Harsh Jagnani, Vice President and Sector Head – Corporate Ratings, ICRA Limited

The Indian telecom industry has been witnessing turbulence especially for the last six quarters, characterized by heightened competitive intensity, pricing pressures, and decline in revenues and profitability, amid elevated debt levels. However, the telecom industry is expected to recover from end of FY2019 on the back of a consolidated structure, better pricing power, and data usage with greater price-inelasticity.

The launch of operations by Reliance Jio Infocomm Ltd. (RJio) led to intense price competition, which along with reduction in Interconnect Usage Charges (IUC), would weigh down the financial performance of the industry in FY2018. ICRA expects that the industry revenues would decline by 13 percent in FY2018, while the EBITDA is expected to fall by 34 percent. But, amidst this situation, there have been some silver linings, namely expedited consolidation and increased data stickiness, which portend better outlook for the industry over the longer term. The data usage in the country has increased manifold, from less than 200 MB per month per subscriber in quarter ending June 2016 to more than 1600 MB per month for quarter ending September 2017, with the likelihood of further strong growth. This consistently increasing data usage pattern should drive price-inelasticity, thereby giving better market power to the telcos.

Moreover, there has been a rush in consolidation in the recent past, with sizeable deals including the impending merger of Vodafone India and Idea Cellular, merger of consumer mobile business of Tata Teleservices into Bharti Airtel, proposed sale of assets by Reliance Communications Ltd. to RJio, and the acquisition of Telenor India by Bharti Airtel. These transactions, assuming they fructify, herald the emergence of an oligopolistic industry structure with larger and relatively stronger players. This is corroborated by the increase in the subscriber market share of three large incumbents along with RJio from 69.8 percent in Sep 2015 to 73.3 percent in Sep 2016 and further to 77.4 percent in Sep 2017.

Both these factors are expected to lead to gradual restoration in pricing power of the larger telcos, which should translate into improvement in financial position in FY2019. ICRA expects the industry revenue to increase by 10 percent and EBITDA to increase by 42 percent for FY2019, although this would still be lower than FY2017 levels, indicating that the longer-term revival of the industry is challenging and elongated.

The concerns would remain in the near term despite the long-term upsides as the competitive intensity is unlikely to abate. The larger telcos continue to seek higher market share, especially from the smaller/exiting ones, to achieve improved visibility of returns. Thus, the pricing competition would continue in the near term as operators look for a strong subscriber base. Amidst this, the high debt levels remain a major concern, at around `4.6 lakh crore as on March 31, 2017. The telcos would have to consistently invest in networks to keep pace with the strong data growth – the CapEx intensity for the industry is expected to remain upwards of `70,000 crore per annum. The CapEx intensity along with the debt repayment obligations remain sizeable in comparison to the expectedly constrained cash flow generation, resulting in increase in total debt of the industry to `4.7 lakh crore by March 2018 as per ICRA estimates. Thereafter, monetization of tower assets is expected to result in migration in some debt from the telecom services industry to the telecom tower industry, which in addition to fund infusion by the promoters, are expected to result in reduction in debt levels to `4.2 lakh crore as on March 2019. Nevertheless, the debt protection metrics will continue to remain weak – estimated debt/EBITDA of 7.2× as of March 31, 2019.

In conclusion, higher pricing power and sticky data usage would be the inflection point of recovery for the industry. Further, the data segment will present more opportunities for the sector and the telcos would focus on better content offerings. Sufficient pricing power is critical for the industry given the sizeable investment requirements and high operating leverage.


 

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