The credit profiles of the top four Indian telcos - Bharti Airtel Limited , Vodafone India, Idea Cellular and Reliance Communications will remain intact in 2015 thanks to a gradual rise in voice tariffs and improving regulatory environment that stem from industry consolidation, according to Fitch Ratings.
“The likely entry of new telco Reliance Jio, which is part of Reliance Industries Ltd (RIL) in H1 2015 will intensify competition in the data segment, and may cause data tariffs to decline by at least 20%,” the report says.
“Jio will focus largely on data and may have a limited impact on the incumbents' core voice business, given a weak "voice-over-LTE" technology ecosystem and lack of affordable 4G-compatible handsets in India. We do not foresee a re-run of the tariff wars of 2009-2013, which led to a severe decline in industry tariffs,” it said.
“The outlook for nationally owned telcos and weaker unprofitable telcos is negative due to their unviable business models, high cost structure, weak spectrum assets and large CapEx requirements. Weaker, unprofitable operators will seek mergers amid EBITDA losses, lack of 3G/4G spectrum assets and likely relaxation of M&A restrictions. Six operators are likely to emerge from the industry shake-out, as 10-12 operators are unsustainable. Fitch expects the top four telcos to increase their revenue market share to around 83% (2014: 79%) of the USD 3Bn industry,” the report added.
“Industry revenue will grow by a mid-single-digit rate in 2015, driven by data services. The top four telco's 2015 average operating EBITDA margin will be mostly unchanged at 32%-33% (2014: 32%) as a decline in data tariffs will offset a gradual rise in voice tariffs,” it mentions in its report.
“The top four telcos will generate a minimal free cash flow (FCF) margin due to higher CapEx and flat EBITDA; the 2015 industry CapEx/revenue ratio could rise as fast-growing data traffic requires supporting investment,” it added.
“Fitch expects Bharti's 2015 Funds Flow (FFO)-adjusted net leverage to improve to 2.2x-2.3x (FY14: 2.5x, excluding unpaid spectrum costs), thanks to an equity issue of USD350m by its tower subsidiary Bharti Infratel and its ability to generate USD600m-700m in annual FCF. Leverage could also improve due to Bharti's plan to monetise its African towers during 2015-2016, which could help raise around USD 2Bn,” according to the report.
