BSNL: The Pressure Points

Thirty months have passed since the formation of BSNL and the market has
undergone a massive change. From a monopoly, the market has transformed into
multipoly. Players like Tata and Reliance have also jumped into the fray, along
with Bharti, HFCL, and Shyam. Prices have fallen at regular intervals in all
telecom services–be it leased line, international long distance, domestic long
distance, Internet, and others–causing a price war. All this has resulted in
erosion of profit margins of service providers.

With
several service providers in different circles, the private operators have
started focussing on high-end customers, which conventionally contribute around
70 percent of the revenue. Private operators are also focussing on high growth
high value circles. But, the incumbent BSNL has no option but to focus its
services across all geographies and across all customers and also continue with
the social obligations all across the country.

Presently, BSNL has a subscriber base of around 40 million lines (including
landline, WLL mobile, cellular, and Fixed Wireless lines) out of which about 22
percent comes from rural areas whereas urban areas account for 78 percent. The
entire rural telephone base is unprofitable whereas in the case of urban
population it is on a higher side and around 50 percent of the total urban base
is unprofitable. So, around 15 million lines are profitable. Around 30 percent
of this, which is about 5 million lines, is the creamy base and contributes
around 70 percent of BSNL’s revenue. Apart from this, BSNL also has an
installed base of 500,000 VPTs, which is also unprofitable.

Now with the private operators focussing their attention on five million
creamy lines, BSNL’s top line as well as bottom line could be under threat.
Even, Reliance Infocomm, the last player to enter basic services in the second
half of 2003 is focussing on 500,000 enterprise customers located in around 200
cities. All this will impact BSNL’s top line as well as bottom line growth as
there would be mass erosion of corporate customers. So, how does BSNL check this
onslaught of private operators? The company should start focussing on four
mantras–branding, financials, productivity, and corporate customers, to boost
its top line as well as bottom line.

Tight Financials

In FY 2002-03, BSNL revenue is expected to be in the range of Rs 25,000 to
Rs 26,000 crore. Though traffic has increased by around 14-15 percent but
revenue growth has only been able to go up in the range of around 4-8 percent,
thanks to drop in tariffs. In terms of investment, the company plans to invest
around Rs 13,000 to Rs 18,000 crore every year and is the only company in the
telecom sector which has been spending such large amount of money in
infrastructure expansion. If one can compare private operators like Bharti and
Reliance, BSNL investment is on a very higher side. For example, Bharti has
invested around Rs 9,724 crore till 31 March 2003 whereas Reliance has invested
around Rs 9,000 crore till 31 March 2003. So, it seems BSNL is creating one
private operator every year. But do we see same investment from BSNL as has been
estimated in the Tenth Plan.

According to the Tenth Five Year Plan, BSNL is planning to investment around
Rs 12,000 to Rs 18,000 crore (with compensation from the government). The
company is planning to generate this fund from internal resources, market
borrowings, and also from compensation that the company receives from the
government for running unprofitable services.

With the corporatization of BSNL on 1 October 2000 there has been an
additional financial burden on BSNL. Many expenses, which were not applicable to
government departments, became applicable to BSNL after corporatization. These
include corporate tax, sales tax, dividend on equity, dividend on preferential
equity, excise duty, additional staff costs, license fees, spectrum, and others.
There are other categories of financial burden, which results out of the
different policies being adopted by the state government. These are increased
power charges at commercial rates, increased charges for road cutting, entry
tax, and others. All this will help in bringing PAT (profit after taxation) down
as the company has to pay corporate tax, sales tax and other taxes which is
around Rs 2,000 crore. So, the company is left with around Rs 1,500 crore and if
license fees and spectrum charges which is around Rs 3,000 crore to Rs 4,000
crore is not reimbursed by the government, BSNL has to incur all these from its
own pocket resulting in a negative PAT.

Clearly, to make itself profitable, BSNL should increase its revenue and grow
by around 15 to 20 percent. This could be a big challenge considering the
current market conditions and aggressive private service providers. But, BSNL
can do it, there is no stopping for the company. The company will most probably
have to repeat its cellular performance in the broadband sector, which is
opening up as a big opportunity. "The challenge will be how to make rural
telephony profitable in the long term, as it contributes around 22 percent of
the total number of DELs", says SD Saxena, director finance at BSNL.

Also, BSNL will have to reduce its operating expenditure, which experts feel
is very high. For instance, the employee remuneration is in the tune of Rs 5,000
crore, and there is annual pension of about Rs 1,000 crore. This could be a very
difficult task, considering that it is a large organization.

But Prithipal Singh, CMD, BSNL feels that there is sufficient cushion to keep
BSNL alive even if its liability increases.

Low Productivity

In terms of employees, BSNL has a strength of around 360,000 people. This
worked out to something like the 30 persons per 1,000 phone. With a freeze on
fresh recruitments, and because of quick deployment of 2 million plus cellphones
in the country, the productivity ratio has gone up 9 persons per 1,000 phones.

But this ratio has to further come down. If one compares, among the private
operators the ratio is on a far lower side and it is presently around 2-3
employees per thousand phones. BSNL should work out some methodology to shed
extra staff as it is more of a liability to the company and this will also help
in improving its productivity. The company should come out with an attractive
VRS package which will be helpful to both BSNL and its employees.

The company can also increase productivity by outsourcing a few activities
like billing, customer care, and enquiry services to third party call centers or
BPO outfits. Though BSNL is planning to outsource its bill generation activity,
that will not be sufficient.

Re-organize Branding

BSNL has been able to get around 2 million cellular customers in five months
and would be achieving three million soon.

Compare this to Bharti, the largest cell operator in the country, which
achieved three million figure in seven to eight years time.

In BSNL, branding started with the launch of cellular services. According to
one estimate, in the last fiscal the company invested more than Rs 75 crore in
brand building. A major part of which was for cellular services. This year, the
company is planning for an advertising budget of Rs 250 to Rs 300 crore, a huge
jump in comparison to last year’s budget and enough to match its competitors.
Take for instance, Bharti whose sales and marketing expenses is in the range of
Rs 319 crore and this is almost equivalent to the network operating expenses. In
terms of revenue, Bharti is spending 10 percent of its revenue in sales and
marketing activities.

In the case of BSNL, the company is spending around 0.29 percent of its
revenue in sales and marketing activities, which is on a very low side. But, now
with increased competition the company should increase this to a minimum of
around 2-3 percent. This can be for GSM, CDMA, and the to be-launched broadband
services in the country. The company can also look at a special plan for
corporate customers, which contribute around 70 percent of the BSNL’s revenue.

In the present circumstances, the company should relook at its overall
branding strategy as it will help the company to move at a faster pace.
Presently, the company has around eight brands and it is very difficult for
anybody to recall those brands–Cellone, ExCel, Tarang, Webfone, Callnow, Bfone,
Sancharnet, and India telephone card. BSNL should focus on minimizing the number
of brands and should have one umbrella brand each for wireline, wireless (GSM),
and wireless (CDMA). This will avoid confusion and also help in reducing sales
and marketing cost of the company.

Enhance Corporate Focus

Of late, both Bharti and Tata, have been changing their strategy for
corporate customers. Recently, Tata has formed Telecom Enterprise Business Unit
(TEBU) which will be a single point interface between corporate customers and
for Tata’s telecom companies. The new unit will offer integrated voice and
data solutions under Tata Indicom brand. Even, Bharti merged its fixed line and
long distance services and data arm to form Bharti Infotel. This provides
synergies of scale and the client also feels comfortable as it can get in touch
with the account manager in case of any problem. Similarly, Reliance which is
planning to launch its basic service has two divisions–CCFU (consumer customer
facing unit) and ECFU (enterprise customer facing unit).

So, why should BSNL be different? The company has taken the first step of
forming a business development group who will look after large corporate
customers says Prithipal Singh. The company has tied up with large network
integrators like Wipro and HCL Comnet, which will help BSNL in terms of giving a
complete solution to the corporate customer.

But that is not sufficient. The business development team should have people
from network design, sales and marketing, network integration, and after sales
support in all the circles and major cities. The team should go with a set of
solutions and provide solutions according to the clients’ requirements. For
this BSNL has to do lot of internal work. First, the company has to go for a
uniform billing system as it will help in giving the client one customized bill
rather than opting for multiple bills for different services and for different
geographies. Second, separate customer support service (customer care and
billing related service) for corporate customers which should be a toll free
number across the country rather than having multiple numbers.

Third, the company has to have a complete range of corporate service under
its belt like web hosting services, data center, IP-VPN.

All this will happen when the company opts for a large scale deployment of
metro Ethernet network by bringing fiber to the building and increasing the
capacity of leased line network capacity. All these services have to be backed
by sector specific and innovative applications. If BSNL can succeed in the
corporate strategy there is no looking back for the company.

The company should also plan to have separate call center for corporate
customers as it will help in providing better and enhanced services to them as
they are more prone to shift to private players because of better after sales
service and more focussed attention.

But all this will happen only when there is a change in the thinking of top
brass. BSNL should move from the number based target to revenue based target. It
is quiet surprising that even in an aggressively competitive scenario the focus
is on how to achieve the number of DELs and not on how to enhance profitability,
productivity and brand equity. BSNL needs to urgently address these issues.

Pravin Prashant

Projection of BSNL’s Financials (FY 2002-03)

The challenge will be how to make rural telephony profitable in the long term, as it contributes around 22 percent of the total number of DELs
SD Saxena, director (finance), BSNL

If one looks at FY 2002-03, there was a financial outlay of around Rs 14,000
crore to Rs 17,000 crore but the company invested around Rs 12,000 crore as
there was a drop in government compensation from an estimated plan of Rs 4,206
crore to Rs 2,470 crore (Rs 2,300 crore for license fees and Rs 170 crore for
USO). The company did not receive any compensation for spectrum charges which is
to the tune of Rs 600 crore and even USO obligation was on a lower side. In
order to meets its infrastructure requirement, the company will also utilize its
surplus which has reduced from Rs 7,500 crore in 1998-99 to Rs 4,500 crore in
2002-03.

Now, if we assume BSNL’s revenue to be Rs 25,500 crore for FY 2002-03. The
total expenses comes around Rs 22,000 crore and PBT is in the range of Rs 3,500
crore (see Estimated Profit and Loss Account of BSNL FY 2002-03). Even SD Saxena,
director (finance) feels that decline in profit is a cause of worry.