India Ratings and Research (Ind-Ra) has maintained a negative outlook for the country’s telecom services sector for the remainder of 2019-20. Ind-Ra believes the credit profiles of telecom operators 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 owing to Reliance Jio’s data tariffs being 25-30 per cent lower than those of Bharti Airtel and Vodafone Idea. Ind-Ra expects Jio’s market share to increase to 40-45 per cent by fiscal 2022 end from around 30 per cent at the end of fiscal 2019, and Bharti and Vodafone Idea’s joint market share to drop to 25-27 per cent each from 30-33 per cent. The aggregate gross debt of Vodafone Idea, Bharti Airtel (India business) and Jio at the end of fiscal 2019 stood at Rs 3.9 trillion, implying a gross leverage of over 8x for the sector. The liquidity profiles of Indian telcos are structurally weak as free cash flows are likely to remain negative over the period 2019-20 to 2021-22 due to high capex intensity (Rs 1.2 trillion in fiscal 2019). 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 (Vodafone Idea, Bharti) and continued financial flexibility due to strong parentage (Jio).
The government has announced that it is planning to auction 4G and 5G spectrum in the near term. As per Ind-Ra’s estimates, at the proposed reserve prices, any incremental investment in 5G technology are likely to yield returns on capital employed of only about 5 per cent. Historically, spectrum auctions have failed to garner adequate participation from telcos, as exemplified by the substantial portion of spectrum remaining unsold and by the lower proportion of spectrum sold above the reserve price, implying a lack of willingness on the part 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.
The media content space is likely to witness disruption with the availability of cheaper and abundant data options under unlimited plans, leading to higher content consumption on mobile devices.