Ind-Ra: FY19 Telecommunications Outlook: Another Tough Year Ahead of Stabilisation

India Ratings and Research (Ind-Ra) has revised the outlook on telecommunications services sector to negative-to-stable for FY19 from negative in FY18. While consolidation has opened avenues for structural improvements, the industry pricing power is yet to return. Weak average revenue per user (ARPU) outlook, coupled with elevated capex for network and technology will continue to suppress sectoral credit outlook.

Ind-Ra believes top telcos would focus on increasing their subscriber market share than revenue market share during FY19, and tariff-based customer acquisition will spread to the lower ARPU segment using feature phones. Return of pricing power is hazy and would be dependent upon complex factors such as Reliance Jio Infocomm Limited's (RJio) pricing strategy and consumer reaction to tariff increases.

The growth in data consumption is likely to remain high in FY19, given the sharp decline in prices and a favourable ecosystem. Broadband subscriber growth mainly stems from conversion of narrowband subscribers and growing adoption of data in the wake of digitalisation.

However, the agency expects industry revenue to remain stable in FY19, although revenue growth would be uneven across telcos. The agency expects revenue upside to remain challenging in FY19 for extant telcos (excluding RJio), who would face double whammy of declining data tariff and voice revenue. However, faster data penetration and consumption could support revenue over the medium term if the ecosystem remains favourable. EBITDA margins for extant telcos (excluding RJio) will remain subdued as interconnect usage charges could be reduced further in line with the government of India's decision to move to zero interconnect usage charges by 2020.

Consolidation has led to sufficient spectrum availability and top telcos have strengthened their business model via acquisition of spectrum at attractive prices. FY19 may not witness active participation in spectrum auctions. Telecom capex in FY19 will be towards network augmentation, technology investments and innovative offerings to capitalise on the rising trend of convergence of telecom and media in line with developed markets.

The rating Outlook remains Negative due to further weakening of the credit profile of telcos. Ind-Ra expects asset monetisation to continue in FY19, which could help deleverage the balance sheets. However, valuations of assets available for monetisation could be subdued.

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