Airtel to Avoid but Jio Could Raise Tariffs to Generate Return on Investment: Fitch

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Reliance Jio, the 4G entrant, may raise tariffs in the medium term to start generating a return on its massive investment of $27 billion-$30 billion, rating firm Fitch Ratings said, adding that India's leading telecom operator Airtel may not raise tariffs due to market pressure.

"We believe that Jio may continue to disrupt the market by offering cheaper tariffs than the incumbents to gain market share. Ongoing industry consolidation will leave only five telcos in the market, will bring back pricing power to incumbents only after one to two years," analysts at Fitch said.

Fitch, in a note, said that it has an adverse outlook on the Indian telco market. "We expect the credit profiles of the top four telcos to come under pressure from tougher competition and greater capex requirements," it said.

The agency said that Airtel's blended average revenue per user (ARPU) could remain flat at around Rs 160 ($2.4) as the telco is unlikely to be able to raise tariffs, given the price competition.


Fitch Ratings on Friday affirmed India-based Bharti Airtel Limited's Long-Term Foreign Currency Issuer Default Rating (IDR) and senior unsecured rating at 'BBB'. It said that Bharti's 'BBB' rating reflects its established market leadership in the Indian wireless services industry.

Airtel has about 35% revenue market share, has diversified and integrated operations and owns a large share of Indian spectrum assets, which are also the most efficient assets. "We believe that its established market position and diversified revenue base will help it withstand intense competition in the Indian mobile segment. It gained about 150bp of revenue market share in 2016 as smaller telcos exited due to fierce competition and another 200bp with the acquisition of Telenor India, which is subject to regulatory approvals," Fitch said.

The agency expects Bharti's FFO adjusted net leverage to worsen to 2.0x2.2x for the financial year ending March 2018 (FY18), from 1.9x in FY17 (excluding USD6.8 billion deferred spectrum costs). "However, we forecast leverage to remain below 2.5x, above which we will consider negative rating action. Bharti is committed to its investment grade rating. We do not expect large debt-funded acquisitions during FY1819 given management's strategy to reduce debt through the possible sale of a 10% stake in tower subsidiary, Bharti Infratel or sale of other assets," it added.

Fitch forecasts Bharti Airtel's FY18 revenue and EBITDA to decline by 2%-3% as growth in non-mobile segments in India, and its African operations may not fully offset the fall in the Indian mobile segment's revenue. Indian mobile EBITDA (63% of consolidated EBITDA) could decline by 5%-10% in FY18.

"Competition is likely to remain intense as new entrant Reliance Jio (Jio), part of Reliance Industries Ltd (BBB/ Stable), will continue to offer cheaper tariffs to gain market share from incumbents," Fitch said.

Fitch said that Bharti Airtel has sufficient spectrum assets to expand its data services in the medium term and will not need to acquire more spectrum. It is unlikely to bid for 700MHz spectrum as the efficiency gains from the 700MHz spectrum do not currently justify the high reserve price set by the regulator.

"We forecast minimal Free Cash Flow (FCF) in FY18 (FY17: FCF deficit of INR62 billion) as cash flow from operations of Rs 250 billion- Rs 260 billion will be insufficient to fund its large capex requirements and moderate dividends. It will likely invest about Rs 260 billion- Rs 280 billion during FY1819, including its core capex of Rs250 billion and around Rs 30 billion- Rs 40 billion for payments related to deferred spectrum cost. The company needs to continually make investments to support its fast-growing data services," the agency said.

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Telecom Analyst

Passionately following the Indian #Telecom Industry for over a decade from Business, Consumer and a Technical perspective. My primary focus area is Consumer & Digital Experience.

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