Commoditization of data : what is there in store for Indian Telecom Companies?

Written by HARIKRISHNAN.T
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Market is always smarter than thousands of individual investors like you and me. Major telecom stocks such as Bharti Airtel and Idea cellular have delivered negative returns for the investors in the last five years (Forget about the people who are capable of buying and selling the stocks at its lowest and highest possible levels, I'm talking about the investors who buy the stocks and hold it for the next five to ten years hoping that it will maximize the returns). At the same time Nifty was able to deliver a decent 11 percent compounded returns in the last five years (Refer graph 1 and graph 2).


Graph 1

Graph 2

it is therefore important to analyze the underperformance of these companies in the last five years. I have taken ROC, ROE, Profit margin and interest coverage ratio to analyse the fundamental performance.

Observations

ROCE & ROE - ROCE and ROE of Bharti Airtel witnessed a sharp fall in the last five years. ROCE of Bharti Airtel which was 18 percent in FY11 was about 11 percent in FY16. ROE was 9.28 percent in FY16 compared to 19 percent levels in FY11. Even though Idea was able to improve its ROCE and ROE from FY11 levels, it is still below the peak the company has achieved in FY15 (Refer Graph 3 and 4) This observation is consistent with the fact that no company can earn excess returns for a long period of time as the excess returns will bring more competition into the market.

Graph 3

Graph 4

Profit Margin - Bharti Airtel taken a serious hit on its profit margin from close to 10 percent in FY11 to 3.28 percent in FY16. Idea improved its margin till FY15 but it started to decline in FY16 (Refer Graph 5 and 6)

Graph 5

Graph 6

Interest Coverage Ratio - The interest coverage ratio of Idea was only 3.2 in FY16. On the other hand, the interest coverage ratio of Bharti Airtel which was 27.92 in FY11 went down to 3.82 in FY16 (Refer Graph 7 and 8). The Debt to Equity ratios of both the companies witnessed a sharp increase in the last five years. 

Graph 7

Graph 8

Market is always smart!!!

From these figures it is clear that the fundamentals of these stocks has been deteriorating significantly. Analysis of the valuation ratios of Bharti Airtel and Idea signifies that market also playing smartly with these stocks in the last several years. For example PE ratio of Bharti Airtel which was 22.56 in FY12 went down to 11.98 in FY15 and currently trading at 15.7 times. Similar kinds of results were observed in Price/book and EV/EBITDA ratios. (Refer Graph 9 and 10)

Graph 9

Graph 10

What is there in store for these companies?

I think there are three to four factors which may change the dynamics of the telecom industry in the coming years.

The data will become commoditized (it has already started) and it is going to be a volume game - As per the report by CISCO, global mobile data traffic is expected to grow at a CAGR of 35 percent for the next several years. In this context, India which is one of the fastest growing emerging markets offer unique opportunity. The increasing number of smartphones will enable India to grow its mobile data traffic several times in the years to come. Telecom players therefore have to focus on volume to sustain their business.

Customers will have more bargaining power - The competition in the market has intensified with the recent launch of Reliance Jio. Companies are trying their level best to retain their customers. This will give even more bargaining power to the customers and the usage charges are expected to go down significantly in the coming years.

Operating efficiency will be the key for survival - When customers get more bargaining power and the services become commoditized, only way in which companies can sustain is by bringing operational efficiencies. Currently Indian telecom players are trying to bring these by deploying various IT tools to reduce customer churn and to serve them better.
  
Government will be there to take excess returns from Telcos - Assets enjoyed by the telecom companies are regulated assets. As a result government will be charging huge fees which in turn will restrict the excess returns of players in the future. Companies have to infuse large amount of capital towards license fees as well as towards capital expenditure. Bharti Airtel is planning to reduce the stake in their tower business to mobilize 36000 crore and parent of Vodafone India is expected to infuse around 48000 crore into its Indian subsidiary.

Is it time for bottom fishing in telecom stocks?

Not really!!! It is better for the investors to adopt a wait and watch policy at this point of time and see how the competition among players is going to change the dynamics of the industry. Data demand will definitely shake up the existing business models of telcos. The response of companies towards this transformation is yet to be seen!!!

Harikrishnan
Views are personal. Comments are welcome. :)



Financial Inclusion - The Path to Sustainable Development of India

Written by HARIKRISHNAN.T
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Introduction
According to the Committee on Financial Sector Reforms, Financial Inclusion, broadly defined, refers to universal access to a wide range of financial services at a reasonable cost. These include not only banking products but also other financial services such as insurance and equity products. Financial Inclusion and sustainable development go hand in hand. The 17 SDGs agreed to by the members of U.N. are made to achieve 169 targets in total. These goals and targets are intricately linked to financial inclusion.

SDGs and their link with Financial Inclusion
On 1st January 2016, the 17 Sustainable Development Goals (SDGs) which focus on - ending all forms of poverty and inequalities, tackling climate change and ensuring prosperity for all officially came into force. According to the sustainable development agenda, ending poverty must go hand-in-hand with strategies that build economic growth and addresses a range of social needs including education, health, social protection, and job opportunities, while tackling climate change and environmental protection.

How financial inclusion can act as a powerful enabler in achieving SDGs?

The following points buttress the claim that Financial Inclusion is at the heart of achieving SDGs.

  • ·         The first step towards prosperity for low-income families is the access to the basic financial services. Financial Inclusion aspires to cater this need.
  • ·         A well-penetrated financial inclusion will ignite microeconomic growth and these repels can be felt on a macroeconomic level also. The present scenario of large portions of population outside the ambit of mainstream financial system causes both social and economic costs, which according to World Bank can only be undone by focusing on Financial Inclusion.
  • ·         Financial literacy and access to financial products like savings accounts, short term credit, insurance policies, and long term credit will help managing consumption, building assets, and handling shocks.
  • ·         For farmers, micro-loans and long term loans provide the essential capital to procure seeds, equipments, farming tools and fertilizers. Products like crop-insurance support farmers through droughts and bad harvests.
  • ·         Deepening financial inclusion in households can empower families to save to pay for school fees and other educational expenses, and helps them to resist shocks that keep children out of school.
  • ·         Providing women with financial services, such as microfinance and digital payments can help to empower them.

·
India as a nation also committed to achieve SDGs by 2030. Considering the importance of financial inclusion in achieving SDGs, it is important to analyze the prevailing scenario, identify the gaps and work towards bridging the gap so that we as a nation can make tremendous improvements in achieving sustainable development.

A detailed analysis of the existing situation in India


As per the latest global financial inclusion report from World Bank, over the period of time India as a nation has made remarkable improvements in extending financial services to citizens. The improvements are represented in Figure 01

Figure 01
Even though the statistics are encouraging, it is important to see whether these developments can be taken as a representative sample for all the states and regions across India and study the imbalances if exist.

Disparities of financial inclusion

The overall benefits of financial inclusion can be materialized as a nation only if the level of financial inclusion is distributed evenly across states and regions. Symmetric distribution of financial services helps the economy to channelize the resources in the most efficient way thereby maximizing the returns.  It can also bridge the income inequality gap between rich and poor and also facilitate more effective interstate and cross border trades.

Empirical evidences however suggest that, in India financial inclusion is not evenly distributed and some states and regions are much more financially excluded than the others.

The latest CRISIL Inclusix index which measure India’s progress on financial inclusion using three tangible and critical dimensions - credit penetration, deposit penetration and branch penetration also shows the existence of strong disparities across regions. The results are represented in Figure 02.

Figure 02
Finding reasons for this disparity

The factors affecting access to financial services can be viewed from two dimensions, demand side and supply side. The barriers from demand side include illiteracy, lack of awareness, low income and social exclusion. Barriers from supply side include geographical barriers, distance from bank branch, high transaction costs, unsuitable banking products and complex requirements of documents for opening bank accounts.

Therefore it is important to analyze these two dimensions and see in which areas we are lacking as a nation.

Demand side analysis

Two major factors have taken into consideration to assess whether the root cause of the disparity is because of the lack of focus on demand side. The first factor considered was the literacy level of people. Literacy level of people is an important demand side factor because the degree of literacy levels can further lead to awareness about various financial services, financial literacy, and can fetch decent jobs thereby increasing the likelihood of better income over the period. The second factor considered was the age factor of people. This is because the percentage of economically active population determines the future demand for financial services.

Literacy level

To study whether lack of literacy level of people acting as a barrier towards achieving financial inclusion, the average CRISIL Inclusix score across regions have been compared with the literacy rates. Statistical test of Karl Pearson coefficient of correlation has been applied on these data and the result showed a moderate positive relationship of 0.56 which means that at least 50 percent of the disparity can be attributed to structural deficiencies. But at the same time some regions such as north eastern region, central and eastern region of India has achieved dismal financial inclusiveness which is far below than the all India average despite possessing an above average literacy rate. The situation of North Eastern states is more alarming. Even though the average literacy rate in the north eastern region is 79.27, the CRISIL Inclusix score is a mere 37.63 which is much below the nation’s overall score of 50.1.

Table 01
Age Factor

Financial service providers usually focus on economically active population and design appropriate products for them. If that is the case, as per the latest census data of 2011 India has 70 crores people in the 15 to 55 age group which is 58 percent of total population. It indicates a robust demand and a huge market for financial services. 

The following observations can be derived from the following evidences.

We are having a favorable literacy level and age factor which indicates that a favorable demand side regime is in place. But unfortunately neither literacy level nor age factor ensures financial inclusiveness.

To reap the maximum benefits from this favorable demand side, the primary focus should be on building a strong supply side and geographic side dimension.

How much effective is the existing supply side framework to handle the imbalances?

Supply side analysis – effectiveness of the existing systems

The government and RBI have introduced numerous actions over the years to increase the level of financial inclusion by giving more focus on supply side. Nationalization of banks (1969, 1980), establishment of Regional Rural Banks (1975, 1976) and self-help group-bank linkage program (1989, 1990) were some of the significant actions in the past.

One of the significant projects introduced in the recent past to tackle the supply side issues is Pradhan Mantri Jan-Dhan Yojana (PMJDY). It is therefore important to evaluate the effectiveness of PMJDY.

Effectiveness of PMJDY

Objective of "Pradhan Mantri Jan-DhanYojana (PMJDY)" as per its official website is ensuring access to various financial services like availability of basic savings bank account, access to need based credit, remittances facility, insurance and pension to the excluded sections i.e. weaker sections & low income groups. As per the latest information, PMJDY project opened 20.87 crores accounts opened with a total deposit of 32730.72 crores. 

To calculate the effectiveness of PMJDY, the number of new accounts opened in PMJDY schemes in each state is divided with the total population of that state. Data has been analyzed for all the states. Special emphasis was provided to the states which scored a score less than 50.1 (India’s overall financial inclusion score as per CRISIL Inclusix index). The results are shown in Table 02.

Table 02
National average of India is found to be 17.12 percent (number of accounts opened in India in PMJDY scheme/Total population*100). The states marked in green performed better than the national average. But the performance of other states was below national average. From these statistics it is evident that supply side dimension also has its own limitations.

The conditions of North Eastern states require special emphasis here. Four out of seven states in the North eastern region of India did not get enough attention in PMJDY.

Quantifiable evidences of financial exclusion in north eastern states

To analyze the progress of financial inclusion in north eastern states over the period, two major factors were considered. Credit Deposit (C D) ratio and the number of PSBs opened in the region. The results are represented in Figure 03, 04 and 05.

Figure 03

Figure 04

Figure 05
The statistics show that north eastern region was not able to make any progress so far but the conditions even worsened over the years. C D ratio is abysmally low in the region and it is the only region showed a decrease of C D ratio in 2014 compared to 2011. Similarly the number of public sector banks opened in the region is also not so encouraging. 

From these facts it is apparent that supply side dimension also has several limitations.

How can we change the scenario?

The way forward

Focusing on the following factors can help us in extending the benefits of financial services to the citizens across geographies.

Digital Financial Inclusion

Connecting people to a digital financial system can generate enormous welfare benefits for the nation. The concept of digital financial inclusion is critical considering the unique geographical conditions of our nation. The inordinate delay in transfer of funds from Government can be bypassed by Digital Financial inclusion. This also leads to the development of a robust and vibrant trade and ultimately leads to narrowing of the income-gaps prevalent in the society.

Unleashing the power of post offices

The branch penetration of post offices in India is so great that it has presence in almost all the villages that beats the branch-network of State Bank of India, the biggest PSB. Regulatory support has to be provided to Post Offices beyond the payment bank license to reap benefits of this massive network to reach the target of financial inclusion in the country.

Targeting our future generations

The traditional educational system does not provide enough attention in building financial awareness among students and younger generations. Concepts such as kiddy bank can be implemented in schools to equip them to gain more practical knowledge. This will create further push to demand side in future.

India has tremendous untapped potential as a nation. Aligning financial inclusion with sustainable development will help us to exit from the vicious cycle of poverty and unemployment and enable citizens to participate more effectively in the social and economic process.

The present government has taken slew of reforms to put financial inclusion at the forefront. With our recommendations the unintended gaps that have crept into the system can be bridged. It is therefore important to have a coordinated and integrated approach between banks and other financial institutions, government, telecom and technology players, and other enabling agencies to take the progress of India to higher orbits via an effective process of financial inclusion.

References

https://rbi.org.in/scripts/publicationsview.aspx?id=10494
https://www.rbi.org.in/scripts/BS_SpeechesView.aspx?Id=862
https://www.betterthancash.org/news/media-releases/india-announces-new-partnership-to-accelerate-financial-inclusion-for-everyone
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2186926
http://www.cgap.org/blog/2015-set-be-big-year-digital-financial-inclusion-india
http://nmrjournal.in/index.php/nmr/article/viewFile/59036/46201
http://inclusionhub.mastercardcenter.org/backgrounds/5936/financial-inclusion-and-the-sdgs/
http://www.iimb.ernet.in/research/sites/default/files/WP%20No.%20474.pdf
https://www.crisil.com/about-crisil/crisil-inclusix.html
https://www.crisil.com/pdf/corporate/CRISIL-Inclusix-Volume-III.pdf
http://www.worldbank.org/en/programs/globalfindex
http://www.nseindia.com/research/content/NSE-IFMR_Paper_3.pdf
http://censusindia.gov.in/
http://pmjdy.gov.in/statewise-statistics
https://www.rbi.org.in/scripts/AnnualPublications.aspx?head=Basic%20Statistical%20Returns
http://www.indiastat.com/banksandfinancialinstitutions/3/performance/16063/officebranches/16072/stats.aspx



Budget 2016-17

Written by HARIKRISHNAN.T
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The budget for the financial year 2016-17 which was presented by the honorable finance minister Mr. Arun Jaitley on February 29 was properly balanced between growth and fiscal discipline. The main focus of the budget was on three major sectors - rural sector, social sector and infrastructure sector. It was a budget for Rural India – for the upliftment of the underprivileged and marginalized section of people. According to experts, the concept of inclusiveness was first tried and tested by the congress led UPA government. The idea was brilliant but unfortunately over the period of time the focus was turned to more of populist ideology. The latest budget tried to provide an enabling environment which can empower rural economy thereby bringing back the same concept of inclusiveness.  

The two major challenges faced by the nation in the past couple of years are; first - the squeeze in the rural consumption because of the two back to back below normal monsoons and second - the corporate under investments. By giving a push to the rural sector and directly addressing the problem of rural consumption, budget also indirectly addresses the problem of corporate under investments.

The following are the major announcements and observations from the budget.



On the agricultural and farmer’s welfare front, the government has been allocated a total of 35984 crores and ensured that proper steps will be taken to double the income of farmers by 2022. Special focus has been given to irrigation, crop insurance scheme, organic farming through Paramparagat Krishi Vikas Yojana, building of compost pits and farm ponds using the MGNREGA scheme and building a common e-market platform to boost the income of farmers.

One of the path-breaking initiatives in the budget as far as the rural sector is concerned; will be the allocation of 2.87 lakh crores to gram panchayaths and municipalities as per the recommendations of 14th finance commission. This devolution of power can radically change the existing political regime and can give a fillip to the local self-governance initiatives.

Other major announcements for the rural sector were - allocation of 38500 crores for MGNREGS for 2016-17, development of 300 Rurban clusters under the Shyama Prasad Mukhajee Rurban Mission, 100 percent electrification by 2018 and emphasis on digital literacy through Digital Literacy Mission. The DBT scheme will be extended to provide fertilizer subsidies. This can create tremendous impact and help the government to effectively address the issue of leakages in the system.

The major announcement made in the social sector was the announcement to provide LPG gas connections to poor households in the name of women members. This can benefit 1.5 crores of households in the BPL category. Apart from that the government also announced to start National Dialysis Services Program and has been allocated 500 crores to stand up India initiative which promotes entrepreneurship among SC, ST and women.

The government has earmarked 1700 crores for the skill development program through the Pradhan Mantri Kaushal Vikas Yojana. Other important announcements in the education sector were – transforming ten public and ten private institutions into world class research and development centres and the establishment of digital depository to keep the academic certificates.

Another thrust area of the budget was infrastructure especially the development of roads and highways. The total allocation towards this was a whopping 97000 crore including Pradhan Mantri Gram Sadak Yojana initiative.

On the financial sector front, the primary focus of the government was to restore the credit growth and strengthen the existing regulatory framework for medium to long run sustainable growth. Key initiatives observed are - amendment of RBI act to include monetary policy committee (The interest rate decisions will be taken by a six member committee, three from RBI side and three from government side with the governor having a casting vote in case of a tie.), enactment of insolvency and bankruptcy code, making the Asset Restructuring Companies to hold 100 percent stake to address the stressed assets issue by modifying the SARFAESI act and amendment of Sebi act to include more benches in the Security Appellate Tribunal to resolve the litigations quickly.

The capitalization plan to the public sector banks remains unchanged at 25000 crores which was a disappointment. But at the same time it has been assured in the budget those other plans such as Indradhanush and the bank board bureau will be in focus for 2016-17. Government is also considering the option of reducing the stake of PSBs to less than 50 percent.

The fiscal deficit target for the 2015-16 remained at 3.9 percent as per the revised estimates and the projected fiscal deficit target for 2016-17 remained at 3.5 percent as per the budget estimates. The government has taken a prudent step to contain the fiscal deficit target within the comfortable range which can give the RBI more room to cut rates. Another major announcement was to do away with the classification of plan expenditure and non-plan expenditure from 2017-18 and the establishment of committee to review the FRBM Act (Fiscal Responsibility and Budget Management) and to suggest changes such as  fixing fiscal deficit target in a specific range.  

The announcements made by the finance minister on the personal tax front were focused on giving some relief to the small tax payers at the same time taxing the well-off section in the society more. The income tax slabs remain unchanged but the tax rebate for individuals with income up to 5 lakhs has been increased to 5000 from 2000.  The exemptions under section 80 C did not witness any changes nevertheless the limit under section 80 GG has been increased to 60000. Another major announcement which can have a significant negative impact on salaried employees was on the tax treatment of provident fund. The withdrawal which earlier was fully exempt from tax has been changed to 60 percent taxable for interest accrued from 2016-17. This has to be considered as a move from the government side to shift from an EEE regime to EET regime as per the findings provided in the latest economic survey.

Another interesting announcement was the introduction of a limited period window (1st June to 30th September 2016) for tax payers to disclose their undisclosed assets. It has been assured in the budget speech that there will not be any further enquiry and the persons will have immunity from prosecution.

In summary it was a budget for Bharat – The Rural India. According to experts, the policies announced can structurally change the future of rural and social economy. The key will be on how the government transforms the promises into reality.

Regards,
Harikrishnan