FY21 Telecom Outlook: Collateral Damage Across The Value Chain

Posted by India Ratings and Research

India Ratings and Research (Ind-Ra) has maintained a negative outlook on the telecom sector for FY21. The agency believes that the crystallisation of large contingent liabilities in the last six months, primarily related to the adjusted gross revenue (AGR) dues payable, has adversely impacted the near-term liquidity of most telecom companies (telcos). Ind-Ra believes that negative implications of the going-concern status of Vodafone Idea Limited (‘IND B’/RWN), will also spill over to other telecom industry players such as tower companies, as the telecom industry operates on shared infrastructure basis.

Ind-Ra estimates tower companies EBITDA may decline by 9%-10% for every 10,000 reduction in tenancies. However, if tower companies manage to pass on the entire impact to large telcos (e.g. Bharti Airtel Ltd) in the form of higher tower rentals, it will have a marginal impact of around 3% on Bharti Airtel’s India EBITDA. The agency therefore believes that the risk on cash flows is much higher for a typical tower company than for large telcos, who have adequate ability to absorb higher costs. The Outlook for telecom handset players remains stretched for FY21, as their EBITDA losses due to high advertisement costs are funded by borrowings from parents.

Industry Fundamentals Improving, if it Sails through AGR Issue: After a steady decline over the last 2.5 years, data tariffs (GB/user/month) rose 25%-40% in December 2019. Also, the share of high average revenue per user data and broadband subscribers is on a continuous rise, which augurs well for revenue growth. Additionally, government initiatives such as evaluating setting up a floor price, extending implementation of zero interconnect usage charge regime and providing a moratorium on spectrum payment would aid the industry in the long-term. That being said, the effectiveness of these initiatives remains to be seen for majority telcos, which are grappling with the near-term liquidity crisis post the Supreme Court order on AGR dues payable and Department of Telecom’s demand for immediate payment of such dues.

Industry-wide Revenue Grew in 3QFY20; Momentum Needs to be Monitored: The recent tariff hikes by almost all telcos in 3QFY20, supported the 9% qoq growth in industry-wide revenue in the same quarter, have more than offset the decline in subscriber base. However, Ind-Ra believes that the momentum of revenue growth need to be seen since the subscriber base had declined in November and December 2019. The agency also believes that the competitive pressure for telcos remains elevated with Reliance Jio Infocomm Ltd’s (‘IND AAA’/Stable) data tariffs still 25% lower than those of Bharti Airtel and Vodafone Idea.

―CT Bureau