Telecom Services Revenues Improve but Meaningful Recovery Will Take Time: Ind-Ra


India Ratings and Research (Ind-Ra) believes that, despite stabilization of mobile services revenues in 4QFY19, the credit profiles of telecom players (telcos) will remain under pressure in the medium term due to the high competitive intensity, elevated debt levels and continued reliance on capital infusion (promoter equity infusion, asset monetization) for debt servicing and capex.

Ind-Ra believes that revenue recovery may continue going ahead, albeit at a slower pace, as the proportion of high ARPU subscribers in the data and broadband (3G+4G) categories continues to be low at 40-44% and 30%, respectively, of overall subscriber base. Also, after falling steadily over the last 2.5 years, data tariffs (expressed in terms of GB per user per month) rose 11%-17% during October 2018-February 2019, and has been stable since then. Nevertheless, R-Jio’s data tariffs remain at a discount of 25-30% to Bharti/Voda-Idea; this has enabled the former to continue to garner market share aggressively, signaling that competitive pressure has not yet subsided. Furthermore, while the average revenue per user (ARPU) for Bharti and Voda-Idea increased by 17-19% qoq in 4QFY19, the growth was optical, as incoming-only subscribers were weeded out of the system through the implementation of minimum recharge offerings.

According to Ind-Ra, the likely recovery in profitability, if any, may not be sufficient to address credit concerns such as high leverage, elevated capex, sustained negative free cash flow and the imminent need for asset monetization. While near-term liquidity issues have been addressed through capital infusion and asset monetization, the business model is unlikely to become attractive unless players record a substantial improvement in profitability.

Despite the likely stabilization of revenues and possibly profitability, telcos would continue to rely on external funding arrangements to support their debt servicing and elevated capex requirements. While R-Jio has spun-off its fiber and tower assets into separate special purpose vehicles (SPVs), Bharti and Voda-Idea have concluded rights issues of INR250 billion each. The pipeline for asset monetization remains strong, with the initial public offering of Bharti’s Africa business and fiber/tower monetization of Voda-Idea. In spite of these capital infusions, the credit metrics of telcos remain at elevated levels, and a material improvement in profitability would be essential for an improvement in their credit profiles.

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