Prepaid tariff hikes earlier this month along with the moratorium on spectrum payments announced by the government will not be a complete solution for the telecom sector in India, which is reeling under acute financial stress, says a research note.
In the report, Acuité Ratings and Research says, “…even taking into account the gains from the revision, the debt coverage levels in the sector as reflected in the debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) levels will continue to remain elevated between 3 times to 6 times. While the relief provided by the government through a moratorium on spectrum payments for two years will help to an extent, the high leverage in the balance sheets will necessitate either significant equity infusion or asset monetisation.”
Acuité estimates that Indian telecom sector will need to raise equity or monetise assets to the extent of Rs50,000 core or over $6 billion over the next one to two years to ensure continuing investments in the networks critical for business sustainability and market share consolidation.
The telecom sector in India is at an inflection point. There are only three large private sector telecom service operators in India down from 10 in 2014. Except for one, all the players are in severe financial distress and there are doubts on their ability to service debt over the medium term. While the sudden increase in liabilities to the government by Rs1.4 lakh crore as per order from the Supreme Court, is one of the triggers for this distress, two of the existing operators have been making EBITDA losses since the last two quarters.
*PBT excluding extraordinary charges
**Debt figures are as on 31 March 2019, for Jio, some figures are estimates
@Debt to EBITDA based on annualised EBITDA estimates without taking into account tariff revision
# Latest market capitalisation
The tariff levels in India were clearly inadequate to sustain the existing operations in the sector.
The telecom tariffs in India is set to witness a significant rise at least to the extent of 40% with two of the operators - Vodafone Idea and Bharti Airtel having already announced their revised prepaid tariff plans and the third player, Reliance Jio expected to follow shortly. "This will be necessary to sustain the services of the telecom operators over the medium term. We are of the opinion that these players may also need to revise their post-paid tariffs to revive their profitability and importantly, to generate some level of cash accruals for near term capital expenditure," Acuité says.
According to the research note, the domestic telecom sector is clearly not in a shape to make the necessary investments in 5G services. The government had announced plans to auction additional spectrum required for 5G early 2020.
The financial position of the telecom companies already had an impact on the previous spectrum auction held in 2016-17 when only 41% of the spectrum on offer was bid out and only Rs65,000 crore could be raised against the base price of Rs5.6 lakh crore. For the proposed auction in the 3300-3600 MhZ band, TRAI has proposed a base price of Rs492 crore per MhZ, which translates into a spectrum outgo of Rs50,000 crore for each operator, assuming a minimum requirement of 100 Mhz for 5G rollout.
Acuité says, "Such a base price is not only the highest among the nations where data is available so far but also significantly higher with South Korea for example having auction cost at Rs134 core per Mhz. Importantly, the balance sheets of the operators except for Reliance Jio, may not permit any aggressive bids for 5G spectrum in the near term. We therefore are of the view that the launch of 5G networks in India may not happen over the next two-three years and may get postponed beyond 2022. Further, the regular capital expenditure including the expansion and upgradation of existing networks is likely to be slowed down in the near term, which will have a bearing on the quality of telecom services."
It is in this context that the tariffs hikes are critical for the Indian telecom sector. The tariff hikes announced by the three players primarily focus on the prepaid customers where excessive competition for subscriber addition and market share, had led to very low average revenue per user (ARPUs). The charges for voice calls had become almost negligible and data prices had dropped very sharply to an average of Rs12 per GB compared to Rs269 in 2014.
"The hikes in prepaid tariffs may lead to a rise of 20%-25% in the EBITDA of the incumbent players since around 60% of the subscribers are in the prepaid category," the report concluded.