was the No. 2 player behind Bharti Airtel Ltd. (Mumbai: BHARTIARTL). (See India Passes 500M Mobile Mark.)

BSNL hasn't even been able to capitalize on its advantage in the 3G market. Along with fellow state-owned operator Mahanagar Telephone Nigam Ltd. (MTNL) , BSNL was handed 3G spectrum more than a year ago, while India's remaining mobile operators are still waiting for their chance to take part in the proposed spectrum auction.

Yet after nearly a year of service, BSNL has just 600,000 3G customers, and it's now investing further in its 3G capabilities in the hope of reaching 1 million 3G users by March this year. (See India's 3G Spectrum in Short Supply and BSNL Does 3G With Ericsson.)

BSNL's situation has been made worse by its problems in adding new capacity to its GSM mobile network. The operator has been mired in legal wrangling over significant contract awards, with the latest tender for 93 million new mobile lines still in limbo. (See Huawei May Lose to ITI in India, NSN Probes BSNL Bid Process, Huawei Touts $2B Deal From BSNL , and BSNL Delays New GSM Tender.)

"If BSNL had been able to get new equipment, it would have done much better than the other players in the market, since it has the best reach," believes KPMG's Jain.

Despite this, the operator has significant network assets. It has an optical transport network of more than 400,000 kilometers, India's largest and most extensive, and a valuable asset in pursuing growth in rural areas. By comparison, Reliance Communications Ltd. 's optical transport network is 40,000km long.

"The only way [BSNL] can be saved is by growth. It has to come up with new products and services, which appeal to the market. It has to generate new revenue streams. The company has to find ways and means to upgrade equipment as well. Unless and until it expands its network, and gets government support [to achieve that], BSNL will not live," believes Dr. Saxena.

— Gagandeep Kaur, India Editor, Light Reading