Spe­cial Re­port

Dalal Street Investment Journal - - CONTENTS -

Tele­com sec­tor is one of the most im­por­tant sec­tors in In­dia which is also be­stowed with the in­fra­struc­ture sta­tus in In­dia. The sec­tor is also the be­drock of Dig­i­tal In­dia. How­ever, the sec­tor is go­ing through a rough patch cur­rently and the very ex­is­tence of some of the tele­com play­ers is at stake.

With com­pe­ti­tion in­ten­si­fy­ing in the past cou­ple of years, FY17 was the first time since in­cep­tion that the In­dus­try’s rev­enue and EBIDTA de­clined. The com­bined rev­enues of the in­dus­try went down in FY17, stand­ing at 2,10,000 crore and is es­ti­mated to de­cline fur­ther by ~ 25,000 crore in the com­ing fis­cal. The drop in rev­enues due to in­tense com­pe­ti­tion has re­sulted in a fall in EBITDA by 12,000 crore, thus lead­ing to sig­nif­i­cantly lower op­er­at­ing cash flows for the tele­com com­pa­nies.

Sev­eral of the rat­ing agen­cies have also raised con­cerns on the sec­tor out­look and its prof­itabil­ity. Tele­com in­dus­try is also one of the in­dus­tries which is taxed heav­ily. The cu­mu­la­tive tax in­ci­dence of ~33 per cent of rev­enues is amongst the high­est in the world.

At the cur­rent junc­ture, the re­duced EBIDTA of the in­dus­try poses a risk of fail­ure to cover the ex­ist­ing debt obli­ga­tions and de­ferred pay­ment com­mit­ments.

The data re­al­i­sa­tion per MB may con­tinue to fall and de­crease by 20-25 per cent in 2017, as per PWC es­ti­mate. The Jio pre-launch un­leashed a price war on mo­bile data in In­dia and the re­sults will be seen on prof­itabil­ity of old tele­com play­ers in the cur­rent year and the com­ing fis­cal as well.

In­vestors can ex­pect tel­cos to ex­pe­ri­ence re­duced data re­al­i­sa­tion in 2017 as the in­crease in data traf­fic will not com­pen­sate for the re­duc­tion in data rev­enues. Poor fi­bre in­fra­struc­ture is also a bot­tle­neck in pro­vid­ing cheap data ser­vices in In­dia. GST im­ple­men­ta­tion also en­sured that tel­cos will face sig­nif­i­cant com­pli­ance costs in the new GST regime.

All th­ese fac­tors prompt us to rec­om­mend avoid on any in­vest­ment in the tele­com sec­tor.

Re­cent de­vel­op­ment

The Tele­com Reg­u­la­tory Au­thor­ity of In­dia (TRAI) has an­nounced a cut in mo­bile ter­mi­na­tion rate (MTR)

1) To 6 paise/min from the cur­rent 14 paise/min ef­fec­tive Oc­to­ber 1, 2017 and

2) Fur­ther down to zero (i.e. In­dia moves to a bill-and-keep regime) ef­fec­tive Jan­uary 1, 2018.

Im­pact on the sec­tor

The Tele­com Reg­u­la­tory Au­thor­ity of In­dia's (TRAI) move to cut in­ter­con­nect us­age charges by 57 per cent is likely to neg­a­tively im­pact in­cum­bent tele­com op­er­a­tors such as Bharti Air­tel and Idea Cel­lu­lar. Idea cel­lu­lar is ex­pected to be worst hit by the new de­vel­op­ment. IUC formed a 9-15 per cent of the con­sol­i­dated rev­enue for Bharti Air­tel and Idea.

In­ter­net us­age charge is the fees paid to tele­com op­er­a­tors where the call is ter­mi­nated by the op­er­a­tor from where the call is orig­i­nated. Jio will be the biggest ben­e­fi­ciary of a cut in the IUC rate as it has a higher share of out­go­ing calls.

Ac­cord­ing to Gold­man Sachs, the cut in IUC will neg­a­tively af­fect Bharti Air­tel's an­nual cash flows by around $ 150 mil­lion. The cur­rent move by TRAI is ex­pected to neg­a­tively af­fect Idea's EBITDA by 7 per cent and Bharti Air­tel's EBITDA by 4 per cent, as per ex­perts track­ing the in­dus­try. Few bro­ker­age firms track­ing the tele­com sec­tor have even es­ti­mated a hit of 12 per cent on EBITDA mar­gins for Idea. Says Rohit Chor­dia at Ko­tak In­sti­tu­tional, “Im­pli­ca­tions of MTR cut go be­yond im­me­di­ate EBITDA hit. TRAI has an­nounced a cut in mo­bile ter­mi­na­tion rate to 6 paise/min (from the cur­rent 14 paise) ef­fec­tive Oc­to­ber 1, 2017 and to zero ef­fec­tive Jan­uary 1, 2020. We note that reg­u­la­tory de­lib­er­a­tion on the is­sue was on for nearly a year now and there was an in­creas­ing sense of in­evitabil­ity about an MTR cut. The quan­tum of cut was the only un­cer­tain vari­able and the an­nounced cut of 57% (from 14 paise to 6 paise) is cer­tainly higher than our es­ti­mated 30-50%.

Conclusion

The tele­com in­dus­try in In­dia is cur­rently at its weak­est and the prob­lems of the in­dus­try are mag­ni­fied due to high de­gree of fi­nan­cial lever­age. The mar­gins are im­pacted due to in­creas­ing com­pe­ti­tion from new player Reliance Jio. We can ex­pect slow­down in in­vest­ment in the sec­tor and some con­sol­i­da­tion. Weaker play­ers will find it dif­fi­cult to sur­vive and the high debt lev­els will make it dif­fi­cult for the weaker play­ers to exit. In such a sce­nario, in­vest­ing in tele­com stocks could be sui­ci­dal.

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