BSNL: A Socialist Hangover That Continues To Cause Headaches

Bharat Sanchar Nigam Limited (BSNL), the state owned telecom company, is in dire straits. Though the company is still the largest provider of fixed telephony in India owing to its low cost packages, rural penetration, and pan-India coverage and the fifth largest provider of mobile telephony, it is fast losing ground to private operators who are better able to engage customers, leverage new technology for promotions and marketing, and offer attractive deals to Gen Y.

BSNL came into being in 2000 as a result of the corporatization of the Department of Telecommunications (DoT). The company enjoyed a monopoly and profited despite poor quality services, operational inefficiencies, and laggard decision making. The entry of private players in subsequent years however busted that business model.

marketshare BSNL and MTNL being Public Sector Undertakings (PSU) were exempted from competing with private operators on spectrum. In 2008, BSNL and MTNL were allotted 3G spectrum ahead of auction though they were later expected to match the winning bid in their respective areas. BSNL was also exempted from paying 2G spectrum charges of ₹1,650 crore earlier in view of its rural and social obligations.

Bottomless Pit

BSNL’s incurred loss in 2012-2013 amounts to ₹8,190 crore. The steep fall in profits over the last three years is attributed to:

  • high employee cost (49% of revenue versus the industry average of below 5%)
  • high customer attrition owing to poor customer service
  • 3G and Broadband Wireless Access (BWA) spectrum purchase (₹18,500 crore)
  • inadequate marketing
  • implementation of revised pay scale (₹2,900 crore)
  • tax liabilities (₹392 crore)

BSNL also had ₹5,231 crore as outstanding dues from customers as on 30 November, 2011 of which the company recovered ₹988 crore in the same period. Its cash reserve fell to ₹2,500 crore in 2010-2011 from a lofty ₹30,000 crore two years back.

Its not that BSNL is not trying. It hired SBI Capital in 2012 to help it raise a long-term loan of ₹12,000-₹15,000 crore for 5-7 years. The company also plans to generate revenue by leasing out its towers and network bandwidth, starting a telecom equipment manufacturing project, offering broadband connectivity to schools, leasing its land bank for commercial use, and setting up Wi-Fi hotspots across the country.

The company is expected to take remedial steps suggested by the Sam Pitroda committee created on the PM’s suggestion in 2010 to turnaround its loss. However, much of that is only on paper. Some of the pills are likely too bitter to swallow for the babus. It is yet to:

  • undertake a strategic stake sale, or
  • reduce its 3 lakh staff by a third, or
  • sell 30% of the company in an initial share sale

The Future of BSNL

The Ministry of Telecom plans to present multiple suggestions to the Group of Ministries (GoM) to revive BSNL’s fortune. These include:

  • government bearing the cost for keeping spectrum beyond 4.4 MHz in GSM and 2.5 MHz in CDMA bands
  • providing a ₹23,000 crore bailout for BSNL and MTNL
  • getting the Centre to bear the one-time spectrum fee for state-owned telcos
  • refunding part of the 4G airwaves costs as the PSUs had surrendered this spectrum in 2011

Private GSM and CDMA operators object to the financial support for BSNL and MTNL as “not permissible” because “this would contravene all tenets of policy, fair competition and level playing field”. That’s a perfectly logical expectation.

BSNL is a text-book example of why the government should not stick its nose where it doesn’t belong. Private telecom operators have done to cheap, pervasive, universal access to basic telephony in 10 years what the government owned DoT, and now BSNL, couldn’t do in 50 years. But how do we reward this incompetence? By throwing good money over bad, by refusing to hold the bureaucrats running the show responsible, and by agreeing to every demand of the unions. Can we just stop pretending that this dog has a fight and just take it to the woodshed? Tax payers would like to know!

 

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Grit, Rules and Determination

Francisco Dao has an interesting post over at Pando Daily about what sets apart dreamers from successful people.

 

In study after study, it’s been shown that discipline and impulse control are the primary traits of successful people and the best predictor of future achievement. In contrast, unwarranted, overinflated self esteem is often a sign of future failure. Compared to discipline, even legitimate measures of intelligence have very little bearing as predictors of success.

 

Discipline is hard. And trying to be dispassionate about the decisions you take is harder. In fact, successful people try and reduce the number of decisions they take daily. For example, US President Obama has tried to eliminate the trivial decisions that most of us face on a daily basis. Michael Lewis, who profiled the president for Vanity Fair, explains that:

 

The president started talking about research that showed the mere act of making a decision, however trivial it was, degraded your ability to make a subsequent decision. A lot of … the trivial decisions in life — what he wears, what he eats — [are] essentially made for him. He’s actually aware of research that shows that the more decisions you have to make, the worse you get at making decisions. he analogizes to going shopping at Costco. If you go to Costco and you don’t know what you want, you come out exhausted, because you’re making all these decisions, and he wants to take those decisions out of his life. So he chucked out all his suits except his blue and grey suits so he doesn’t have to think about what he’s going to put on in the morning. Food is just arranged for him and he’s not making any decisions about what he’s eating. What most people spend most of their life deciding about, he’s had those decisions are removed from his life. He does this so he creates an environment, a mental environment, where he’s got full energy for the decisions that are really important decisions.

 

The take away: follow a routine that reduces the number of decisions you take. Have rules that prevents you from being impulsive. And most importantly, invest without emotions.

 

Source:
The importance of grit, rules, and discipline
Obama’s Way

 

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Improving Consistency

Stumbled on an awesome post at KirkReport on improving one’s trading consistency. Six things you need to do to improve your consistency:

  1. Have A Consistent Daily Routine
  2. Adopt And Maintain A Consistent Strategy
  3. Simply, Simply & Simplify More
  4. Track What You Do Everyday
  5. Flowchart Everything
  6. Set Your Rules & Follow The Rules

Read the whole thing here.

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Is Commodity Disinflation a boon for India?

A giant wave of disinflation is hitting the world. Two factors seem to be playing a major role:

  1. The US Shale oil boom, and
  2. Slowdown in China

commodity prices

The combination of hydraulic fracturing and horizontal drilling has unleashed a natural-gas bonanza that has made the U.S. the world’s largest natural-gas producer. Five years ago, many companies built natural-gas import terminals, anticipating greater U.S. demand for imported fuel. Now, those terminals are being re-purposed to export gas to Japan and other parts of Asia.

The glut of cheap natural gas has had a knock-on effect on coal. American coal mined in the eastern U.S. is begin shipped overseas to Europe, especially the U.K., the Netherlands and Italy. And rising US supply of cheap energy is meeting falling demand of raw materials in China and Europe.

Spot iron ore prices fell to match their lowest level on May 15 on the back of a soft Chinese steel market. Iron ore is also under pressure from additional supply, with top miners on track to boost output. Rio Tinto, the world’s second-biggest iron ore producer, is slated to increase its annual production capacity to 290 million tonnes this year from 237 million tonnes currently.

The Chinese have been exceptionally slow in reducing supply in the wake of falling demand. Aluminum Corp. of China, or Chinalco, says that more than 90% of the aluminum produced in China is produced at a loss. Huaxin Cement Co’s President was on record saying that cement makers need to shut down old plants to avoid “catastrophe” for the whole industry. In 2012, the majority of Chinese steel companies operated at a loss. Some reports peg Chinese steel overcapacity at 20%-30% – putting China’s excess capacity at the same size as the total output of India, the world’s fourth largest steel producing country, last year.

So what does this mean for India? If the fall in commodity prices sustain, then India will figure among the biggest winners in terms of higher growth, lower inflation and better economic fundamentals. Lower commodity prices will likely lower WPI inflation, help moderate the current account deficit and help reduce the government’s fuel and fertilizer subsidy bill. This might embolden the RBI to cut interest rates and pave the way for a cyclical recovery.

Hang tight, we are just getting started!

Sources

Iron ore revisits 2013 low
U.S. Coal Finds Warm Embrace Overseas
India Inc sees gains from falling commodity prices

 

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Introduction To Stock Exchanges

History of the Stock Exchange

The oldest trading companies were either owned by individuals or were family partnerships. In 1553, a British explorer set up an enterprise to find a North East trade route to China and the Orient. 250 merchants put up 25 pounds each to equip 3 ships for the voyage, thus sharing the cost and any eventual profits. This was the birth of the first modern shareholding enterprise, a ‘joint stock company’ called the ‘Muscovy Company’. The famous East India Company was formed in 1600 and was dominant in trading up to about 1850. The importance of the Dutch empire led to the formation of the United East India Company of the Netherlands in 1602 and the Dutch West India Company in 1621.

Thus, trading began in these companies. Europe’s oldest stock exchange was opened in Amsterdam in 1611. In London, brokers and jobbers (as they were called) met in coffee houses. To regulate the market, New Jonathan’s Coffee House was converted into the ‘Stock Exchange’ in 1773. In 1850, the US had about 250 functioning stock exchanges. However, by 1900, New York was totally dominant due to the introduction of the telegraph and ticker-tape.

The role of the Stock Exchange

Stock Exchanges are important as they provide the regulation of company listings, a price formation mechanism, the supervision of trading, authorization of members, settlement of transactions and publication of trade data and prices. However, the role of the stock exchange is becoming hazy as many listing rules are made by government bodies (like the SEC in the US), settlement is being taken over by separate settlement entities and more and more computerized matching systems outside exchanges are capturing business.

Some of the world’s largest exchanges are – the New York Stock Exchange (NYSE), the London Stock Exchange, Tokyo and the NASDAQ (National Association of Securities Dealers Automated Quotations). Technically, NASDAQ never had an exchange as such and only deal on computer screens. Their shares are actually ‘over the counter’ (OTC) but the companies are much larger than one usually finds with OTC trading. The market value of a stock exchange is the number of shares in existence multiplied by the share price of each. This is also called ‘capitalization’. Share prices go up and down all the time and the capitalization is only that at the moment when calculation is done.

International Equity

Nowadays, it has become common for multinational companies to seek a listing on several foreign stock exchanges. This may be to attract a wider investor market or because the local market is a little small for the ambitions of the company. The result has been a large expansion in primary market issues and secondary market trading in non-domestic equities. Large new equities are now offered on an international basis and similarly, US mutual funds and pension funds have gradually become less parochial and are investing more abroad.

Indices

Share indices are usually based on market capitalization. If the index is of the top 50 companies, say, then ‘top’ means biggest by market capitalization. Sometimes the index is described as ‘weighted’. This simply means that a 1% change in the price of the largest company in the index will have more impact that a 1% change in the price of the smallest. Since the share price is always changing, the ‘top’ shares are not always the same. There is provision for removing some shares and adding others, for example, every quarter.

Modern indices are based on taking the number of shares and multiplying by the price. This gives proper weight to the companies worth the largest capitalization. For example, Standard and Poor’s S&P 500 is an index based on market capitalization. The Dow Jones industrial average, which tracks 30 companies, simply averages the share price using a method known as the ‘constant divisor’. The Dow used to be calculated hourly but is now done every minute.

Stay tuned for next week where I discuss equity markets!

 

[stockquote]SHALPAINTS[/stockquote]

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