The credit profiles of the top four Indian telcos Bharti Airtel (Bharti; BBB-/Stable), Vodafone India, Idea Cellular and Reliance Communications will remain intact in 2015 thanks to a gradual rise in voice tariffs and improving regulatory environment that stem from industry consolidation, Fitch Ratings says in a new special report.
The likely entry of new telco Reliance Jio, which is part of Reliance Industries (RIL; BBB-/Stable) in 1H15 will intensify competition in the data segment, and may cause data tariffs to decline by at least 20%. Jio will focus largely on data and may have a limited impact on the incumbents' core voice business, given a weak ''voice-over-LTE'' technology ecosystem and lack of affordable 4G-compatible handsets in India. We do not foresee a re-run of the tariff wars of 2009-2013, which led to a severe decline in industry tariffs.
The outlook for nationally owned telcos and weaker unprofitable telcos is negative due to their unviable business models, high cost structure, weak spectrum assets and large capex requirements. Weaker, unprofitable operators will seek mergers amid EBITDA losses, lack of 3G/4G spectrum assets, and likely relaxation of M&A restrictions. Six operators are likely to emerge from the industry shake-out, as 10 12 operators are unsustainable. Fitch expects the top four telcos to increase their revenue market share to around 83% (2014: 79%) of the USD30bn industry.
Industry revenue will grow by at a mid-single-digit rate in 2015, driven by data services. The top four telcos' 2015 average operating EBITDA margin will be mostly unchanged at 32%-33% (2014: 32%) as a decline in data tariffs will offset a gradual rise in voice tariffs. The top four telcos will generate a minimal free cash flow (FCF) margin due to higher capex and flat EBITDA; the 2015 industry capex/revenue ratio could rise as fast-growing data traffic requires supporting investment.
Fitch expects Bharti's 2015 funds flow from operations (FFO)-adjusted net leverage to improve to 2.2x-2.3x (FY14: 2.5x, excluding unpaid spectrum costs), thanks to an equity issue of USD 350 million by its tower subsidiary Bharti Infratel and its ability to generate USD 600 million-700 million in annual FCF. Leverage could also improve due to Bharti's plan to monetise its African towers during 2015-2016, which could help raise around USD2bn. Bharti's operating EBITDAR margin will remain stable at around 32%-33% (2014: 32%) as the Indian competitive landscape continues to improve and Bharti gains market share in its African operations.
The outlook for profitable private telcos could turn negative should price-based competition return in the voice segment, which would narrow profitability. The sector outlook could turn negative if the Indian government auctions a smaller-than-expected quantity of telecom spectrum in 2015, which could lead to aggressive bidding by incumbents whose licences expire during 2015-2016.
