Credit profiles of telecom operators (telcos) will remain under pressure in the medium term due to intense competition, elevated debt levels and continued reliance on capital infusion for debt servicing and Capex, India Ratings, a Fitch Group company has said. Reliance Jio will be the only telco whose market share may increase to 40-45 percent by 2022, it said.
"Competitive intensity in the telecom industry has remained elevated with Reliance Jio Infocomm's (RJio) data tariffs that are 25-30 percent lower than those of Bharti Airtel Limited (Bharti) and Vodafone-Idea Limited (Voda-Idea)," said the report.
Ind-Ra expects RJio's market share to increase to 40-45 percent by FYE22 (FYE19: around 30 percent) and Bharti/Voda-Idea's joint market share to drop to 25-27 percent each (30-33 percent).
"The aggregate gross debt of Voda-Idea, Bharti (India business) and RJio at end-FY19 stood at Rs 3.9 trillion, implying gross leverage of over 8x for the sector," the agency said.
The liquidity profiles of India telcos are structurally weak as free cash flows are likely to remain negative over FY20-FY22 due to high Capex intensity (Rs 1.2 trillion in FY19). Hence, these companies will continue to rely on refinancing or capital infusion. However, near-term liquidity is supported by large cash levels available post capital infusions (Voda-Idea, Bharti) and continued financial flexibility due to strong parentage (RJio).
"The government of India has announced that it is planning to auction 4G and 5G spectrum in the near term. As per Ind-Ra's estimates, at the proposed reserve prices, any incremental investment in 5G technology may yield a return on capital employed of only about 5 percent.
"Historically, spectrum auctions have failed to garner adequate participation from telcos as exemplified by a substantial portion of spectrum offered remaining unsold and lower proportion of spectrum sold above the reserve price implying the lack of willingness of telcos to pay higher spectrum prices.
Ind-Ra will monitor RJio's pricing strategy and response by other large telcos, timely and adequate capital infusion and asset monetization to support funding shortfall and additional investments in spectrum and 5G technology.
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