India Ratings and Research (Ind-Ra) has revised its sector outlook on the telecom sector to Stable for 2HFY21 from Negative, owing to the resolution of regulatory overhang and moderation in competitive intensity so far in FY21, compared to the past two to three years.
Even without tariff hikes, the sector has been structurally moving towards higher average revenue per user (ARPU) regime as evident from the rising proportion of higher-ARPU data customers in the overall subscriber mix. Competition intensity is alleviating, as exemplified by the lack of any competitive tariff cuts by telcos in the past 12 months and gradual reduction in tariff differentials among them. Ind-Ra believes that higher-than-expected investments in spectrum acquisition or 5G deployment remain a risk, albeit the selected telcos have sufficient balance sheet strength. The evolution of the industry over the coming quarters will determine whether the mobility market will remain a 3+1 player market or will transition to a 2.5+1 player market.
Ind-Ra has also revised the Rating Outlook for 2HFY21 on its rated entities to Stable from Negative, since the entities have displayed an improvement in their financial profile, backed by rising profitability and consistent deleveraging initiatives. While Reliance Jio Infocomm Limited’s (‘IND AAA’/Stable) ratings are furthered by timely financial support from its parent Reliance Industries Ltd (‘IND AAA’/Stable), the ratings of Bharti Airtel Limited (debt rated at ‘IND A1+’) are supported by its diversified revenue profile and a re-surgent Africa business. While the recent ruling on adjusted gross revenue dues has certainly provided the much-needed liquidity cushion to the telcos, credit profile of Vodafone-Idea Limited remains to be monitored, given consistently falling market share, weaker profitability, stretched liquidity and rising debt levels.
Moreover, COVID-19 is not expected to have a material impact on the sector, owing to the essential nature of services being provided, as per the agency. Although the GDP slowdown coupled with weak rural wage growth in FY21 is expected to marginally delay consumer shift to high ARPU broadband plans and adversely impact India’s 5G roll-out, the data usage and enterprise business activities could surge. That being said, the agency believes that the movement in subscriber base needs to be monitored to identify whether the loss in subscribers in the four months ended June 2020 was transitory in nature or is a permanent loss. Telecom handset manufacturers such as (OPPO Mobiles India Private Limited – ‘IND BB-’/Stable), which rely heavily on Chinese imports, are expected to face the brunt owing to the supply chain disruptions.