BSNL’s asset monetisation plan faces stress test in realty market

It’s impossible to miss the vast tracts of land owned by telecom operator Bharat Sanchar Nigam Ltd (BSNL) in Mumbai’s western suburb of Borivali. In a city infamous for its congestion and general lack of space, state-owned BSNL’s wealth of property is the rarest of exceptions. Now, with the beleaguered telco fighting for its future, it is considering selling some of its landholdings. These include the barren 42.43-acre plot in Borivali, a 45-acre housing colony in Deonar, and a 3.5-acre plot in Juhu that boasts a guesthouse and a 12-storey residential building.

These three land parcels in Mumbai—arguably the most promising ones in BSNL’s portfolio—are among the 14 assets BSNL wants to monetise to raise Rs 20,000 crore (~$2.7 billion) in four years. This is a key element of the Rs 69,000-crore (~9.6 billion) plan the Union government approved last month for the revival of BSNL and its fellow public telco Mahanagar Telephone Nigam Ltd (MTNL). 

The revival is an about-turn for the government, which considered shutting down the loss-making public sector enterprises as recently as 2019. According to sources, the Prime Minister’s Office shot off a letter to Telecom Secretary Anshu Prakash, asking about the possibility of shutting down the two companies and selling their assets.

That plan, however, changed as the government realised that India was hurtling towards a duopoly of Bharti Airtel and Reliance Jio, the only two telcos whose futures are guaranteed at the moment. Vodafone-Idea, the other major player, faces an uncertain future. Its mountain of debt—around Rs 1 lakh crore ($14 billion)—coupled with a recent Supreme Court directive to pay Rs 53,400 crore (7.4 billion) in licence-related dues have left it on life-support.

Vodafone-Idea’s potential demise, though, could make BSNL invaluable. Doubts linger over the ability of Airtel and Jio to service the 336 million-odd Vodafone-Idea customers left in the lurch. Already, consumers have complained about network congestion in India’s metros. While both companies could upgrade their networks to handle the deluge of new customers, BSNL could help ease the burden.

BSNL’s own closure would also create a massive void. It has 117 million mobile subscribers, 9.8 million fixed-line customers, and 8.51 million broadband users. In many remote and militancy-prone areas, it is either the only player or one of two players servicing customers.

In addition, many of its mobile subscribers are at the bottom of the socio-economic pyramid and are crucial to the government’s aims to further digital payments and financial inclusion. Access to these subscribers will also be crucial to the various startups looking to scale by going beyond tier-1 and tier-2 cities, targeting first-generation smartphone users.

The government seemingly understands these imperatives and is hoping to turn BSNL around. Its plan involves the merging of BSNL and MTNL, monetising their assets, restructuring debt by raising sovereign guarantee bonds, and rolling out a voluntary retirement scheme (VRS) to its bloated workforce of over 170,000 people. The government will also foot the Rs 14,115 crore ($1.9 billion) bill for the 4G spectrum it allocated to BSNL last October as well as the Goods & Services Tax payable for the same. Previously, the telco only had 2G and 3G spectrum.

The goal now, is daunting—achieve profitability in two years. This will require Herculean effort as BSNL has been losing money since 2009. It has accumulated losses of Rs 90,000 crore (~$12.5 billion). A 22% drop in revenue from telecom services (mostly mobile services) in the year ended March 2019, saw the telco post a loss of Rs 14,938 crore (~$2 billion).

BSNL, though, has a not-so-secret weapon—its assets. Towers, spectrum, fixed lines. But especially its landholding. According to a 2015 valuation, a third of its land parcels worth over Rs 1 crore, are valued at Rs 70,524 crore (~$9.8 billion) cumulatively. 

Now, as the company looks to clear the Rs 15,000 crore (~$2 billion) debt on its books and chart a course for profitability, the monetisation of these assets will be critical. It could also provide the required funds BSNL needs to purchase communications equipment to operationalise its recently acquired 4G spectrum (or even purchase 5G spectrum in the future). But while this may seem like a deus ex machina of sorts, realising this value will be easier said than done.

Prime property

No other public sector company in the country even comes close to BSNL in terms of property. Most of this land was inherited by the telco when it was carved out from India’s Department of Telecommunications (DoT) at the turn of the century. In the ten years following this—from 2000 to 2010—BSNL only grew its landholdings by purchasing a further 731 land parcels, with a total area of around 193 acres.

All told, the company has a total of 15,192 plots available across the country, according to the Public Accounts Committee which reviewed BSNL’s land management in 2016-17. Crucially, around 93% of these land parcels are freehold, meaning they can be easily sold. This includes over 1,700 vacant plots, with a total area of 667 acres.

And if the golden rules of real estate are location, location, location, BSNL is blessed. The public sector company has land and buildings scattered generously across central areas in major Indian cities. In Mumbai’s upmarket Juhu area—where Bollywood actor Alia Bhatt spent Rs 13 crore ($1.8 million) for a 2500 sq ft apartment—it has three parcels of land. So, too, in the bustling but less upscale locality of Borivali. It intends to sell one parcel in Borivali and another in Juhu.

 No surprise then that the Parliamentary Standing Committee on IT, noted in a recent report that there is ”tremendous opportunity for BSNL to earn revenue from commercial exploitation of land available with them, which otherwise are laying idle. (sic.)”

In December 2019, BSNL, in conjunction with the DoT, sent a list of 14 properties to the Department of Investment and Asset Monetisation (DIPAM). Selling just these, it hoped, would raise over Rs 20,000 crore ($2.7 billion) in four years. Thus far, sources in the know say DIPAM has called for limited bids for 11 of these sites.

BSNL officials expect the three land parcels in Mumbai alone to fetch the company Rs 12,000 crore ($1.6 billion). Besides these, there are two plots in Chennai valued at Rs 657 crore ($91 million), as per BSNL’s balance sheet. In addition, there’s BSNL’s 80-acre training centre in Ghaziabad and 16 parcels in Trivandrum, with book values of  Rs 537 crore ($75 million) and Rs 257 crore ($35 million), respectively. 

The book values, however, are extremely conservative figures, with the actual value of these holdings potentially much higher. Government sources told news agency Press Trust of India that the Ministry of Skill Development is considering taking the Ghaziabad campus from BSNL, with the value of the potential transaction estimated at Rs 2,000 crore ($279 million).

These are not the only assets on the block. Soon, as per the Union government’s plan, more will follow. According to a DoT circular The Ken has accessed, all but six of BSNL’s regional training centres are expected to close in the next two years. In the past, the government’s policy think tank NITI Aayog has recommended closing down all four of BSNL’s telecom factories. These are situated in Mumbai, Kolkata, Jabalpur and Bhilai. All of these could soon be up for sale, too.

The sale of these should handily wipe the debt off BSNL’s books. With the real estate market in a slump, however, realising the true value of all this land will be a challenge.

Bear Necessities

In a land-starved market like Mumbai, it’s rare to find parcels of land as large as BSNL’s. As such, they will definitely find interested parties. The problem, though, is that the real estate market has been in trouble for a while now. Real estate developers across the country have had liquidity struggles for the past few years, with the number of developers filing for bankruptcy doubling in the nine months ending October 2019.

”The market never shuts down. You will find enough and more buyers,” says Shobhit Agarwal, managing director and chief executive officer at real estate consultant Anarock Capital. However, he adds, it will be difficult to get top-dollar pricing. A property that would ordinarily go for Rs 1,000 crore ($139 million) and attract 15 bidders, Agarwal says, will likely see only half as many bidders and sell for around Rs 700 crore ($97 million) in the current bear market.

Brokers The Ken spoke with estimate prices in Juhu to be around Rs 120 crore (~$16 million) per acre, land values at Chembur/Deonar to be around Rs 80 crore ($11 million) an acre, and prices in Borivali in the range of Rs 60-65 crore ($8.3 million- $9 million) per acre.

At these rates, the 3.5-acre land parcel in Juhu could fetch Rs 420 crore ($58.7 million), while the 45-acre campus at Deonar and the 42-acre campus at Borivali could generate Rs 3,600 crore (~$503 million) and Rs 2,520 crore (~$352 million), respectively—a little more than half the amount BSNL was hoping to realise from these sales.

Even at these bargain-basement prices though, BSNL would be lucky to pull these sales off. ”The timing is bad. The market is too stressed. Projects with all permissions are stuck. Barring a Mahindra Lifespaces or a Godrej Properties who could buy a parcel each, none of the builders in Mumbai has any cash or are is a position to raise further debt,” says a broker in Mumbai. 

The same broker said that one leading non-banking financial company (NBFC) has sanctioned a Rs 100-crore ($13.9 million) loan to a developer, but has only disbursed Rs 60 ($8.3 million) and charged the remaining as interest for the loan. Another NBFC is willing to sell a Rs 35 crore ($4.8 million) loan for Rs 25 crore ($3.4 million) but hasn’t found any takers.

BSNL’s best hope, at present, is for large companies like Larsen & Toubro or Mahindra Lifespaces to step forward. Or perhaps, said one builder, it could break up its properties into smaller, more affordable plots. Alternatively, its fellow public sector enterprises may also be interested. Builders, too, could rope in private equity partners to table a bid.

Should interest fail to materialise at a price BSNL believes is fair, it could always choose to lease these properties instead.

Or it could just wait. “Liquidity issues are likely to get ironed out in the coming years, and there may eventually be interest from large corporate giants or credit-worthy developers,” says Prashant Thakur, director and head of research at Anarock Group.

And should BSNL choose to wait, it could look beyond its real estate portfolio to raise the money it so desperately needs.

No takes for towers

Like its bread and butter—telecom assets. The company has 67,000 telecom towers, 800,000 route kilometres of optical fibre, two crore wireline connections, and has approximately 800 MHz of spectrum across five bands.

 BSNL’s telecom infrastructure could have made BSNL the beating heart of India’s evolving telecom market in the early-2000s. Post-2005, when the wireless telecom market was expanding, BSNL was well-positioned to lease out its infrastructure to other operators, who were investing in setting up their own infrastructure. The private operators approached it to rent fibre and tower assets. Shortsightedly though, BSNL officials didn’t appreciate sharing and monetisation of these passive infrastructure assets.

Today, however, with private telcos already in possession of expansive infrastructure assets, BSNL’s assets are markedly less valuable.

“BSNL could have had them (private operators) eating from its palm. But you made it difficult. Now, the monster is standing right in front. Moreover, now the demand for traditional telecom infrastructure is falling,” said Mahesh Uppal, director of Com First, a communications advisory firm. 

The kind of infrastructure needed now is also very different. “You don’t need these large towers for 5G. You need short, slim, pole towers and you need a lot of them,” Uppal said. With the Indian telecom industry also undergoing a period of rapid consolidation since Reliance Jio’s entry in 2016, BSNL has also struggled to find tenants for its towers. 

At present, Reliance Jio has mounted its equipment on 8,000 of BSNL’s towers, driving the average tenancy per tower up to 1.2. According to a Mumbai-based analyst, at this tenancy ratio and based on the market cap of tower company Bharti Infratel, the average value of one BSNL tower would be no more than Rs 26 lakh ($36,382). Its entire tower portfolio, then, would be worth Rs 17,420 crore (~$2.4 billion). BSNL has spun its tower assets off into a separate company, which fetches the telco around Rs 1,000 crore ($139 million) annually, according to BSNL’s annual report.

Monetising its towers in the near future, though, will be hard. Due to the capital expenditure-intensive nature of the telecom business, it’s unlikely that either Bharti Airtel or Reliance Jio has an appetite to purchase or lease BSNL’s assets. As for Vodafone-Idea, its focus is on survival, not an expansion of any sort.

BSNL’s fibre assets are similarly hard to sell. The public telco has 800,000 route kilometres of optical fibre. However, while the need for fibre will grow as the demand for bandwidth grows with 4G and 5G, there is growing consensus that captive fibre is unviable. Instead, fibre-sharing is likely the only way to monetise fibre effectively. This is similar to the tower sharing set-up Airtel pioneered.

Already, Bharti Airtel and Vodafone Idea have 260,000 km and 160,000 km of fibre, respectively. The two companies have plans to club these assets to form a merged fibre assets company, as The Ken has reported in the past. BSNL, therefore, is unlikely to find willing buyers.

With BSNL setting short time frames for a turnaround—two years for profitability; four years for sale of land—none of this is good news. In the short-term, at least, land remains its best bet to raise the money it needs. It may have to take a severe haircut, though, if it wants to meet its self-imposed deadlines.

With reporting inputs from Ranju Sarkar.

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