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.