According to a recent study by Fitch Ratings, the revenue and earnings before interest, taxes, depreciation, and amortisation (EBITDA) growth of Indian telcos in the financial year ending March 2021 (FY21) will slow due to lower data growth and weaker economic activity amid the coronavirus pandemic.

Notwithstanding the effect of the pandemic, Fitch expects FY21 industry mobile service EBITDA to increase by about 15 per cent year-on-year (YoY) (FY20: 25per cent), which will outperform Indian gross domestic product (GDP) growth forecast of 0.8 per cent, as the industry will realise the full-year benefit of industry-wide tariff hikes of around 30 per cent, effective from December 2019. Telcos’ fourth quarter (4Q) FY20 EBITDA growth was driven by tariff hikes and 4G data growth, which it forecasts to decelerate in FY21, as lockdowns were only implemented from March 24, 2020.

Further, Fitch forecasts Bharti Airtel’s (BBB-/Stable) FY21 Indian mobile segment’s EBITDA to improve by 15 per cent-20 percent, below its previous expectation of 20 per cent-25 per cent, on lower data growth, as smartphone sales are likely to drop significantly in H1 FY21 as feature-phone users are unable to upgrade to 4G smartphones during the lockdowns. Further, it also lowered the assumption of FY21 net subscriber addition to around 15 million, from 30 million, as users are unable to port their numbers during the lockdowns. The pandemic-led economic slowdown will mostly affect lower-revenue users – those who spend Rs 50- Rs 100 a month – which could prevent further improvements in monthly average revenue per user (ARPU).

Airtel’s slower EBITDA growth would result in FFO adjusted net leverage of 2.1x-2.2x, excluding $6.3 billion in deferred spectrum costs. This is still below 2.5x, the threshold above which Fitch may consider negative rating action. Bharti has paid only $2.6 billion to date to settle its adjusted gross revenue (AGR) dues, compared with the original demand of $4.9 billion by the Department of Telecommunications (DoT). However, the rating agency has factored the entire amount into its FY20 leverage estimates.

Airtel’s 4QFY20 Indian mobile segment revenue and EBITDA rose by 16 per cent and 27per cent quarter-on-quarter (QoQ), respectively, led by 14 per cent growth in monthly ARPU to Rs 54, a 10 per cent growth in the 4G customer base to 136 million and 8 per cent growth each in monthly data usage per user to 15GB and voice usage to 965 minutes; 4QFY20 ARPU was the highest of the previous 11 quarters, boosted by tariff hikes, as the overall subscriber base remained flat around 284 million.

Market leader, Reliance Jio, (BBB-/Stable), reported sequential revenue and EBITDA growth of 6 per cent and 11 per cent, respectively, as ARPU growth was less pronounced, at 2 per cent, to Rs 131. This was due to the significant proportion of Jio’s customers being on long-tenor plans, on which tariff hikes will be implemented only in 1Q FY21. In addition, sale of incremental Jiophones led to slower growth in ARPU. Its monthly data and voice usage per user was at 11.3GB and 771 minutes, respectively. Jio continued to gain market share at the expense of India’s third-largest telco, Vodafone-Idea Limited, as it added 18 million subscribers to reach a customer base of 388 million, the industry’s highest. Fitch expects Jio’s FY21 mobile revenue to increase by at least 20 per cent, led by higher monthly ARPU of Rs 147 and subscriber additions of 30 million.

Further, the rating aganecy expects Airtel to generate small positive free cash flow in FY21, as capex/revenue is likely to decline to around 26 per cent-27 per cent on lower core capex, interest costs and the government’s two-year moratorium on the payment of existing spectrum dues, which will defer about $ 840 million in each of FY21 and FY22. Airtel has almost completed the shutdown of its 3G network across India and has redirected its 900MHz and 2100MHz spectrum for 4G usage. Further Fitch believes sector capex peaked in 2019, as both Bharti and Jio front-laded capex to expand 4G coverage and capacity and invested in fibre networks and in-building coverage.

Further, the study highlighted that 5G spectrum auction looks increasingly improbable in 2020 in light of incumbent telcos’ limited financial flexibility, a high base price of $ 7 billion for pan-India 5G spectrum in 3.3GHz-3.6GHz bandwidth and a limited business case for 5G, when 4G penetration is only around 50 per cent.

Revenue market share is consolidating fast at Jio and Bharti, with Vodafone Idea rapidly losing market share. Vodafone Idea lost about 131 million subscribers in the last six quarters and is struggling to service its debt due to stagnant EBITDA generation, which is insufficient to cover its interest costs. The telco’s subscriber base is shrinking due to its deteriorating network on limited capex. Vodafone Idea has paid only $926 million in adjusted gross revenue dues, against the department’s demand of $6 billion, and has not yet reported its 4Q FY20 results.