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September 11, 2017

Sector Report: Telecom Services

This report is available to users in India for ₹40,000 + applicable taxes

 

Credit profile of telcos at a low point, stress may continue in 2017-18 as well

 

With estimated debt outstanding of Rs 4.0-4.2 trillion as in 2016-17, the telecom industry's credit profile hasdeteriorated. India has one of the lowest average revenue per user (ARPU) globally. Three out of four large playershave reported net losses in 2016-17 and these are expected to continue, further impacting credit profiles. Net debtto earnings before interest, depreciation, taxes, and amortisation (EBIDTA) of most players remains closer tofour, indicating significantly low future investment capability.

 

Total debt of the sector is concentrated among smaller players (other than top three players), which contribute ~25%of revenue while amounting to 50-60% of total debt. We believe overall spectrum capex between 2017-18 and 2021-22 will be Rs 1.5 trillion, lower than the Rs 2.5 trillion of past five years. Active capex will be however high at ~Rs 2trillion over the period. This will add to debt requirements for the telcos. Interest coverage ratio for smaller players isalready below 1.0, suggesting extreme pressures on earnings to service debt. Smaller players are expected to be hitmuch more than bigger players like Bharti, Idea and Vodafone. Ability of smaller players to retain a significantlydeteriorating market share will be critical in the medium term.

 

Continuous capital expenditure in spectrum has further capped probability of improving returns, which is reflected inconsolidation drive across players. Spectrum-sharing, trading regulations and merger guidelines have led to dealslike the following:

  • Bharti acquiring entire 4G spectrum in 1800MHz band from Videocon and Telenor and 2300MHz spectrumfrom Aircel and Tikona, to become a pan-India 4G player
  • RCOM's merger with Aircel
  • RCOM and RJio entering into multiple spectrum-sharing and trading deals
  • RCOM announcing its merger with Sistema Shyam Teleservices Ltd in recent past

Idea and Vodafone are also in merger talks. If successful, they would create the largest telecom player with a revenue market share of 44% and subscriber market share of 35%. This would not only result in synergy benefits limiting future spectrum capex for the merged entity, but would also reduce its costs and improve margins.