ICRA has revised the outlook on the Indian telecom tower industry to Negative from Stable. The industry has been facing headwinds in the form of elongated receivables, on account of delays in payments by Vodafone Idea (Vi).
ICRA said the gross receivable days are likely to remain above the ICRA’s outlook revision threshold of 80 days. The stretch in the working capital cycle resulted in moderation in the liquidity profile of the telecom tower industry and increased the reliance on external debt, which, coupled with the provisions for doubtful receivables, is likely to weigh down on the return metrics of the industry.
“Weakness in the credit profile of some telecom service providers exerted pressure on the working capital cycle of telecom tower companies. The elongation in receivables is likely to result in tower companies making sizeable provisions to the tune of Rs 10,000 crore in FY2023, denting their profitability,” Ankit Jain, Vice President and Sector Head, Corporate Ratings, ICRA, said.
ICRA expects the provisions to continue going forward, though the quantum is likely to moderate from the FY2023 levels. Increased reliance on external debt is expected to keep the net debt levels elevated, with net debt/OPBDITA settling at around 2x for FY2024.
Several payments between the weaker telecoms and tower companies remained unfulfilled and thus pressures continued to mount on the working capital cycle of telecom tower companies. ICRA expects revenue growth of the tower companies to remain low at 3-4 percent with operating margins (adjusting for energy revenues) at around 60 percent going forward (lower than 75-77 percent in the past).
These, along with elevated working capital requirements, resulted in moderation in the cash balances of the industry to around Rs. 2500-3000 crore, from Rs. 6500-7000 crore levels in the past.
While the technology upgrade to 5G brings with itself a favourable demand outlook for the tower companies, their Capex intensity is likely to increase and ICRA expects the annual Capex to be in the range of Rs 6,000-7,000 crore for the industry.
In a scenario where 5G deployment has remained pocket specific, these investments are likely to give returns over a relatively longer period, impacting the return metrics of the tower industry with the RoCE expected to drop to around 11-12 percent levels from 18-20 percent levels earlier.
The demand for telecom services, especially data, witnessed strong growth in the past, translating into consistent network expansion and upgradation by the telcos. This kept the demand for tower companies buoyant, resulting in steady addition in tenancies.
The tenancy ratio has stabilised and is likely to remain at around 1.2-1.3 times in the medium term. The tower industry’s dependence on weaker telcos in terms of tenancies remains high at around 34 percent, ICRA said.
