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India to be the only country in Asia to witness falling telecom revenues, says Moody's

November 01, 2017

Ratings agency Moody's has stated that India will be the only country in Asia where industry revenue is declining due to unprecedented price competition spurred by a new entrant. It added that organic revenues of telecom operators will remain under pressure over the next 12-18 months reflecting heightened competitive intensity, revamping of pricing plans and ongoing pricing pressures. The agency pointed that profitability for Indian operators will remain under pressure until consolidation activity concludes and market shares redistributed.

The agency has stated three factors that drive the stable outlook in the telecom sector which include expectations of year-on-year average revenue growth of about 2.0-2.5 per cent over the next 12-18 months, earnings before income, taxes, depreciation and amortisation (EBITDA) growth of 0-2 per cent although average margins will contract slightly next year and capex as a percentage of revenue to remain elevated at around 25 per cent. It also added that telecom industry in Asia Pacific remained stable but will face headwinds from technological changes.

However, it pointed that organic revenue growth is slowing, although the pace varies by country, due to increasing mobile penetration rates, ongoing competition and technological headwinds. In emerging countries, excluding India, Moody's expects revenue growth of about 3.5 per cent in 2018, lower than the forecast GDP growth of about 5.8 per cent. Revenue growth in developed markets will remain in line with expected GDP growth of around 1.5 per cent.

The agency noted that in Indian telecom sector, Bharti Airtel's strengthening subscriber market position through industry consolidation besides exit of players like Reliance Communications (RCOM) is expected to offset some negative pricing pressure over the next 12-18 months. The market leader will be a key beneficiary as the smaller players are forced out and pricing stabilizes as competitive dynamics ultimately result in a three-player market.

Although EBITDA contraction is likely to be less severe for incumbents such as Bharti given its larger scale, the agency still expects the company’s organic EBITDA to contract around 10 per cent year-over-year by March 2018. In the longer term it expects Airtel’s profitability to benefit from operational and capital-spending synergies after completing its announced acquisitions. Moody’s added that Airtel’s leverage, including deferred spectrum payments incurred over 2015 and 2016, was likely to remain elevated around 3.7x barring any further significant reduction in debt from additional efforts to monetize its assets.

In the Asia Pacific market, the agency expects companies like Indosat, Bharti, and NTT and its mobile arm NTT DOCOMO to tap the bank or bond markets to fund upcoming debt maturities or capital spending.

However, the agency expects companies to continuously expand into digital media, advertising and mobile payments to future-proof their revenue streams.


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