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ICRA: Industry To Close FY2019 On A Weak Note; Minor Recovery Expected In FY2020

Posted by ICRA

Indian telecom industry continues to face tough times in terms of revenue decline. As the industry continues to witness intense competition and limited pricing power, FY2019 would be the third consecutive year of revenue decline. The launch of services by RJio marked the beginning of the intense price-based competition, which has largely continued. The pricing pressure so exerted on the industry manifested in severe deterioration in the financial performance, marked by a decline in revenues, lower profitability (even losses for some telcos) and low cash generation.

However, trends of last few months indicate some recovery with ARPUs showing signs of stabilization. A modest increase in pricing is expected in FY2020, which can reflect in better revenues and profits. The operators will also be bolstered by the planned deleveraging initiatives to the tune of Rs. 0.9-1.0 lakh crore. The estimated debt metrics of the industry are weak with interest coverage of 1.1x and debt/EBITDA of more than 11x as on March 31, 2019. The anticipated deleveraging, if it materializes, can improve the interest coverage to 1.4x and debt/EBITDA to 8x as on March 31, 2020 although they will remain high. The stress on the industry has impacted the government’s non-tax revenues from the sector. ICRA expects FY2019 and FY2020 non-tax revenues to be in the range of Rs. 35,000 – Rs. 40,000 crore per year. Return of the auctioned spectrum by exiting telcos can result in Rs. 1100 crore per year reduction in deferred spectrum pay-outs to the Government.

Explaining this further, Harsh Jagnani, Sector Head & Vice President, Corporate Ratings, ICRA, says, “The revenues of the industry which declined by 11% in FY2018 to Rs. 2.1 lakh crore are estimated to decline further by 7% in FY2019. The industry EBITDA is estimated to reduce by 18% in FY2019, following a 21% erosion in FY2018 (Rs. 49,000 crore). However, based on Q3 trends the decline in ARPU has been arrested and the incumbent operators are looking for triggers of upward movement, with some operators implementing minimum recharge plans. FY2020 can witness the benefits of higher data usage, and a relatively more consolidated and stable industry structure resulting in some pricing discipline. We expect minor improvements with revenues estimated to grow by 6% and EBITDA by 20% in FY2020. However, these come off a lower base and will still be significantly lower than the peak of FY2016.”

As of now, there is limited visibility of the industry achieving the peak revenues seen in FY2016. The subscriber base of the industry has not seen significant growth over the last two years. It stood at 1176 million as of December 2018 and moderate addition is expected going forward. At such subscriber level, the industry ARPU would have to improve from Rs. 116 (per month) in FY2018 to Rs. 155 for the industry to achieve FY2016 revenues levels (assuming non-mobile revenues remain the same).

Pressures on cashflow generation in addition to need for continued capex have kept the debt levels elevated, estimated to be at Rs. 4.75 lakh crore by March 2019. The debt coverage metrics of the industry have remained stressed with estimated debt/EBITDA of more than 11x as of March 2019. The telcos have lined up sizeable deleveraging plans, which include equity infusion plans by most operators, stake sales in tower companies as well an IPO in the African unit by Bharti Airtel Limited. These plans are expected to result in inflows of around Rs. 1 lakh crore which can lead to reduction in debt to Rs. 4.3 lakh crore as of March 31, 2020.

Adds Mr. Jagnani, “Overall, despite the reduction in debt levels and some improvement in operating profits, the coverage indicators would continue to remain weak as reflected by the estimated interest coverage of 1.4x and debt/EBITDA of 8x as on March 31, 2020. Over the longer run, benefits emerging out of the consolidation and greater stickiness of data usage could result in stronger pricing power to the operators, which has the potential to provide greater revenue visibility and drive the organic deleveraging.”

The pressures on the industry has led to a reduction in non-tax revenues of the Government of India, with lower license fee (LF) and spectrum usage charges (SUC). These two-combined declined by 24% in FY2018 and are expected to decline further in FY2019. Further, the exits by some operators may result in a sizeable quantum of spectrum, around 551 MHz across bands to be repatriated back to DoT. ICRA expects FY2019 and FY2020 non-tax revenues from the sector to be in the range of Rs. 35,000-Rs. 40,00 crore per year. The proportion of overall receipts to the total non-tax receipts is expected to be the lowest in last 6 years.―CT Bureau

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