India’s youngest industry is now the most vulnerable, financially. A combination of intense competition, price war and bidding race for radio waves has resulted in rapid deterioration in the finances of telecom operators.
Not surprisingly, most brokerages are pessimistic about the industry’s financial prospects, given the current environment of stagnant revenues with rising capex and operating costs.
“It is apparent that the current wireless industry size is not sufficient for most players to make any return, let alone a reasonable return on investment. Even an established player such as Idea will likely make losses in FY2018-19 based on our current projections for the market size,” wrote Kotak Institutional Equity’s Sanjeev Prasad in a recent report.
“The Indian wireless industry revenues should be a lot higher for even the likes of Bharti and Idea to make a decent return on their investments,” the report said.
The industry’s financial dilemma is best captured by the poor profitability of individual operators. Four out of five listed operators (except Bharti Airtel) reported net loss during April-December 2016 period. In the unlisted space, all five operators – Vodafone India, Aircel, Tata Tele, Bharat Sanchar Nigam and Shyam Sistema – made losses in FY16.
In all, four operators – MTNL, Tata Tele, Aircel and the listed Tata Tele Maharashtra – have large and ever-growing accumulated losses resulting in negative net worth, which means their liabilities exceed assets.
Shareholder returns have deteriorated substantially. The combined return on equity (RoE) for listed operators declined to 5.6 per in FY16 and was estimated to have turned negative during the first nine months of FY17. The same sample had reported RoE of 11.7 per cent in FY14.
The combined debt to equity ratio of the five listed telecom operators, including Bharti Airtel, Reliance Communications and Idea Cellular, zoomed to a record high of 2.2 times at the end of FY16 from a healthy 0.5x in FY10 and 1.7x at the end of FY15. Net debt-equity ratio (adjusted for cash on books) was marginally lower at 2x at the end of the last financial year.
For the first time in history, the listed operators’ debt now exceeds their market capitalisation making the industry technically insolvent. This, analysts say, makes it difficult for operators (with the exception of Bharti Airtel) to use the equity market to raise capital and retire their debt.
In better times, operators, such as Idea Cellular and Reliance Communications, used market buoyancy to raise equity capital through qualified institutional placement (QIP) of shares.
The industry’s leverage ratio has zoomed to 3.7x if we include the numbers for unlisted operators such as Vodafone India, Aircel, Tata Teleservices and Bharat Sanchar Nigam (BSNL). In all, the industry owed nearly Rs 4.11 lakh crore to their creditors and bankers at the end of March last year (excluding figures for Reliance Jio), up from Rs 3.14 lakh crore at the end of FY15 and Rs 2.76 lakh crore at the end of FY14.
According to Reliance Industries consolidated segment finance, its other division (largely Jio telecom venture) had assets of Rs 1.54 lakh crore at the end of FY16 marginally less than Bharti Airtel’s consolidated assets of Rs 1.58 lakh crore at the end of last fiscal. The latter reported gross debt of Rs 1.01 lakh crore at the end of March 2016.
Every Rs 100 worth of industry’s revenues now supports Rs 130 of debt, up from Rs 60 in FY10.
The industry’s financial travails continue in FY17 as well, with the combined debt for listed operators rising 27 per cent during the first half of FY17 (on interim basis) compared to the corresponding period last fiscal. As a result, the listed operators’ interest cost was up 32.4 per cent year-on-year during the first nine months of FY17.
On an annualised basis, the industry’s interest obligation rose 70 per cent in last two years against stagnant revenues and operating profit during the period. The result has been a steady decline in the operators’ debt servicing capacity as indicated by interest coverage ratio (ICR). The ratio declined to 3x during April-December 2017 period down from 5.2x during FY15.
Analysts attribute the industry’s current financial problem to the entry of Reliance Jio and its strategy of offering freebies to gain customers and market share. “The capacity (spectrum) cost along with the non-spectrum capex is set to rise for the industry post the entry of RJio. Resultantly, not only near-term profitability is challenged, even long-term RoCEs (return on capital employed) will remain at best mid-teens, assuming no disruption,” writes Ambit Capital’s Vivekanand Subbaraman in his recent report on the sector.
Getting more from each customer is also becoming a challenge. Subbaraman says the average revenue per user may not rise despite data users paying for content as specialist content providers exert bargaining power.