Ind-Ra keeps negative-to-stable outlook on telecom; says industry's pricing power yet to return

India Ratings and Research (Ind-Ra) has maintained a 'negative-to-stable' outlook on telecom sector for the rest of FY19, saying weak revenue per user and high capex will continue to suppress the sectoral credit outlook.

"...the industry's pricing power is yet to return. Continued weak average revenue per user (ARPU) forecasts, coupled with elevated capex for network and technology, will continue to suppress the sectoral credit outlook," Ind-Ra said in its forecast.

The agency said that with Vodafone and Idea Cellular merger finally approved and network integration in offing, the industry will now be in the stabilisation phase.

"The revenue market shares of all the players will also evolve over FY19, in line with their share of 4G data subscribers (higher ARPU customers)," it said.

The rating agency said the current ARPUs are "unsustainable" from the cost and returns point of view, and that the ARPU decline is likely to be contained.

"The second round of consolidation in the industry will be based on a transition from multiple to single SIM, and would be a key event to watch for, once the tariffs witness upward corrections," it said.

On the telecom sector's debt levels - a key monitorable for industry watchers - it said that debt levels are likely to remain high due to ongoing capex needs.

The agency does not expect the sector leverage to reduce meaningfully in FY19, as most of the debt will be refinanced.

"As over 50 per cent of telcos' debt is in the form of deferred spectrum liabilities, which enjoy a fixed rate of interest, the sector is partially cushioned from the impact of tighter interest rates," it added.

Ind-Ra noted that while India's wireless data usage has increased exponentially to almost 20 per cent of the current global data usage, the smartphone penetration in India is only 33 per cent.

"Global wireless markets such as the US and Europe are more mature, with higher tele density, stable operating profitability despite competitive pressures. The capex intensity (measured by capex to revenue) in these markets, however, is significantly lower than that in India," it added.