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India telecom sector outlook reveals stable forecast

Fitch Ratings today released India Telecoms – Sector Outlook, revealing Stable Forecast for the telecom sector.

Leading telecom operators in India include Reliance Jio, Bharti Airtel, Vodafone Idea and BSNL.

Fitch forecasts mean net leverage of the top-three telcos to remain stable, at 4.2x-4.3x (2020F: 4.2x) in light of stronger cash flow generation and lower CapEx.

We expect Bharti Airtel’s FFO net leverage to be around 2.2x-2.4x, below our downgrade trigger of 2.5x, supported by sustained higher wireless tariffs amid easing price competition. Our leverage calculation factors in outstanding regulatory dues of USD4.0 billion. Bharti Airtel paid USD2.4 billion on adjusted gross revenue dues in 2020.

Reliance Industries, the parent of Reliance Jio, will be close to a net cash position towards end-2021, following the sale of a 33 percent stake in Jio Platforms for about USD 20 billion.

Net leverage at Vodafone Idea is likely to deteriorate substantially as a result of the Supreme Court’s verdict that the company should pay average gross revenue dues of USD8.9 billion. Its cash balance at end-June 2020 of USD470 million already falls below its short-term debt maturities and guarantees of USD3.6 billion.

Cash Flow Generation – FCF Neutral Average CFFO is likely to rise thanks to higher tariffs from increasing data usage amid user migration to 4G networks. Barring spectrum payments, negative average FCF could turn neutral, as we expect capex/revenue to decline to around 28 percent in 2021 (2020F: around 30 percent).

Jio and Bharti Airtel will gain revenue share at the expense of Vodafone Idea to dominate 75 percent- 80 percent of the market, from around 70 percent currently. This would see Vodafone Idea lose 50 million-70 million subscribers in the next 12 months, after losing about 155 million subscribers in the last nine quarters.

Reliance Jio could pick-up over half of Vodafone Idea’s subscriber losses, with the balance going to Bharti Airtel.

Delay in 5G spectrum auctions
5G spectrum auctions could be delayed if the government prioritises 4G auctions in 2021 to allow telcos to renew spectrum in 800MHz/900MHz bands in certain states.

There will be limited participation by Bharti Airtel and Vodafone Idea in the 5G auctions given high reserve prices and limited use cases. Both companies may raise equity by monetising stakes in soon-to-be-merged tower companies; Bharti Infratel and Indus Towers.

Strong revenue and EBITDA growth
Bharti Airtel and Jio’s revenue will rise by around 10 percent-15 percent (2020F: 15 percent-20 percent), following strong growth expectation in 2020 of over 30 percent. EBITDA margins may widen by 100bp-200bp to 37 percent and 44 percent for Bharti Airtel and Jio, respectively, on higher wireless tariffs and fixed-broadband expansion.

Vodafone Idea may continue to lose subscribers, although EBITDA could slightly recover amid cost savings.
CT Bureau

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