Ind-Ra predicts negative outlook for the Telecom Sector

Reliance Jio to continue to seize market share from other Operators

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Credit Rating and Research firm India Ratings and Research (Ind-Ra) has maintained a negative outlook on the telecommunications services sector for FY20. Ind-Ra believes the pricing recovery in FY20 is unlikely to be sufficient to compensate for the revenue loss witnessed in the preceding two years. The EBITDA for the top two private telcos will improve but not to the extent that it would lead to any meaningful recovery in their standalone credit profiles. Ind-Ra expects Reliance Jio Infocomm Limited’s (RJio) dominance to increase as it would continue to seize market share in terms of both subscribers and revenue from Bharti Airtel Limited (Bharti) and Vodafone-Idea Limited (Voda-Idea) in FY20 and could eventually emerge as the largest telecom player in the industry.

Given the continued Capex commitments, refinancing requirements would remain high for all the players. As a result, free cash flows would remain negative in FY20. The aggregate net debt of Bharti, Voda-Idea and RJio at end-FY19 is estimated to be around INR3 trillion, implying net leverage of over 6x for the sector. Telcos will continue to require equity infusion and asset monetisation to deleverage.

Given the continued Capex commitments, refinancing requirements would remain high for all the players. As a result, free cash flows would remain negative in FY20. The aggregate net debt of Bharti, Voda-Idea and RJio at end-FY19 is estimated to be around INR3 trillion, implying net leverage of over 6x for the sector. Telcos will continue to require equity infusion and asset monetisation to deleverage.

Post-consolidation, there are three private and two public sector players (BSNL and MTNL) in the telecom industry. Ind-Ra has rated RJio at ‘IND AAA’/Stable, reflecting the rating given to its parent, Reliance Industries Limited (RIL; ‘IND AAA’/Stable), given the strong linkages and huge investment made by RIL in RJio. The outstanding rating of ‘IND AA-’/Negative for Voda-Idea factors in the demonstrated and expected financial support from the sponsors (Aditya Birla Group and Vodafone Plc). The Negative Outlook on Voda-Idea reflects the consolidated entity’s weak operating and financial risk profiles.

The focus of operators will eventually shift to average revenue per user (ARPU) from subscriber market share (SMS), in Ind-Ra’s opinion. The share of 4G subscribers, who offer higher ARPU, will be a critical profitability indicator and RMS will evolve accordingly. Revenue growth would be uneven across telcos and RJio is positioned to outperform peers with its superior offerings.

Telecom

Overall subscriber growth will remain muted in FY20, or it could even witness a decline, as India is a dual-sim market, which could consolidate with ARPUs trudging upwards. The ARPU is likely to improve over H2FY19-FY20 as the minimum recharge plans launched by Bharti and Voda-Idea will weed out low ARPU customers.

As highlighted continually by Ind-Ra, network quality will be a key success factor for retaining customers. Ind-Ra expects the capex-to-revenue ratio for private sector telcos to remain at 25%-30% (estimated INR700 billion) in FY20. Telcos have continuously been investing in network augmentation, as evident from the surging order books and capacity expansion plans of optical fibre cable (OFC) players. The telecom equipment industry is also witnessing strong growth because of rising data demand and the growing need for investments in technology. In FY20, the industry may not witness active participation in 5G spectrum auctions because of several reasons such as companies having other capex priorities, the immature ecosystem for 5G, and already stretched leverage profiles. Therefore, any disruption from 5G is unlikely in the near term.

 

The media content space in India is likely to undergo a disruption, with the availability of cheaper and abundant data under unlimited plans leading to increasing consumption of content on mobile devices.

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