Over the past three years, the debt burden of telecom operators has increased significantly owing to high spectrum acquisition costs, working capital requirements, etc. To reduce their short-term debt, operators are resorting to stake sales or raising long-term capital. They are also increasing voice tariffs and reducing opex to improve revenue realisation. Industry experts comment on the impact of the debt burden on companies’ performance and possible deleveraging measures...

How are Indian operators leveraged vis-à-vis their global counterparts?

 Hemant Joshi

Most Indian telecom operators are more leveraged than their global counterparts. There are various reasons for this:

•  The cost of spectrum is higher in India compared to other countries.

•   ARPUs are low as compared to western countries, thus overall industry revenue remains low. Moreover, operator margins are quite low, due to the low voice tariffs in India.

 Shobhit Khare

Indian wireless incumbents (Bharti Airtel, Idea Cellular and Vodafone India) are comfortably positioned in terms of leverage, with a net debt/earnings before interest, taxes, depreciation and amortisation (EBITDA) ratio of 2-3x compared to the global benchmark of 3x. However, the leverage position of most other operators (challengers) is alarming. As per our estimates, the challengers account for over 60 per cent of the industry net debt but constitute less than 10 per cent of the industry EBITDA.

Sabyasachi Majumdar

One metric for gauging debt burden could be the international credit ratings of telecom players. Major global players have higher ratings than their Indian counterparts. This highlights the debt pressures faced by Indian telecom companies vis-à-vis their global counterparts. The high debt burden of Indian companies is a result of the sizeable payouts for acquiring spectrum in the past and pressures on profitability due to high competition intensity.

Harit Shah

The debt burden of Indian telecom companies is quite high, with a significant amount of capital invested in 3G and broadband wireless access spectrum as well as in meeting working capital requirements and operating the networks. Given the upcoming licence renewals, further capital may be required. The tariff wars and competition in the sector post-2008 led to declining revenue growth, even as operational costs remained high.

Romal Shetty

The debt-to-equity ratio of Indian operators is around 0.9 as compared to about 1.5 in the US and Europe. Although Indian telecom companies are relatively less leveraged, the interest rates on loans are higher, putting additional pressure on earnings before interest, taxes, and amortisation (EBITA). Indian operators’ EBITA is quite low and stands at 15 per cent as compared to 36 per cent of their Asian counterparts.

What will be the impact of the high debt burden on operators’ near-term operational and financial performance?

 Hemant Joshi

The high debt burden will have a negative impact on the near-term operational and financial performance of telecom companies in India. The key reasons for this are:

•    Most of the profits go towards debt servicing, which limits the cash available for operations and future expansions.

•   Banks are unwilling to give loans to the debt-laden operators due to low confidence in them given the policy and regulatory uncertainty. Also, banks are not sure of operators’ repayment capacity due to their lack of pricing power.

•   Operators need to constantly invest in technology to keep pace with advancements and meet consumer demands.

Shobhit Khare

Most operators have reduced their capex intensity and shifted their focus from acquiring subscribers to improving the revenue per minute/profitability. Challengers have discontinued operations in select circles in order to curtail losses. With competition intensity easing, an improvement is expected in the operational and financial performance of telecom companies, led by increased pricing power and cost efficiency.

Sabyasachi Majumdar

The debt burden of Indian telecom companies has increased over the past few years, which has had a considerable effect on their operational and financial performance. Interest expenses have increased significantly, which has affected operators’ cash flows. Moreover, leveraged balance sheets have made it difficult for operators to raise additional funds for capex related to network expansion. The devaluation of the rupee has added to the problem, given the sizeable foreign currency loans and foreign currency-denominated payables.

 Harit Shah

High debt and interest costs over the past several quarters have resulted in poor financial performance of telecom operators. As per media reports, major telecom companies like Tata Teleservices Limited had negative net worth in 2012-13, with significant losses of nearly Rs 50 billion, partly on account of high interest costs.

 Romal Shetty

Operating losses can eat into equity and have an adverse effect on the debt-equity ratio. For instance, in 2011, the debt-equity ratio for an incumbent player stood at 0.38, which worsened to 2.76 in 2012 and in 2013, equity has gone into negative. The devaluation of the rupee vis-à-vis the dollar has meant higher payouts for external commercial borrowings. During 2012, the capex requirements of the Indian telecom industry resulted in the addition of Rs 2,500 billion of debt as against a total revenue of Rs 149 billion. Low EBITA and an uncertain regulatory environment would mean higher interest rates for new loans, which, in turn, would put pressure on declining profit margins.

When is the financial performance of operators likely to improve? What steps do they need to take to this end?

Hemant Joshi

Their financial performance will improve only when they have pricing power and the hyper competition eases. Their financial performance is also dependent on the policy framework. Spectrum is a huge capex for operators and discovery of the right price for it is crucial for an improvement in their financial condition. Operators can take several measures to improve their financial situation such as concentrate on cost and network optimisation; outsource non-core processes; and conduct data analytics to understand customer behaviour patterns to increase revenue streams.

Shobhit Khare

The industry is already taking corrective measures, which should increase profitability and return ratios. We expect significant earnings recovery for Bharti Airtel, Idea Cellular and RCOM in 2013-14, with their aggregate profit after tax likely to increase by 70 per cent year on year.

 Sabyasachi Majumdar

In the quarter ended June 2013, the sector witnessed some turnaround, with operators reporting better numbers. This was primarily because of a reduction in the competition intensity. Operators have taken initiatives to improve per minute revenue realisation and their operating profitability to allow some organic deleveraging. Data services are the next big growth driver. Operators have reduced tariffs in order to encourage data service adoption. Once customers get accustomed to these services, operators may consider hiking tariffs intermittently. Meanwhile, telecom companies are exploring other means to reduce their opex.

 Harit Shah

There has been some improvement in the operational performance with the April-June 2013 quarter witnessing some tariff hikes. This had a positive impact on operating margins, with Idea Cellular reporting a significantly high EBITDA margin. Thus, we have witnessed initial signs of easing competition. Telecom operators need to continue to focus on improving tariff realisations and optimising opex to be able to repay debt and thus deleverage their balance sheets. Another important focus area is data services as it witnessed an 80-90 per cent year-on-year growth in revenues.

 Romal Shetty

Recently, the sector witnessed operators selling equity stake and repaying debt to reduce their interest burden. Apart from this, consolidation in the industry would give synergies of scale and reduce the intensity of tariff wars. This would go a long way in improving companies’ performance.

Besides, there is a need for constant innovation with regard to data, media and entertainment, and financial services as well as services for rural areas to boost revenues and enhance margins.

 What are the financial options available to operators to reduce their debt burden? What role can the government play in helping them reduce their financial liabilities?

 Hemant Joshi

Operators could go for the asset light model, selling their infrastructure to monetise the same. The government needs to formulate a detailed policy framework to tackle issues like spectrum sharing, refarming and trading; mergers and acquisitions (M&As); and consistency in taxation across states to enable operators to make their business plans with greater certainty. Giving the sector infrastructure status, support for soft loans, infrastructure funding, and use of the Universal Service Obligation Fund would go a long way in improving industry sentiment.

 Shobhit Khare

Selective asset monetisation (sale of 3G/4G spectrum, if allowed under the new regulations or the sale of other non-core assets) could reduce the stress on the balance sheets of highly leveraged companies. Although the government may not be able to provide direct support to the industry, rationalisation of spectrum prices and an enabling M&A policy would help.

 Sabyasachi Majumdar

Operators are considering different sources for equity infusion or divesting business verticals to deleverage their balance sheets. For instance, Bharti Airtel has recently raised about $1.26 billion through equity infusion by the Qatar Foundation Endowment. Idea Cellular has secured approval from its board members to raise equity. Similarly, Reliance Communications (RCOM) has been in talks over a stake sale in its undersea cable business, Reliance Globalcom.

Operators are also considering alternative revenue streams such as the enterprise segment and data centre solutions.

 Harit Shah

Telecom companies need to focus on improving tariff realisation and data revenue, and reducing costs to improve profitability and cash flow, which can then be used for repaying debt. Bringing in higher investments from a strategic partner is another option.

 Romal Shetty

Securing funds through equity sale or hiving off of business units, consolidation in the industry, debt restructuring and infusion of fresh capital in the market through IPOs are some of the measures that can help reduce the debt burden. Favourable regulations and policies that enable consolidation and clearer M&A norms would help telecom companies deleverage their balance sheets by attracting investments.

 What will be the impact of recent regulatory developments such as the removal of the foreign direct investment (FDI) cap on the financial health of the sector?

 Hemant Joshi

The removal of the FDI cap will renew foreign investor interest in the Indian market; this, in turn, will drive growth. The move is crucial as:

•   Cash inflow into the sector is the need of the hour for rolling out new technologies and penetration into rural areas.

•   Additional revenue and job opportunities could be created.

•    Foreign companies like Vodafone, Telenor and Sistema will be able to operate in India without a local partner.

 Shobhit Khare

While the removal of the FDI cap makes it easier for foreign companies to participate in the sector as there would be no requirement for an Indian minority partner, policy clarity and spectrum reforms are a prerequisite for attracting meaningful foreign investment, especially considering the regulatory challenges and financial burden faced by foreign companies like Telenor, Sistema and Vodafone.

 Sabyasachi Majumdar

Allowing 100 per cent FDI is a positive step as it creates an investor-friendly environment and enables operators like Telenor and Sistema to gain control over their operations and decision-making. A reduction in the reserve price as recommended by TRAI would reduce future spectrum payments and annual spectrum charges. A lower reserve price would have a positive impact on operators’ cash flow position in the future.

 Harit Shah

Increasing FDI to 100 per cent is a positive step. It could enable operators to cut their debt burden, strengthen their balance sheet and improve their financial leverage.

 Romal Shetty

Removal of the FDI cap will allow foreign players to invest in the sector without entering into partnerships with Indian companies, and enable them to take operational and strategic decisions in an autonomous manner. The move should help the industry get fresh funds without the pressure of high interest costs, and would lead to a positive cycle of roll-out of new services, higher ARPUS and higher EBITA.