17 April, 2014 21:09 IST
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Source: rss (17-Apr-14)
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Fitch Ratings said on Wednesday the outlook for the Indian telecommunication (telco) sector in 2013 is negative, reflecting expected weaker balance sheets due to regulatory payments to re-acquire licences and continuing ability to raise tariffs, given the high level of competition. Government's decision to change its spectrum-allocation policy from a fixed-cost regime to an auction of all existing and future spectrum assets will significantly raise the cost of licences and spectrum, which will weaken the credit metrics of most telcos, if funded by debt.

The top-four operators by revenue market share - Bharti Airtel (Bharti, 'BBB-'/Negative), Vodafone India, Idea Cellular  and Reliance Communications - will have to pay significant amounts for a one-off charge for excess spectrum (above 4.4MHz), spectrum re-farming and future spectrum auctions. Fitch believes the one-off charge and refarming payments will occur in 2013.

The credit metrics of the other four private telcos are unlikely to improve significantly due to large capex needs, weak balance sheets, and more debt being incurred as they re-acquire their cancelled licences at significantly higher prices. Nationally owned telcos will continue to suffer operating losses due to high staff costs and subscribers with low average revenue per user (ARPU).

Ongoing Industry consolidation is unlikely to reduce overcapacity in 2013, as the market will remain competitive enough to prevent any sustainable rise in tariffs. Industry participants will come down to nine, from over 13 at the start of 2012.

Fitch believes the sector can afford at most only six profit-making operators in the long-term, and that average revenue per minute (ARPM) - currently the cheapest in the world at Rs 0.41-0.43 - needs to rise for the industry to be sustainable.

Fitch believes that the top-four operators' EBITDA margins (2012 simple average of 28%) are unlikely to improve much, due to a combination of competition, high initial 3G network costs and low ARPU for new users. Revenue in 2013 will rise only by the mid-single digits, in line with subscriber growth which should go up by an average monthly net addition of 3 million-5 million. Voice will remain the primary driver of revenue growth, while data's contribution to revenue will double to 7%-9% (2012: 4%-5%).

High interest costs, and capex required to meet growing data traffic and voice coverage, will keep 2013 free cash flow (FCF) margins low at around 2%-4% - insufficient to pay for regulatory payments. Fitch believes that Indian telcos' capex will run at around 20%-25% of revenue to meet rising demand.


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