India Ratings and Research (Fitch Group) has maintained a negative outlook on the telecommunications services sector(telecom Industry) for the remainder of FY20. Ind-Ra believes the credit profiles of telecom operators (telcos) will remain under pressure in the medium term due to intense competition, elevated debt levels and continued reliance on capital infusion for debt servicing and capex.
Competitive intensity in the telecom industry has remained elevated with Reliance Jio Infocomm’s (RJio) data tariffs that are 25%-30% lower than those of Bharti Airtel Limited (Bharti) and Vodafone-Idea Limited (Voda-Idea).
Ind-Ra expects RJio’s market share to increase to 40%-45% by FYE22 (FYE19: around 30%) and Bharti/Voda-Idea’s joint market share to drop to 25%-27% each (30%-33%).
The aggregate gross debt of Voda-Idea, Bharti (India business) and RJio at end-FY19 stood at INR3.9 trillion, implying gross leverage of over 8x for the sector. The liquidity profiles of India telcos are structurally weak as free cash flows are likely to remain negative over FY20-FY22 due to high capex intensity (INR1.2 trillion in FY19). Hence, these companies will continue to rely on refinancing or capital infusion. However, near-term liquidity is supported by large cash levels available post capital infusions (Voda-Idea, Bharti) and continued financial flexibility due to strong parentage (RJio).
The government of India has announced that it is planning to auction 4G and 5G spectrum in the near term for the telecom industry. As per Ind-Ra’s estimates, at the proposed reserve prices, any incremental investment in 5G technology may yield return on capital employed of only about 5%. Historically, spectrum auctions have failed to garner adequate participation from telcos as exemplified by (a) a substantial portion of spectrum offered remaining unsold and (b) lower proportion of spectrum sold above the reserve price implying the lack of willingness of telcos to pay higher spectrum prices. Ind-Ra believes any incremental capex towards spectrum or 5G technology will derail the fragile recovery and be negative for ratings.
Ind-Ra will monitor RJio’s pricing strategy and response by other large telcos, timely and adequate capital infusion and asset monetisation to support funding shortfall and additional investments in spectrum and 5G technology. The media content space in India is likely to undergo a disruption, with the availability of cheaper and abundant data options under unlimited plans leading to higher content consumption on mobile devices.