Over the last few quarters, the clouds over the Indian telecom industry have thickened with pressures on profitability and stress on balance sheets. ICRA expects the situation to remain worrisome for the industry over the next few years. With competition expected to intensify following the entry of Reliance Jio Infocomm Limited (RJio), improvement in profitability would be challenging. And the upcoming auctions as well as continued CapEx requirements would further strain the capital structure of the industry. 

The industry operating metrics were on an improving trend till Q3FY15, but have been sliding since. The gross ARPU (average revenue per user) has declined from Rs.183 in Q3FY15 to Rs.178 in Q3FY16 for the three listed telecom companies (Bharti Airtel Limited, Idea Cellular Limited, and Reliance Communications Limited). Breaking it further, the voice ARPU has declined from Rs.140 in Q3FY15 to Rs.127 in Q3FY16. The primary cause of concern has been the decline in voice RPM (revenue per minute) from 36.5 paisa in Q3FY15 to 33.0 paisa in Q3FY16. Minute realizations have been under stress owing to changes in regulations, namely, reduction in roaming charges as well as in inter-connect usage charges, and the overall competitive pressure preventing the telecom companies from undertaking price hikes despite the fact that the competitive intensity has waned as compared to few years ago. The other key service of the telecom companies - data - presents a different picture. For 3LT, data ARPU improved from Rs. 145 in Q3FY15 to Rs. 162 in Q3FY16. Given the small base, there has been strong growth in subscriber addition as well as in data usage per subscriber. However, data realizations have been on a consistently declining trend - from 22.6 paisa per MB to 19.7 paisa per MB from Q3FY15 to Q3FY16. Telecom companies are attracting more users to experience data services by offering attractive pricing and free data. ICRA believes it would be difficult to raise data tariffs at a later stage, as had been the case in voice segment. Going forward, the contribution from data revenues will remain a key driver of growth in revenues and profitability of the telecom companies.

The concern on declining trend of realizations - both voice and data - is exacerbated by the impending entry of RJio. Entry of a large player would adversely impact the pricing power of the entire industry, that too at a time when the incumbents have to invest significantly for acquiring spectrum and for network rollout.

Looking at the capital structure of the industry, the situation is grimmer. The last auction which concluded in March 2015 resulted in addition of Rs.80,000 crore debt to the industry. Another auction is planned in mid-2016. This auction is proposed to be the largest, both in terms of spectrum put to auction and the value of spectrum. As per the recommendations of Telecom Regulatory Authority of India (TRAI), 2103 MHz of spectrum across seven bands is proposed to be put to auction, the value of which is pegged at staggering Rs.5.37 lakh crore. ICRA expects a large part of spectrum to remain unsold and the spectrum sales amount to be lower than the March 2015 auctions. Nevertheless, it would add to the elevated debt levels of the industry. Further, sizeable CapEx - maintenance, up-gradation, and green-field - for rollout of data services would add to the debt. ICRA estimates annual non-spectrum CapEx to be to the tune of Rs.50,000 crore for the next few years. As per ICRA's estimates, post auctions, the industry debt would rise by 16 percent. A significant part of this would be toward the spectrum liabilities, which though have long repayment period (12 years), but that is only a minor relief. Overall, the debt metrics of the industry are weakening and the industry would require debt refinancing.

ICRA sees two respite factors. The short-term respite would come from the asset sale transactions proposed by some telecom companies, namely, Reliance Communications (tower business), Viom Networks Limited (stake sale in tower business) and Airtel (sale of tower assets in Africa). ICRA expects these transactions, if successful, to reduce industry debt by Rs.30,000 crore. The long-term respite is expected from the industry and spectrum consolidation following the spectrum trading and sharing transactions which have been initiated, such as Idea-Videocon and Reliance Communication-Sistema-Aircel-RJio. These would improve the quality of spectrum holding, thereby improving the efficiency of the telecom companies, as well as give some pricing power to the industry. In the medium term, ICRA expects the industry to remain under a cloud. Long-term relief would only come from growth in revenues and internal accrual generation, which would allow for gradual deleveraging and improvement in debt metrics.

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