2017 will be a difficult year for margins: Sunil Mittal

Talking about the debt situation, he said that there is enough cash being generated by the telco to not worry about debt. The bank debt is probably about a billion dollars, he said. “We haven’t clogged our banking lines.”

Going forward, the focus will be on network rollout and ensuring customer satisfaction.

The world is focussed on India. The country is in a great spot, he said.Below is an excerpt from the conversation between Sunil Mittal and Shereen Bhan on CNBC-TV18.Q: Would you qualify 2016 as the year of turbulence, as a year of disruption?A: 2016 has generally been a tough year for the telecom industry with a lot of money gone into the spectrum, spectrum auctions coming through, moving from 3G mid-broadband to going to LTE 4G. So, it has been a very eventful year, yet it has been very tough on the industry in terms of investment cycles, return on capital, generally stock prices and the overhang of Jio’s launch which was impending for most of the year which came through in the last quarter.Q: The buzz word here in a lot of the sessions is creative destruction, but that is not what you are seeing in your industry today, are you?A: No, in our industry, just more of the same is happening. A big powerful has come in. It is the same products, the same services. It is not that this industry is being disrupted by a new technology. So, it is just one new player and of course, a big player. So, that creates a disruption and the smaller players, as you know, are all packing up one-by-one. Videocon has gone, MTS has gone, other small ones are finding ways and means to combine, join, exit. All sorts of things are going on.Q: Are you going to have any role to play in any of those possible exits?A: We always have a role to play. Sometimes, we play a passive role, sometimes we play an active role.Q: Are you in the market to play an active role?A: I am always open to talk and everybody talks to me. The good thing about our industry is that being the veteran of this industry now of nearly 23 years, almost everybody talks to me. So, we talk. We sometimes agree.Q: Has Telenor called you?A: Yes, Sigve and I are good friends, we talk all the time. He is in difficulty. He has to find a way out in India.Q: Are you going to be the white knight?A: I do not know.Q: Possibility?A: You never rule anything out because in the end, most of the spectrum that they have is with us already. So, we just add more spectrum.Q: But would it make strategic sense for you because as you said, there is already overlap as far as spectrum is concerned. But is this something that you would actively maybe consider?A: We have not come to a point of decision. We are in the process of looking at it for sure.Q: You are in the process of looking into it?A: Yes, but so are others, I am told. So, it is not that we are the exclusive people working on it. There are many other people looking at it. It is clearly, not the time to put too much money at stake to buy more stuff. Our spectrum pool is very powerful, it is very good, we are putting out a lot of network, but you never say never, you look at things and also equally, you advise your friends.Q: You have never been one to shy away from making audacious moves. So, what do you feel like at this point of time? What is your gut telling you about the next big audacious move that you could make?A: We have to focus more on the market and very clearly more networks and more technology. Pricing is already being disrupted, we are three as you know, everybody is coming up with their own offering. Vodafone, Idea, us, everybody is jumping with counter-pricing to protect their turf, so it is going to be a year of interesting year of turbulence. 2017 will be a difficult year from revenue generation. It will be tough on margins or equally it is going to start to clear a lot of issues in the telecom industry, regulatory wise, competition wise, small players’ consolidation. So, I would say, if we meet some time next year here, you could be finally down to those four players in the market.Q: You have been saying this for a while, for a very long time in several interviews.A: We needed a Jio to do that, which we could not do ourselves.Q: Let me ask you about realisations and whether this disruption that we are seeing as far as the price model is concerned is going to change pricing model altogether. Now people are talking about moving to a bundled average revenue per user (ARPU) led model. What is this going to mean as far as the industry is concerned?A: In India, this has been overdue. India has been a generally per minute, per MB, model and we are the founders of the per-minute factory, as you know. We created the outsourcing model. That time is up now. It has run its life. We will move to buckets, bundles, whatever you call them and they will be low in ARPU, mid-end and very high buckets. And that is what is happening in Europe, US, Japan, Singapore. So it is not something India is going to discover, but we are finally coming to the party where if voice minutes are going to be bundled in, time has come to look at bundles and buckets.Q: So as we move towards this new pricing model, in the interim, what is the hit going to be as far as realisations are concerned? We continue to see them drop. But this is in a sense, at this point in time, looks like a race to the bottom.A: In the end, volume or scale matters.Q: Will that offset it? Will the volume offset it?A: To some extent and eventually, if there are only 3-4 players, we have to serve the entire nation of 1.3 billion people, the volume will be justified.Q: But 3-4 players by when? A: This year.Q: This year?A: Look at it. For the last three years, nearly 80 percent of the new revenue is between the three players. So, the revenue consolidation has already happened in the last three years. 20 percent has been the smaller players and they will be merging, exiting, consolidating. So, that pool is going to disappear, that I can predict very safely now. If that pool is going to disappear, it is going to move towards Jio, to the existing players and then you are going to get to four players. And plus, BSNL I am not counting, they will always be there. I am talking about four private players.Q: Since we are talking about consolidation and that seems to be the theme that we started on, let me ask you about what is being speculated on at this point in time and that is the big mega merger, Vodafone and Idea. Since you talk to everybody, what are you hearing on that?A: I talk to them as well. My own view is that everybody is looking at everything, but these are big moves. These are not small moves which can be done over coffee. Serious consideration and thoughtfulness will have to be given to such mergers. There are overlaps, there are spectrum cap issues, but I am still saying four. Can it go down to three? Answer is not impossible. Q: But do you think, in the realm of possibility, how high would this mega merger be?A: Depends on how much pain this disruption causes. If the pain is great, the possibility becomes higher.Q: What does your gut tell you today about the pain and whether it will lead to this eventuality?A: Hard to say. You have to put yourself in somebody’s mind. A foreign investor like Vodafone or an industrial empire like Birla’s, what will they think, what will they want to do? So, it is hard to say that, but rationality forces people to come up with an out of box solution. Q: Could this be an out of the box solution, Vodafone and Idea?A: I would not rule it out. CLSA has just done a report of what that contour or shape will look like. So, people are shy to talk about it. You saw Luxottica and Essilor merger. People are doing fantastic, big things in the world. So, why should India not look at these big moves? And eventually, if you are really going to be a digital powerhouse, you need well-funded, strong balance sheets, which can be endowed to take care of the digital piece of India, so bigger the better.Q: So, if it were to come down to three, good news for Bharti?A: I always think so although Vodafone and Idea theoretically becomes bigger than us, but this is not a race to who has got the highest revenue market share. It is a race to a profitably viable sustainable industry.Q: But in terms of a revenue market share, you are at a seven year high. What kind of headroom do you believe, given the kind of disruptive environment we are seeing for growth for you, there is?A: My own view is the overall revenue table is not going to grow this year given all the disruption that is there on pricing, but within that table, which may be same or slightly lower on revenue, we expect to gain market share from here.Q: But you expect revenue could perhaps even decline?A: It could decline.Q: Since we are talking about exits and mergers, etc. Bharti Infratel now, what is the plan, what is the update, talks of KKR being the frontrunner, how much are you likely to offload, will you offload entirely? What is the story on Bharti Infratel?A: We have had interest from many people. In the past, as you know, we did the IPO. First we did the private equity sale to class of investors including KKR and Temasek. Then we did the IPO and after that, we have done follow-on sales and we are now down to about 72 percent share. We have been approached by people, controlling stake, minority stake.Q: Are you open to giving up on controlling stake?A: I do not know. We have set up a committee which will look at all these offers which will be given to the committee.Q: Is this a priority to get this done in 2017? A: No. I would not call it a priority, but equally we have divested towers in Africa and we have divested nearly 28 percent stake in Infratel. So, it is something we are open to.Q: What would top the scale for you to be able to do this? Valuation would obviously be just one metric, I would imagine.A: My own view is this is also a strategic view on the towers, how important it is for the mobile companies, should you part with the asset and at what price do you part with it? Infratel has seen Rs 500 a share, it has seen Rs 150 a share. What is the right price point for the shareholders to feel comfortable? And finally, I must say that Infratel and Indus, both are doing very well. They are the best in class tower companies in India. Even biggest competitor, now, new Jio is taking a lot of sites on that.Q: So, what is the plan as far as debt reduction is concerned? You are sitting on a debt of a little over Rs 81,000 crore at this point in time. If you are saying that divestures, etc. may not necessarily be a priority for you. You have done some in Africa already. Perhaps, you could see more. But what is the debt reduction scenario from here on?A: We are actually not focused on debt reduction at the moment because we have an earnings before interest, taxes, depreciation and amortisation (EBITDA) of USD 5 billion. That takes care of all the new capital expenditure (Capex) and a very heavy Capex that we put in last two years. Big Capex years, we put 87,000 sites last year which was a record outside China anywhere in the world. So, there is enough cash being generated to take care of our needs, interests, service. You must also remember where is my main debt. USD 5.75 billion is our bonds which are determined time period when they come up for renewal. And equal USD 5.75 billion is Department of Telecommunication (DOT) debt which is to be paid over twelve years. So, large part of this debt, nearly USD 11.5 billion has no covenant, has no pressure on the company. and the bank debts is only USD 1-1.5 billion and in fact, banks always keep telling us if you want more take it because banks have no stuffing of debts from our side. So, our debt position has been very small that we have not clogged our banking lines. And what is our ratio, about 2.5-2.6. Every other telecom company in India and around Asia is at a much higher level.Q: You talked about how the last two years have been big on Capex. What is the outlook now as we look forward?A: We have to roll out more networks. It is all about network, more fibre.Q: What would it entail in terms of investments?A: Typically, the last series spent Rs 15,000 crore. This year would be because we did a big lifting last year, maybe Rs 11,000-12,000 crore. So order of magnitude remains the same.Q: So, about Rs 11,000-12,000 annually?A: Annually, yes.Q: You started the conversation saying that you hope that you are behind a lot of these issues especially when it comes to regulatory run ins. But you are back in that same space. You are back to the Telecom Regulatory Authority of India (TRAI), you are back to the Telecom Disputes Settlement and Appellate Tribunal (TDSAT), you are back to the DOT, you are dealing with penalties. The regulatory environment gone back to where it was a few years ago?A: When a new player comes in, there are always regulatory moves. Is free right or not, are points of interface (POI) being given properly or not. So, all these things.Q: Is the POI matter now resolved?A: I have said the same thing in the last interview. POI can never be an issue where you can stand up and say I will use this as a weapon.Q: But, it was made an issue.A: Not an issue because suddenly somebody starts services, you decide suddenly to say I want to do something overnight. You need to have planning. POIs are not something that you click on a button and the fact is now, Jio has probably more POI given to them in a matter of four months than Vodafone or Idea have in 20 years. So, a lot of stuff has been done.Watch videos for the entire discussion...