Telecom Operators to Remain Under Pressure as the Competition is Still High As noted, Ind-Ra has maintained a negative outlook on the Indian telecom industry and the operators will be under pressure for the remainder of FY20. The research firm says the telcos will face pressure due to elevated debt, intense competition and continued reliance on capital infusion for debt servicing and capex. Right now, Reliance Jio is the leader when it comes to the prepaid segment, but Vodafone Idea and Airtel, are leading the postpaid segment with attractive bundled offerings. That being said, Jio might turn things in its favour with the JioPostpaid Plus service launch that is scheduled to happen on September 5. When it comes to prepaid plans, Reliance Jio is miles ahead of Bharti Airtel and Vodafone Idea, and according to Ind-Ra, Jio’s tariff plans are still 25%-30% lower than those of the competitors. The gross debt of Vodafone Idea and Bharti Airtel at the end of FY19 stood at Rs 3.9 trillion, which implies gross leverage of over 8x for the sector. “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),” said Ind-Ra in a new press release. This is the reason why the companies will continue to rely on refinancing or capital infusion. However, Ind-Ra believes that near-term liquidity is supported by large cash levels available post capital infusions (Voda-Idea, Bharti) and continued financial flexibility due to strong parentage (Reliance Jio). Spectrum Auction May Dent Telcos Even More The government of India has announced that it is planning to auction 4G and 5G spectrum in the coming months. Ind-Ra estimates that the incremental investment in 5G technology may yield a return on capital employed of only about 5% and that too at the proposed rates by Trai. “Historically, spectrum auctions have failed to garner adequate participation from telcos as exemplified by (a) a substantial portion of spectrum offered remaining unsold and (b) lower proportion of spectrum sold above the reserve price implying the lack of willingness of telcos to pay higher spectrum prices,” added Ind-Ra. Ind-Ra believes any incremental capex towards spectrum or 5G technology will derail the fragile recovery and be negative for ratings. Media Content Investments Likely to Undergo a Disruption Ind-Ra also stated that it would continue monitoring Reliance Jio’s pricing strategy and the response to Jio’s pricing by other telcos. Additionally, Ind-Ra will also monitor adequate capital infusion and asset monetisation to support funding shortfall and additional investments in spectrum and 5G technology It’s also that the media content space in India is likely to undergo a disruption, with the availability of cheaper and abundant data options under unlimited plans leading to higher content consumption on mobile devices. Already, top telcos like Bharti Airtel and Vodafone Idea have established major partnerships with media content providers like ZEE5, SunNXT, SonyLIV and so on to lure the subscribers.
