At the peak of the stock market boom in 2007-08, retail investors were salivating at the prospect of participating in the IPO of a state-owned telecom firm that was being valued at over $100 billion.

“The mother of all IPOs by Bharat Sanchar Nigam Limited (BSNL)” was how it was then being labelled by the media.

As its Finance Director in 2008 put it, Vodafone’s acquisition of Hutchison Essar valued the latter at $21 billion, whereas BSNL’s ‘conservative valuation’ of $100 billion made it 5-6 times bigger.

BSNL’s IPO, he said, could happen in six months: “We will not rush into it. We will try to convince everyone. If there is a delay in the issue it is better. The valuation may go up.”

Well, everybody knows how BSNL, in those days, was considered one of India’s most coveted public sector undertakings (PSUs). Given its strong performance and also very favourable market conditions at that point, it was, indeed, an ideal candidate for divestment.

From IPO to begging bowl

What followed the next five years is, however, a sordid saga of how political interference, wrong policy decisions, and inability to keep pace with changes in one of the world’s most vibrant telecom markets has compelled this once ‘most valuable Navaratna’ company now into seeking a bailout.

Yes, the $100 billion valuation dream has simply evaporated into thin air. In 2006-07, BSNL’s total income stood at around Rs 40,000 crore, with profits after tax of Rs 8,000 crore. At the end of 2007, BSNL’s value was tentatively pegged at Rs 400,000 crore or so.

In comparison, Bharti Airtel’s market capitalisation at that point was Rs 170,000 crore and that of Reliance Communications at Rs 160,000 crore. But from 2007-08 onwards, the PSU’s profits first started falling and, two years later, turned into losses. In the financial year ended March 2012, BSNL’s post-tax losses almost touched Rs 9,000 crore, with its income also falling below Rs 28,000 crore, a 30 per cent decline over that in 2006-07.

The accompanying table highlights the deterioration in the financial indicators of the company over the last five years.

It can be seen how BSNL’s employee remuneration expenses have ballooned and now account for 48 per cent of its income, as against 23 per cent five years ago.

Even its cash balances have come down drastically from well over Rs 40,000 crore in 2007-08 to less than Rs 2,000 crore in 2011-12, part of which has gone towards purchasing 3G and broadband wireless access spectrum.

So, what went so wrong during this period as to force the company not only to abandon its grand IPO plans – the Telecom Commission announced its deferral in 2010 – but also approach the government just to stay afloat?

Fixing responsibility

BSNL’s financial deterioration is a result of poor management as well as policy delays and interference on the part of the Government.

In terms of mobile subscriber base, BSNL’s position has dropped to No. 5 today, with an approximately 11.5 per cent market share. The company hasn’t been able to expand capacity to meet growing demand. It is said that vested private sector operators have used political clout to block BSNL’s successive expansion plans, even while it has been stuck with un-remunerative landline operations and servicing rural mobile markets.

Further, the company’s inability to upgrade technology and provide efficient customer service has cost it the profitable corporate and other high-ARPU (average revenue per user) businesses, which it is unlikely to regain.

Considering the above facts, it is obvious that policy delays and governmental interference in the operations of BSNL have played a major role. The Government, in particular, has lost a great opportunity to divest a stake in a high performance company at the right time.

Today, both BSNL’s own financial position and depressed valuations in the telecom space have meant it having to kiss the ‘IPO dream’ goodbye. Worse, the company is now facing the prospect of using taxpayers’ money to pay for the voluntary retirement scheme of a bloated workforce of almost 300,000 employees, which is completely out of tune with current harsh telecom market realities.

Who is responsible for such huge loss to the taxpayer? Some analysts expect that a bailout of Rs 50,000 crore or thereabouts is needed over the next three years, with no hope of a real business turnaround. That is just yet another example of taxpayers having to pay for an incompetent Government’s actions!

(The authors are with Aarin Capital Partners)

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