Indian telecom Capex may go up in FY 2015, says Ind-Ra

Capex for Indian telecom operators such as Vodafone, Airtel, Aircel, Idea Cellular, etc. is likely to be high in FY15 on account of licence renewals and the need to continuously invest in spectrum acquisition and technology upgradation such as 3G and 4G while expanding the voice and data capacity, said India Ratings & Research (Ind-Ra).

The rating agency did not specify the Capex growth.

The telecom sector would recover in 2014. This is based on a gradual revival of investor confidence on the back of emerging clarity on regulatory issues towards end-2013, a reduction in the spectrum base price, relaxation of M&A norms and foreign direct investment limits being increased to 100 percent.

However, key risks include spectrum re-farming in the 900MHz band and one-time fees for excess spectrum which, if implemented, could burden cash outflows for the top three telecoms.


Announcing a revised outlook on the Indian telecom sector to stable from negative for FY 2015, the agency said the revision is led by recovering pricing power in the mature voice telephony segment, strong growth potential in the emerging data business with only 20 percent penetration and reducing regulatory overhang.

The agency expects the telecom sector to continue witnessing polarised operational improvements in FY15. EBITDA margins for top three telecoms together expanded by 391bp y-o-y in H1 FY 2014, while weaker telecoms (with revenue market share below 10 percent) were still incurring EBITDA losses.

The number of aggregate telecom operators in all 22 circles across India continues to reduce (to 179 in June 2013 from 277 in December 2012), with several smaller/newer players exiting or scaling down operations. Consequently, the top three telecoms Bharti Airtel, Idea Cellular and Vodafone India continue to gain market share.

Revenue market share on the basis of adjusted gross revenues of the top three telecoms increased to 70.2 percent in November 2013 from 63.8 percent in December 2012 and the combined subscriber base increased to 483 million in November 2013 from 447 million in December 2012.

There are clear signs of a shift of the price war from voice to data with data tariffs already being slashed (up to 50 percent) by large telecoms in the last few months of 2013. Simultaneously, over-the-top players are already cannibalising SMS and voice revenues streams. Though data average revenue per user (ARPUs) will be augmenting overall ARPUs, realisations are exposed to pricing pressure risks.

Ind-Ra believes the fragmented telecom sector might evolve into an oligopolistic market once sponsors of smaller, unprofitable telecoms exit on being unable to sustain losses. Consolidation is likely to be catalysed by relaxing merger and acquisition (M&A) norms and reducing regulatory and legal overhangs.

Ind-Ra expects the upcoming February 2014 spectrum auction to witness active participation, as licenses of key players are due for renewal and eight operators have confirmed participation. However, there is a risk of aggressive bidding in the metro circles which could increase the spectrum payouts for telcoms.

Operational improvements are partially offset by the risk of delayed deleveraging leverage, on account of continued outgo in FY15. The conversion impact on forex debt has further compounded the issue.


Lower Earnings, Higher Cash Outflow: The outlook could be revised back to negative on stressed balance sheets as well as cash flows due to lower-than-expected earnings and higher-than-expected regulatory charges.

Fresh Competition: Resurfacing competition after Reliance Jio Infocomm Limited’s entry could strain telcos’ pricing power and sustainability of margin improvement thus leading to a negative outlook.

Legal/Regulatory Overhang: Adverse impact of litigation and unfavourable policies on spectrum reframing in the 900MHz band, spectrum sharing and trading policy, and spectrum usage charges will have a negative impact on the outlook.

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