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When Mukesh Ambali’s Jio entered the telecom market last year with free voice calls for life and free data for a limited period, it was clear that a shake-up was imminent in the market. At one point, India’s telecom market had close to a dozen players but competitive intensity had already whittled this number down to three large ones – Bharti Airtel, Vodafone India and Idea Cellular – and less than half a dozen fringe players. So when Jio trooped in with a promise of unlimited freebies and a known appetite to absorb losses, it was apparent that the telecom market pecking order had to change to survive.
India is the world’s second-biggest mobile phone market by subscribers, behind China, but high competition in the crowded market has traditionally kept profits under pressure for all players. With competition rising due to Jio entry, consolidation is the only way forward. In this scenario, whispers of a possible merger between Vodafone and Idea have been doing the rounds for months – they were finally confirmed by Vodafone only last week.
If these discussions do fructify into a merger, the new entity will be the undisputed leader of India’s telecom market in terms of subscribers. And the biggest loser in this scenario would obviously be the long standing telecom czar, Bharti Airtel. Jio, whose arrival triggered an industry-wide consolidation, will also find the going tough in future since customer acquisition will become tougher.
So Why Are Vodafone And Idea Cellular Exploring A Merger At All?
The country’s number one telco by subscribers is Bharti Airtel, with Vodafone a close second and Idea coming in at number three. A merger between Bharti Airtel and either of the remaining two would have caused trouble as India’s merger and acquisition rules allow a merger, only if the percentage of adjusted gross revenue market share of the merged entity does not exceed 50 per cent in any particular telecom circle. The guidelines also specify that the combined entity should have less than 50 per cent of spectrum in each band individually in addition to having less than 25 per cent of the spectrum allocated to all operators in all bands in all circles.
So in the event that Bharti Airtel and Vodafone, say, explored a merger, these caps would have been violated in a large number of circles. The only other option was for the number two and three to explore synergies – which is what is happening right now.
How Does This Merger Benefit Vodafone And Idea?
Vodafone Plc has had to write down close to $5.5 billion in India, has been talking of a listing on Indian bourses with little success and has never been profitable in the world’s second largest telecom market. If a merger were to happen, it gets to not only perhaps reduce its losses but also gets to list on the bourses since Idea is already listed, without having to undergo the initial public offer (IPO) process. For Idea too, a merger makes sense. Analysts say it has been weighed down by debt of over Rs 40,000 crore and a merger would enable a re-rating, possible increase in market cap.
Why Has Jio’s Arrival Spooked The Market So Fast?
Jio came with its freebies, including lifetime free voice calls and cheap data plans, but the heat has been on for all three players even before its arrival. Now, thanks to the freebies, margin pressures have only increased.
This article shows how market leader Bharti Airtel suffered in the third quarter due to increased competitive intensity. Third quarter net profit slumped 55 per cent from a year earlier as its voice and data businesses felt the full impact of Jio’s free services. Revenue fell 3 per cent as data and voice rates fell and more subscribers left the operator. Bharti Airtel managing director and chief executive Gopal Vittal said: “The quarter has seen turbulence due to the continued predatory pricing by a new operator…This has led to an unprecedented year-on-year revenue decline for the industry, pressure on margins and a serious impact on the financial health of the sector.”
Rivals including Bharti Airtel were forced to slash effective data rates and offer free voice calling on some plans across price segments. Telcos had started cutting tariffs even before Jio’s launch, hurting key operational metrics such as average revenue per user (ARPU) and average revenue per minute (ARPM). Even after cutting data rates sharply, the company’s data customer base fell 12.4 per cent quarter on quarter, pulling down data usage by 3.5 per cent.
What Kind Of Muscle Will The Merged Entity Have?
As Jio continues to extend its freebies, consolidation could well be a necessity as both Vodafone and Idea will need to protect revenues, profitability and valuations. Fitch Ratings said in a note to clients last week that a planned merger between Vodafone and Idea should help them withstand intense price competition in the market. The ratings agency said it expects the merger could improve the combined EBITDA margin by 250-350 basis points due to cost savings – mainly on network and marketing expenses. The combined entity will also have a more balanced subscriber mix, as Vodafone is strong in urban areas whereas Idea focuses more on the rural mass market. “We estimate the merger would create an entity with 390 million subscribers, a leading revenue market share of around 40 per cent, revenue of $11-12 billion and an EBITDA margin of about 28 per cent to 30 per cent,” the Fitch analysts said.
Will This Merger Be Easy To Achieve?
As with any mega corporate deal, possible merger between Vodafone’s Indian operations and Idea would face challenges. As explained earlier, M&A norms may cause some trouble. Brokerage firm CLSA has pointed out earlier that a merger of these two companies would breach the revenue market share ceiling in five out of 22 telecom circles. But a telecom market expert says the knotty problem of revenue market share cap breach may get resolved once Jio – which is offering free services till now – begins charging and the revenue market share dynamics shift. All in all, a merger will work as long as both partners work out a solution to the M&A caps. Of course, the usual merger issues such as valuation, which partner gets to control how much in the new entity and which gets to run the new entity will also need to be resolved as the talks progress.
Is The Telecom Industry Game For Further Consolidation?
If the Vodafone-Idea merger happens, then the merged entity and Bharti will together control over 70 per cent of India’s telecom market share by revenue. This obviously spells doom for remaining small players. Industry estimates peg post-merger market share for Tata Teleservices at 6.5 per cent, BSNL and MTNL combine at 5 per cent, Aircel at 5.7 per cent and Sistema at 4 per cent. Reliance Communications (RComm) is estimated to be close to Sistema’s share at 4.2 per cent.
It then becomes incumbent upon these small players to either unleash another round of consolidation or wind up. Tata Teleservices is embroiled in a legal tangle with its Japanese equity partner DoCoMo and this alone may prevent any near term consolidation.
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- In the Large States category (overall), Chhattisgarh ranks 1st, followed by Odisha and Telangana, whereas, towards the bottom are Maharashtra at 16th, Assam at 17th and Gujarat at 18th. Gujarat is one State that has seen startling performance ranking 5th in the PAI 2021 Index outperforming traditionally good performing States like Andhra Pradesh and Karnataka, but ranks last in terms of Delta
- In the Small States category (overall), Nagaland tops, followed by Mizoram and Tripura. Towards the tail end of the overall Delta ranking is Uttarakhand (9th), Arunachal Pradesh (10th) and Meghalaya (11th). Nagaland despite being a poor performer in the PAI 2021 Index has come out to be the top performer in Delta, similarly, Mizoram’s performance in Delta is also reflected in it’s ranking in the PAI 2021 Index
- In terms of Equity, in the Large States category, Chhattisgarh has the best Delta rate on Equity indicators, this is also reflected in the performance of Chhattisgarh in the Equity Pillar where it ranks 4th. Following Chhattisgarh is Odisha ranking 2nd in Delta-Equity ranking, but ranks 17th in the Equity Pillar of PAI 2021. Telangana ranks 3rd in Delta-Equity ranking even though it is not a top performer in this Pillar in the overall PAI 2021 Index. Jharkhand (16th), Uttar Pradesh (17th) and Assam (18th) rank at the bottom with Uttar Pradesh’s performance in line with the PAI 2021 Index
- Odisha and Nagaland have shown the best year-on-year improvement under 12 Key Development indicators.
- In the 60:40 division States, the top three performers are Kerala, Goa and Tamil Nadu and, the bottom three performers are Uttar Pradesh, Jharkhand and Bihar.
- In the 90:10 division States, the top three performers were Himachal Pradesh, Sikkim and Mizoram; and, the bottom three performers are Manipur, Assam and Meghalaya.
- Among the 60:40 division States, Orissa, Chhattisgarh and Madhya Pradesh are the top three performers and Tamil Nadu, Telangana and Delhi appear as the bottom three performers.
- Among the 90:10 division States, the top three performers are Manipur, Arunachal Pradesh and Nagaland; and, the bottom three performers are Jammu and Kashmir, Uttarakhand and Himachal Pradesh
- Among the 60:40 division States, Goa, West Bengal and Delhi appear as the top three performers and Andhra Pradesh, Telangana and Bihar appear as the bottom three performers.
- Among the 90:10 division States, Mizoram, Himachal Pradesh and Tripura were the top three performers and Jammu & Kashmir, Nagaland and Arunachal Pradesh were the bottom three performers
- West Bengal, Bihar and Tamil Nadu were the top three States amongst the 60:40 division States; while Haryana, Punjab and Rajasthan appeared as the bottom three performers
- In the case of 90:10 division States, Mizoram, Assam and Tripura were the top three performers and Nagaland, Jammu & Kashmir and Uttarakhand featured as the bottom three
- Among the 60:40 division States, the top three performers are Kerala, Andhra Pradesh and Orissa and the bottom three performers are Madhya Pradesh, Jharkhand and Goa
- In the 90:10 division States, the top three performers are Mizoram, Sikkim and Nagaland and the bottom three performers are Manipur and Assam
In a diverse country like India, where each State is socially, culturally, economically, and politically distinct, measuring Governance becomes increasingly tricky. The Public Affairs Index (PAI 2021) is a scientifically rigorous, data-based framework that measures the quality of governance at the Sub-national level and ranks the States and Union Territories (UTs) of India on a Composite Index (CI).
States are classified into two categories – Large and Small – using population as the criteria.
In PAI 2021, PAC defined three significant pillars that embody Governance – Growth, Equity, and Sustainability. Each of the three Pillars is circumscribed by five governance praxis Themes.
The themes include – Voice and Accountability, Government Effectiveness, Rule of Law, Regulatory Quality and Control of Corruption.
At the bottom of the pyramid, 43 component indicators are mapped to 14 Sustainable Development Goals (SDGs) that are relevant to the States and UTs.
This forms the foundation of the conceptual framework of PAI 2021. The choice of the 43 indicators that go into the calculation of the CI were dictated by the objective of uncovering the complexity and multidimensional character of development governance
The Equity Principle
The Equity Pillar of the PAI 2021 Index analyses the inclusiveness impact at the Sub-national level in the country; inclusiveness in terms of the welfare of a society that depends primarily on establishing that all people feel that they have a say in the governance and are not excluded from the mainstream policy framework.
This requires all individuals and communities, but particularly the most vulnerable, to have an opportunity to improve or maintain their wellbeing. This chapter of PAI 2021 reflects the performance of States and UTs during the pandemic and questions the governance infrastructure in the country, analysing the effectiveness of schemes and the general livelihood of the people in terms of Equity.
Growth and its Discontents
Growth in its multidimensional form encompasses the essence of access to and the availability and optimal utilisation of resources. By resources, PAI 2021 refer to human resources, infrastructure and the budgetary allocations. Capacity building of an economy cannot take place if all the key players of growth do not drive development. The multiplier effects of better health care, improved educational outcomes, increased capital accumulation and lower unemployment levels contribute magnificently in the growth and development of the States.
The Pursuit Of Sustainability
The Sustainability Pillar analyses the access to and usage of resources that has an impact on environment, economy and humankind. The Pillar subsumes two themes and uses seven indicators to measure the effectiveness of government efforts with regards to Sustainability.
The Curious Case Of The Delta
The Delta Analysis presents the results on the State performance on year-on-year improvement. The rankings are measured as the Delta value over the last five to 10 years of data available for 12 Key Development Indicators (KDI). In PAI 2021, 12 indicators across the three Pillars of Equity (five indicators), Growth (five indicators) and Sustainability (two indicators). These KDIs are the outcome indicators crucial to assess Human Development. The Performance in the Delta Analysis is then compared to the Overall PAI 2021 Index.
Key Findings:-
In the Scheme of Things
The Scheme Analysis adds an additional dimension to ranking of the States on their governance. It attempts to complement the Governance Model by trying to understand the developmental activities undertaken by State Governments in the form of schemes. It also tries to understand whether better performance of States in schemes reflect in better governance.
The Centrally Sponsored schemes that were analysed are National Health Mission (NHM), Umbrella Integrated Child Development Services scheme (ICDS), Mahatma Gandh National Rural Employment Guarantee Scheme (MGNREGS), Samagra Shiksha Abhiyan (SmSA) and MidDay Meal Scheme (MDMS).
National Health Mission (NHM)
INTEGRATED CHILD DEVELOPMENT SERVICES (ICDS)
MID- DAY MEAL SCHEME (MDMS)
SAMAGRA SHIKSHA ABHIYAN (SMSA)
MAHATMA GANDHI NATIONAL RURAL EMPLOYMENT GUARANTEE SCHEME (MGNREGS)