Ratings and research agency India Ratings and Research (Ind-Ra) has maintained a negative outlook on the telecommunications services sector for FY20 and it believes the pricing recovery in FY20 is unlikely to be sufficient to compensate for the revenue loss witnessed in the preceding two years.
It said the earnings before interest, tax, depreciation and amortization (EBITDA) for the top two private telecom companies will improve but not to the extent that it would lead to any meaningful recovery in their standalone credit profiles, Ind-Ra said in its Telecom Sector Outlook FY20.
Ind-Ra expects Reliance Jio Infocomm’s (RJio) dominance to increase as it would continue to seize market share in terms of both subscribers and revenue from Bharti Airtel (Bharti) and VodafoneIdea (Voda-Idea) in FY20 and could eventually emerge as the largest telecom player in the industry.
“Given the continued capex commitments, refinancing requirements would remain high for all the players. As a result, free cash flows would remain negative in FY20. The aggregate net debt of Bharti, Voda-Idea and RJio at endFY19 is estimated to be around INR3 trillion, implying net leverage of over 6x for the sector. Telcos will continue to require equity infusion and asset monetisation to deleverage,” a statement by the agency said on Thursday.
Post consolidation, there are three private and two public sector players (BSNL and MTNL) in the telecom industry. Ind-Ra has rated RJio at ‘IND AAA’/Stable, reflecting the rating given to its parent, Reliance Industries (RIL; ‘IND AAA’/Stable), given the strong linkages and huge investment made by RIL in RJio. The outstanding rating of ‘IND AA-’/Negative for Voda-Idea factors in the demonstrated and expected financial support from the sponsors (Aditya Birla Group and Vodafone Plc). The negative outlook on Voda-Idea reflects the consolidated entity’s weak operating and financial risk profiles.
The focus of operators will eventually shift to average revenue per user (ARPU) from subscriber market share, in Ind-Ra’s opinion.
The share of 4G subscribers, who offer higher ARPU, will be a critical profitability indicator and RMS will evolve accordingly. Revenue growth would be uneven across telcos and RJio is positioned to outperform peers with its superior offerings, the agency feels.
It said overall subscriber growth will remain muted in FY20, or it could even witness a decline, as India is a dual-SIM market, which could consolidate with ARPUs trudging upwards. “The ARPU is likely to improve over H2FY19- FY20 as the minimum recharge plans launched by Bharti and Voda-Idea will weed out low ARPU customers,” the report said.
Network quality will be a key success factor for retaining customers and Ind-Ra expects the capex-to-revenue ratio for private sector telcos to remain at 25-30 per cent (estimated Rs 700 billion) in FY20. Telcos have continuously been investing in network augmentation, as evident from the surging order books and capacity expansion plans of optical fibre cable (OFC) players. The telecom equipment industry is also witnessing strong growth because of rising data demand and the growing need for investments in technology.