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Harsh Jagnani
Sector Head & Vice President - Corporate Ratings
ICRA

Industry Woes Persist; Stabilization Not Yet In Sight: ICRA

The Indian telecom industry continues to face headwinds of intense competition and pricing pressures. Recovery in pricing power of the telecom operators, which was anticipated on the back of a consolidated industry structure and higher data usage with greater price-inelasticity, has been prolonged.

The sector has been going through 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 1Q FY2017 to Rs 116 in 1Q FY2019 – leading to decline in the industry adjusted gross revenue (AGR) 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 steep pressure on the profitability and cashflows. At the same time, the industry is weighed down by high debt levels.

The industry debt remains elevated owing to reduction in organic cash flow generation and consistently high CapEx requirements. Further, rupee depreciation adds to the debt burden given the sizeable foreign-currency denominated debt. 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 slightly to Rs 4.2 lakh crore, primarily on account of inorganic sources of funds such as monetisation of assets/investments and equity infusion. Nevertheless, the debt protection metrics will continue to remain weak – debt/EBITDA is estimated to be upwards of 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 demands that both the revenue generation as well as the profitability will have to improve substantially. While the potential for growth in subscriber base is limited, the key drivers would be: a) pricing improvement, and b) identification and implementation of 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 realization (or ARPU) which is achievable. But the competitive headwinds remain strong. As the industry consolidation culminates, the remaining operators are looking for greater and firmer hold of the market share. Thus, the outlook for pricing restoration remains hazy and not so imminent.

Going forward, greater proliferation is expected in the home broadband and Direct-to-Home (DTH) services. While these services have been provided by some telecom players for many years, a new entrant with plans for widespread penetration, is likely to provide greater fillip to these segments. It is expected that the subscriber base would increase rapidly in these segments, albeit at certain cost to the pricing levels. Another emerging trend for the industry is greater focus on content to increase customer stickiness. These developments would mean greater convergence of various means of mobility and entertainment, with telecom networks serving as the foundation.

Amid these developments, the rate of CapEx has remained high for most operators 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 percent against the average levels of 15 – 20 percent 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, the likelihood of spectrum auctions is increasing with the passage of time, as the existing spectrum gets exhausted, and spectrum-intensive uses are introduced.

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