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Debt Management: Operator strategies to deleverage their books

November 04, 2016
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The Indian telecom industry has plunged into a price war, which means lower margins and a fresh round of investments. This will stress telecom operators who are already struggling to cope with their massive debt burden.

Given Reliance Jio Infocomm Limited’s (RJIL) tariff structure with its low data tariffs, free voice and free national roaming, incumbent operators will need to slash their rates. At the same time, they must invest in improving their quality of service as many customers are unhappy about slow data speeds and poor voice call quality. RJIL will also have to invest in customer-facing infrastructure as it goes mass market.

It is clear that data will drive future growth. In terms of revenue, data has already assumed increasing importance. Data revenues have grown by over 20 per cent for most operators in the April-June 2016, compared to the same quarter a year ago. But data realisations are now expected to fall as other operators make rate cuts to match RJIL.

India has around 250 million smartphone users, who have access to mobile broadband services either through 3G or 4G networks (there are about 70 million 4G-capable handsets in circulation), and about 350 million mobile internet users (including 2G and 2.5G). The country will have an installed base of 600 million smartphones (mostly 4G capable) by 2020.

Data revenues have risen steadily. The growth rates in data usage and data revenue share will accelerate in this fiscal. As of now, data generates 20-25 per cent of revenues for the incumbents. RJIL intends to turn that into a paradigm where data generates nearly all the revenue and the free voice gambit is taken seriously.

RJIL has an IP-only network and substantial bandwidth in three different wavelengths across all 22 circles. Other incumbent operators will have to invest in buying more 4G spectrum and in building infrastructure to improve their respective networks.

The spectrum acquisition by operators in the recently concluded auction will also lead to a higher debt burden. India’s 12 incumbent wireless companies already carry over Rs 4 trillion in debt. The consolidated debt for the telecom service industry has increased by a significant 41 per cent since March 2014, according to credit rating agency ICRA.

The aggregated debt-to-turnover ratio appears to be in the danger zone since turnover is much lower than debt. The entire industry generated about Rs 2.6 trillion in annual revenues in 2016-17 and meeting interest payments could become difficult, especially for those with higher debt.

In fact, the level of debt will rise significantly despite the low-key bidding in the recent auctions. Although operators have committed to just Rs 650 billion, the aggregate debt will rise to Rs 4.7 trillion, up from the current Rs 4.1 trillion. At the aggregate level, the industry’s cumulative debt is at 155 per cent of the industry turnover (Rs 2.6 trillion). The average interest costs work out to 5-6 per cent, which means that the interest burden is in the range of Rs 265 billion. That is over 10 per cent of the current aggregated turnover, which makes it tough to service debt. Incremental debt could stress some balance sheets to the level of bankruptcy.

Individual corporates are comparatively better or worse off but, by normal accounting standards, no company really has a healthy debt situation. In most cases where the financials are available, the debt exceeds the net worth.

Several operators are already teetering on the edge of bankruptcy or are technically bankrupt. Public sector enterprise Mahanagar Telephone Nigam Limited’s (MTNL) net worth (equity plus accumulated reserves) has eroded to nearly zero, while Tata Communications has a negative net worth and Tata Teleservices Maharashtra Limited also has negative net worth. Even RJIL, which is a subsidiary of Reliance Industries, is raising more funds through the rights issue of a Rs 150 billion optionally convertible instrument. Meanwhile, the Reliance Communications-Aircel merger may lead to an improvement in the financials of the merged entity.

Also, operators must invest in improving networks. In a submission to the Supreme Court, the Cellular Operators Association of India said that a new tower is being erected every three minutes. The cost of new investments would have to be met by pumping in new capital since operators lack internal resources to support such a pace of expansion.

As mentioned above, ICRA has gloomy projections about the telecom industry, and India Ratings and Research too has revised its outlook on the telecom services sector for 2016-17, down from stable to negative. ICRA expects voice revenue to grow at a moderate rate, while it expects data realisation to contract by 30-40 per cent per megabyte in this fiscal.

Debt management will be vital in the 2016-17 fiscal and more consolidation is likely, with smaller or financially weaker operators being forced to consider mergers. Shakeouts have occurred in most large telecom markets and India is unique in terms of its number of operators. The pressures of 2016-17 could finally bring about the sort of consolidation that industry observers have long expected.

By  Devangshu Dutta

 
 
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