Prepaid Tariff Hikes in Telecom Not Adequate For Sustainability: Report
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.
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    COMMENTS

    Bipin Kochar

    10 months ago

    In addition to the 150000 cr which DOT will be getting from Telecom companies, a host of other companies like GAIL, Powergrid, Railways have to pay it a similar amount -

    Maruti Suzuki recalls 63,493 units of Ciaz, Ertiga, XL6
    Maruti Suzuki on Friday announced to recall 63,493 units of 'petrol smart hybrid' variants of Ciaz, Ertiga and XL6 models due to a likely issue with their motor generator units (MGU).
     
    In a regulatory filing, the company said: "A possible defect may have occurred in the MGU during manufacturing by an overseas global part supplier." 
     
    The company said that starting Friday, owners of the vehicles under this recall campaign would be contacted by Maruti Suzuki dealers for inspection and replacement of the faulty part. 
     
    "Maruti Suzuki has decided to proactively recall the vehicles for inspection and those found 'OK' will be released immediately. Vehicles requiring replacement of faulty part will be retained for part replacement free of cost. Keeping in view customer convenience, Maruti Suzuki dealers may make alternate mobility arrangements in such cases, if required," the filing said. 
     
    Recall campaigns are undertaken globally to rectify faults that may be potential safety defects. At 2.47 p.m. on Friday, shares of the company on the BSE was trading at Rs 6,898.55, lower by Rs 107.05 or 1.53 per cent from its previous close. 
     
    Earlier in the week, the company announced to increase the prices of its vehicles from January 2020, which it attributed to the rise in the input costs. 
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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    Indian Pharma Largely Unaffected by Proposed Caps on Trade Margin, Says Fitch Ratings
    India's proposal to cap trade margins available to drug distributors will not significantly hurt the profitability of pharmaceutical companies, as the proposal does not restrict the margins at which pharma companies sell to distributors, says Fitch Ratings.
     
    The National Pharmaceutical Pricing Authority (NPPA)—the regulatory body responsible for drug-pricing matters—is making progress in reaching a consensus with pharma companies and distributors to cap the trade margins for drugs that are not under explicit price control. 
     
    The proposal builds on the regulator's success in cutting cancer drug prices by as much as 85% following a similar exercise to cap trade margins.
     
    The proposal, which aims to make drugs more affordable, will cover an estimated 80% of generic formulations in India. 
     
    "However," Fitch says, "we do not believe it will significantly disrupt pharma distribution, even if implemented in an all-encompassing way, as currently reported. This is because the existing trade margin for the bulk of generic drugs, which are sold under a 'branded generics' model, is already broadly consistent with the proposed 30% level, with wholesale distributors getting 10% and retail chemists 20% of the printed drug price."
     
    India's is broadly a branded generics market in which pharma companies sell generic drugs under their own brands, unlike some larger markets globally. This business model, which accounts for 70%-80% of generic drugs, is mostly physician driven, as most prescriptions include the brand name rather than only the generic formula. 
     
    The moderate level of trade margins under this business model reflect the direct involvement of pharma companies in engaging with physicians to promote their product.
     
    Fitch says, "We believe the proposal is likely to have a greater effect on the 'generic-generic' segment, in which pharma companies sell their drugs in bulk to distributors who retain higher margins as they handle sales and marketing expenses. This may temporarily disrupt sales, especially in rural areas, but will also present opportunities for larger pharma companies to gradually establish a greater presence. The proposal is also likely to affect the margins of institutional buyers, such as hospital chains that procure in bulk directly from pharma companies, bargaining for higher margins because of direct access to patients in acute need for niche medicines."
     
    Within Fitch's rated portfolio, Glenmark Pharmaceuticals Ltd derived a large 32% of its revenue from the domestic market in the first half of the financial year ending September 2019. Nonetheless, the ratings agency says, "the company's business is mostly focused on branded generics under the retail model, which accounted for more than 90% of its sales in India. Hence, we do not believe the proposal will significantly affect the company."
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    COMMENTS

    Nakul Kumar Reddy

    10 months ago

    Providing medicine at lowest price to public is the most appreciated thing,
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