ICRA Maintains Negative Year End Outlook For Indian Telecom Industry

ICRA Maintains Negative Year End Outlook For Indian Telecom Industry

The telecom industry woes according to ICRA is expected to persist amid intense competition and pricing pressures. A recovery, backed by restoration of pricing power with the telcos, is still not in sight. The recovery, which was anticipated on the back of a consolidated industry structure and data usage with greater price-inelasticity, has been prolonged. To add to these, the recent rupee depreciation and increase in diesel prices would hurt the industry further.

The sector has been going through a phase of turbulence during the last few years, with intense competition and pricing pressures leading to a decline in revenues and profitability. Consistent downward revision in prices has resulted in one of the steepest falls in the industry average revenue per user (ARPU) levels with the estimated blended ARPU falling from Rs. 169 in Q1 FY2017 to Rs. 116 in Q1 FY2019 – with the industry adjusted gross revenue (AGR) falling from Rs. 44,570 crore to Rs. 25,580 crore in the same period. The overall high operating leverage of the industry means that the decline in revenues has percolated to pressure on profitability and cashflows. Further, the industry is weighed down by high debt levels and capital expenditure (CapEx) requirements.

The industry debt remains elevated owing to reduction in organic cash flow generation and consistently high CapEx requirements. Further, the recent rupee deprecation has added to the debt levels. As per ICRA estimates, the debt as on March 31, 2018 stood at Rs. 4.7 lakh crore. For FY2019, ICRA expects the industry debt levels to reduce to Rs. 4.2 lakh crore, with monetisation of tower assets and promoter support being the major drivers. Nevertheless, the debt protection metrics will continue to remain weak – estimated debt/EBITDA more than 7.0x as of March 31, 2019.

These factors have resulted in poor return on investments for all the operators. The inherent unsustainability of this for longer period manifests that both the revenue generation as well as the profitability will have to improve substantially. While the subscriber base growth potential is limited, the key drivers would be: a) pricing improvement, and b) identifying and implementing new use cases for the telecom services. The latter is a longer-term goal and would require more investments. But in the immediate term, it is the push for higher realisation which is achievable. But the competitive headwinds remain strong with most operators looking for greater entrenchment. Thus, the outlook for pricing restoration remains hazy and not so imminent.

Greater proliferation is expected in the home broadband and Direct-to-Home (DTH) services. While these services have been provided by many telecom players for many years, a new entrant with plans for widespread penetration, is likely to provide greater fillip to these segments. Another emerging trend is greater focus on content by the telecom operators to increase customer stickiness. These developments would mean greater convergence of various means of mobility and entertainment, with telecom networks serving as the foundation.

The rate of CapEx has remained high for most operators in last few quarters and no major let-up is envisaged in medium term. The industry needs to expand in terms of technology and reach; strong growth in data usage being an important contributor. The CapEx requirement is coming from network expansion, technology upgradation, and greater fiberisation which is essential for data-heavy usage.

The CapEx to sales ratio for the telcos has increased significantly – at around 30% against the average of 15 – 20% seen in the past. Going forward as well, the operators would need to invest to develop newer technologies for increasing use-cases of telecom networks and services. On top of this, likelihood of spectrum auctions is increasing with passage of time, as the existing spectrum gets exhausted with usage expansion, and spectrum-intensive use-cases are introduced. Payouts for spectrum would be an additional financial burden for the industry. – CT Bureau

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