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.
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%.
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.