The aggregate gross debt of Vodafone Idea, Bharti (India business) and Reliance Jio Infocomm (RJio) at end-FY19 stood at Rs 3.9 lakh crore, implying gross leverage of over 8x for the sector.
The liquidity profiles of Indian telecom operators are structurally weak as free cash flows are likely to remain negative over the next two financial years (FY20-FY22) due to high capex intensity, which has increased to Rs 1.2 lakh crore in 2018-2019 versus Rs 83,200 crore, making the companies to rely on refinancing or capital infusion, according to the mid-year telecom sector outlook by ratings firm India Ratings and Research (Fitch Group).
The aggregate gross debt of Vodafone Idea, Bharti (India business) and Reliance Jio Infocomm (RJio) at end-FY19 stood at Rs 3.9 lakh crore, implying gross leverage of over 8x for the sector. The ratings firm observed that these companies will continue to rely on refinancing or capital infusion. However, near-term liquidity is supported by large cash levels available post capital infusions — Voda-Idea, Bharti and continued financial flexibility due to strong parentage for RJio.
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Maintaining a negative outlook on the telecommunications services sector for the remainder of FY20, the ratings firm believes the credit profiles of telcos will remain under pressure in the medium term due to intense competition, elevated debt levels and continued reliance on capital infusion for debt servicing and capex.
Competitive intensity in the telecom industry has remained elevated with RJio’s data tariffs that are 25%-30% lower than those of Bharti Airtel and Vodafone-Idea. India Ratings said, “RJio’s market share is estimated to increase to 40%-45% by FY22, which was estimated around 30% in FY19, and Bharti/Voda-Idea’s joint market share to drop to 25%-27% each (30%-33%)”.
On the government’s plan to auction 4G and 5G spectrum soon, it is estimated that at the proposed reserve prices, any incremental investment in 5G technology may yield return on capital employed of only about 5%. “Ind-Ra believes any incremental capex towards spectrum or 5G technology will derail the fragile recovery and be negative for ratings,” it said.
RJio’s pricing strategy will be monitored by the ratings firm and response by other large telcos, timely and adequate capital infusion and asset monetisation to support funding shortfall and additional investments in spectrum and 5G technology, it said.